Temasek To Write Down US$275 Million (S$377 Million) Investment in FTX

2022 is indeed a very bad year for most investors, especially so for crypto investors.

There were already a series of high-profile collapses – from Terra-Luna, followed by Three Arrows Capital, Hodlnaut, and now… FTX.

If you have not heard by now, Singapore’s state investor, Temasek, has invested quite a bit in FTX.

To be exact, it’s US$275 million (or S$377 million) and it will write down its investments in FTX.

For the uninitiated, a write-down is an accounting term for the reduction in the book value of an asset when its fair market value (FMV) has fallen below the carrying book value, and thus becomes an impaired asset.

In layman’s terms, this means that Temasek will consider this investment in FTX as a loss, and likely remove these investments from their balance sheet.

How Much Did Temasek Invest?

According to its official statement, Temasek has invested US$210 million (S$288 million) for a minority stake of about 1 per cent in FTX International.

It also stated US$65 million (S$89.1 million) for a minority stake of about 1.5 per cent in FTX US.

Overall, its FTX investments occupy 0.09 per cent of its net portfolio value of S$403 billion as of 31 March 2022.

Temasek had invested in FTX in the Series B, Series B extension, and Series C funding round during October 2021 and early January this year.

Temasek is one of the many institutional investors in the cryptocurrency exchange, with other notable backers who’ve also reportedly written down their FTX investments:

• Sequoia Capital: US$214 million (S$293.5 million)
• SoftBank Group: US$100 million (S$137.1 million)
• Paradigm: S$215 million (S$295.3 million)

Temasek’s Investment Rationale & Beliefs

If you’re wondering if Temasek is still investing in cryptocurrencies, the state investor has clarified that it does not have direct exposure to cryptocurrencies.

Rather, its investment framework and strategy focus on investing in the ecosystem and technology behind it, for example, Blockchain technology.

Instead of investing in the asset, institutional investors such as Temasek invest in the operation of the system and the companies behind these technologies.

An excerpt from Temasek’s statement is as follows:

As an investor-owner seeking sustainable returns over the long term, we believe that we have to invest in new sectors and emerging, nascent business models to understand the applications and impact they may have on the business and financial models of our existing portfolio, or be drivers for future value in an ever-changing world. This is why we invest in early stage companies and accept the binary risks associated with such investments. Our early stage investments constitute ~6% of our portfolio, and as a group have generated good returns for us, with IRRs in the mid- teens. However, we do recognise the inherent risks of investing in early stage companies and take a very measured approach to such investments by applying an illiquidity risk premium on the cost of capital. In addition, we also add on a venture risk premium for the early stage they are in. Our blockchain direct investments are not a significant part of our early stage investments.

Temasek’s Due Diligence Process

According to the official statement, Temasek took approximately eight months from February to October 2021 to review FTX’s audited financial statement, which showed it to be profitable.

Additionally, they have focused on the associated regulatory risk with crypto financial market service providers, particularly licensing and regulatory compliance, and cybersecurity.

Throughout the eight months, they have also sought advice from external legal and cybersecurity specialists in key jurisdictions, as well as legal and regulatory reviews for the investments.

While the current situation meant a loss, the company also added that it will continue to recognise the “potential of blockchain applications and decentralised technologies to transform sectors”.

What Does The Collapse of FTX Mean for Investors?

The Blockchain Association of Singapore co-chairman Chia Hock Lai considers the fall of the FTX exchange an isolated event as there’s an element of fraud involved, and cites that “losses are part and parcel of investing and that it is common for institutional investors such as Temasek to diversify their portfolios to include all sorts of asset classes.”

This sentiment is also shared by Maybank economist Chua Hak Bin:

While the loss to Temasek is painful, it represents less than 0.1 per cent of Temasek’s total assets, which are estimated to be about S$403 billion in 2022… As an investor you have to take risks to get returns, and historically Temasek has been able to generate good returns

Is It Wise to Still Invest in Cryptocurrency?

While sentiments might differ from person to person, it’s no doubt that investors should study the risks they take when they park their money in a market that’s not regulated actively.

Ironically, the Monetary Authority of Singapore (MAS) had recently proposed crypto regulations in Singapore to reduce the risk of consumer harm from cryptocurrency trading and to support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.

To be exact, Tharman Shanmugaratnam, chairman of MAS has also come forward to say that cryptocurrency is “certainly not suitable for retail investors” in April 2021.

What are your thoughts?

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