Constant dialogue and regulatory flexibility is propelling Asia to the forefront of the crypto industry, while Western jurisdictions and regulators fall behind by adopting a slower “wait and see” approach, according to executives at two EU-based cryptocurrency firms.
“Asia can already claim its status as a hub for the development of the crypto industry to-date,” says Ido Sadeh Man, founder and president of the Switzerland-based crypto non-profit Saga Foundation. “The reason for this lies in where I see the future of cryptoasset regulation in Asia, namely the constant and fruitful dialogue between industry players and the regulators.”
Man points to Japanese cryptocurrency exchange Zaif as an example. In September, hackers stole $59m worth of cryptocurrency from the platform. According to a local report, the criminals lifted a majority of the funds from users’ active wallets, and then made off with $20m of company assets.
“Instead of choosing to block Japan’s burgeoning cryptocurrency industry due to fears around risk, the regulators chose to take action and provide new legislation aiming to pave the way for a more supportive and secure regulatory backdrop to ensure that consumers are protected from exchange hacks,” says Man.
“This is just one example of the proactive and supportive approach regulators in some of Asia’s largest economies are taking. I believe that Asian regulators’ ability to see the potential in the industry will mean that Asia will not only maintain but also dramatically increase its market share in the years to come.”
“A major lesson that can be learned from Asia is that any disadvantage can be used as an advantage,” Erik Wilgenhof Plante, director of Maltese cryptocurrency exchange BeQuant. “A lot of Asian countries have huge underbanked populations. Cryptocurrency requires very little infrastructure and can be used for the transference of things like salaries.
“This obviously excludes China, because China is more about controlling the flow of currency. A lot of Chinese users are looking at crypto as a way to evade the existing controls, something of course the government absolutely does not want.”
In July Chinese state media reported that the People’s Bank of China had brought renminbi-to-bitcoin trading below 1% of global trading, following a ban on direct trading issued to prevent financial risk. It added that 88 virtual currency exchanges and 85 ICO platforms had been removed from the country since September 2017.
Other Asian countries are leading the way when it comes to cryptocurrency, according to Plante: “If you look at countries like Singapore, there is a lot of support from the government and from regulators. I think they see that to exchange your Singapore dollar to Malaysian ringgit and then go to Vietnam and change it to dong and lose money at every stage is a huge pain point.”
In a January 2018 parliamentary question and answer session conducted by the Monetary Authority of Singapore (MAS), Tharman Shanmugaratnam, deputy prime minister and minister in charge of MAS, stated that “cryptocurrencies are an experiment.” He went on to say that “the underlying technologies, in the form of blockchains or distributed ledgers, may prove to have potentially useful applications in facilitating payments and trade settlements. MAS has, for this reason, been involved in and encouraging a number of blockchain experiments with the financial industry.”
Western “wait and see”?
“The mere classification of crypto assets is not a trivial challenge - they could be interpreted as securities, as currencies, or as utility tokens at the same time, each triggering various licenses and regulatory approaches,” says Man. “We have therefore witnessed a phenomenon where centralised regulators, such as Switzerland’s Financial Market Supervisory Authority (FINMA) and the UK’s Financial Conduct Authority (FCA), which can tackle all of those regulations in a central efficient matter, are proving to be, ironically enough, much more slow-moving in regards to regulating these decentralized technologies.”
In Europe and the US, regulators are “approaching things with that ‘wait and see’ attitude,” says Plante. “In their case, it is to properly impose a framework and safeguard existing financial systems. In the EU there also needs to be greater consensus as when something passes it passes across the whole of the continent.”
The EU is almost the opposite of the US, he adds, where every state has a regulator and every regulator has an opinion on cryptocurrency: “All the states can come in with their own regulation as long as no federal law is passed to supersede it.”
“If you look at Europe and the US, there is not only the matter of different regulators trying to decipher this new asset class, but also different hierarchy of bodies,” says Man, “those operating on the state level and those working on the federal level, meaning the federal government in the US or the European Union in Europe. We are therefore seeing in both geographic cases that some states are moving forward faster than others, while the US federal or the EU levels take a more apprehensive, stalling approach to this phenomenon.”
The European Banking Authority (EBA) released a report into cryptoassets in January, in which it recommends “a comprehensive analysis, taking account of issues inside and outside the financial sector, to determine what, if any, action is required at the EU level at this stage.” That same month the European Securities and Markets Authority (Esma) called for an EU-wide approach to the regulation of cryptoassets and initial coin offerings (ICOs).
In the US, the Commodities Futures Trading commission (CFTC) outlined its position on cryptocurrency in September 2015, when it ruled that bitcoin and other virtual currencies were commodities. Chairman of the CFTC Christopher Giancarlo told CNBC in an October 2018 interview that cryptocurrency is “here to stay” and that “there is a whole section of the world that really is hungry for functioning currencies” like bitcoin. The US Securities and Exchange Commission (SEC) determined in July 2017 that initial coin offerings (ICOs) involving virtual contracts and decentralized autonomous organisations (DAOs) were to be considered securities.
The regulation of cryptocurrencies no matter the jurisdiction can be a difficult proposition, according to Gerhard Greuter, managing director of regtech and compliance firm Lawson Conner. “The speed with which crypto-assets have gathered traction means regulation has been light so far, and there are different rules for different jurisdictions. There is some difficulty with unifying regulation and establishing a robust regulatory framework.
“Setting up the technology infrastructure required to regulate cryptocurrencies will be time-consuming and probably disruptive in the short-term. It will offer legitimacy though – there has been growing concern about the financial risk associated with cryptocurrencies and fears that they are increasingly associated with the dark web and used for money-laundering purposes. Establishing a robust regulatory framework for the cryptoasset market could help the business model to mature, and the first jurisdiction that gets such an infrastructure in place could become a global centre for the sector.”