Crypto Regulation - Asia Leading the Way

The exponential growth of institutional and retail investor interest in the crypto markets has led to the inevitable need to reposition existing financial regulatory frameworks to incorporate supervision of digital asset markets. With the recent bitcoin surge back to above $10,000 per bitcoin, it is evident that crypto markets have become too substantial and accessible to the public for regulators to not intervene.

Crypto markets are currently faced with significant operational challenges, leading to undermined investor confidence. Perhaps most notably, in recent years numerous serious cyber security breaches have been widely reported on, with hackers infiltrating crypto exchanges, stealing millions of dollars’ worth of virtual currency. What is more, some exchanges have been involved in deceptive and predatory practices, market manipulation and insider abuses. Recent research conducted by TIE shows that as much as 75% of cryptocurrency exchanges are reporting dubious volumes.

National regulators in the Asia Pacific region (APAC) such as Hong Kong and Singapore have responded to investor concerns regarding the integrity of crypto exchanges by introducing new licensing laws with a prerequisite to obtain regulatory approval before trading is allowed. The assessment includes an evaluation of the exchange monitoring systems, including market surveillance for the detection of market abuse behaviour, in addition to Know Your Client (KYC), Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT) screening solutions for onboarding of institutional clients. The need to counter criticism of crypto markets being used for criminal activity requires exchanges to implement robust control systems to detect, prevent and report market abuse behaviour and financial crime.

In Hong Kong, the Securities & Futures Commission (SFC) classifies Initial Coin Offerings (ICO) as a security, subject to the country’s securities laws. Crypto assets are treated no differently than any other regulated security assets. Crypto exchanges aiming to launch a trading venue are subject to new licensing laws, combined with restrictions limiting trading to institutional clients only. Similarly, in Singapore, the Monetary Authority of Singapore (MAS) issued guidelines stating that ICO’s resembling capital market products will be regulated under the Securities and Futures Act. Crypto platforms here are also subject to a licensing regime and are limited to serving accredited investors only.

Recently Japan’s Financial Services Agency (FSA) has established guidelines to classify ICOs and denote investment limits to protect investors, having previously allowed its crypto industry to operate on a self-regulatory basis. Since a cyber breach of a record $530 million in 2018 at Coincheck, one of Japan’s largest crypto exchanges, the FSA has tightened regulations on crypto exchanges and introduced new screening requirements, including a new licensing obligation.

In Malaysia, the government has placed all tokens under securities regulation and non-compliance is sanctioned with fines and up to 10 years in imprisonment. In 2019, the Securities Commission Malaysia approved three firms to establish and operate a digital asset exchange.

The Chinese crypto market once dominated the world stage, accounting for 90% of all global trades. This preceded the bull run in the latter part of 2017, which spread fear of a market crash in crypto markets and resulted in a tightening of regulations. In September 2017, China outlawed ICOs as a means of unauthorised and illegal funding whilst cracking down on crypto trading, resulting in the closure of 88 cryptocurrency exchange platforms and closure of 85 ICOs. This led Hong Kong and Singapore to respond to growing investor demand, resulting in an explosive growth of new crypto exchanges.

Recent market speculation suggests that the People Bank of China is close to launching its own digital currency. The rational is to replace cash, to side-line established crypto currencies and to counter the threat of new digital currencies including Facebook’s Libra. This would represent a marked changed in strategy by China on crypto currency focussing on centralised control by being the sole issuer of its own digital currency. However, this is unlikely to lead to China relaxing the restrictions it has in place on trading foreign digital currencies or lifting the restrictions on crypto exchange platforms.

Regulators in the US are also moving forward with the crypto markets’ regulation, but somewhat slower that their Asian counterparts. In the US, the Commodity Futures Trading Commission (CFTC) and the US Securities Exchange Commission (SEC) have made statements around regulatory oversight of financial crypto products with determination depending on the facts and circumstances of the virtual currency.

The UK currently has no specific cryptocurrency laws. Recently the FCA published its final guidance on crypto assets and restated its position that crypto assets have no intrinsic value. Furthermore, it stated that crypto trading venues and exchanges are not required to receive authorisation from the FCA before conducting their business. As crypto investments are unregulated, investors are not covered by the Financial Services Compensation Scheme.

The Financial Action Task Force (FATF), an inter-governmental organisation comprising of 15 global jurisdictions including G7 countries, established to promote international policies and standards to combat financial crime, has issued guidance for the monitoring and reporting of suspicious crypto transactions. The guidance helps countries and virtual asset service providers understand their anti-money laundering and counter-terrorist financing obligations, and effectively implement the FATF’s requirements as they apply to this sector. As a result, crypto exchanges are likely to face tighter regulation.

In conclusion, it is evident that the regulatory decision in China to outlaw crypto trading has led to other national governments in the APAC region to implement regulatory frameworks to oversee trading of these new assets, including new licensing rules to regulate cryptocurrency trading and encourage liquidity. Many regulators across the APAC region have taken a pragmatic approach, encouraging the industry to benefit from this new but rapidly growing market. As this market evolves, it will be interesting to see whether regulators in Europe and the US will follow suit. Thus far it appears that the APAC region is determined to establish itself as a global hub for the trading of digital assets.