Crypto regulation in Asia: What you need to know

Top Global Financial Centers Japan, Hong Kong and Singapore have some of the most mature financial regulations worldwide. It is therefore no surprise that discussions about how to regulate crypto began many years ago, although they have taken very different directions.

Japan has been tough on consumer protection, but has recently eased requirements for token listings and pushed a more welcoming message to firms. While China banned crypto trading and cracked down on mining, Hong Kong exercised its autonomy to chart its own course, announcing it was open to crypto firms in a bid to preserve its status as an international financial center. Crypto firms may find it difficult to meet the regulatory bar at first, but the signs are that regulations will continue to ease. Meanwhile, in Singapore, existing market players know that regulations will tighten further. Last year’s implosion of high-profile firms registered in the city-state, such as Three Arrows Capital and Terraform Labs, started a regulatory process that looks set to result in more restrictive regulations.

Read more: As part of CoinDesk’s Politics weekreporters covered the regulatory outlook in the largest financial centers in Asia, including India, South Korea and Japan.

Despite their differences, “The more developed markets in Asia are quite advanced in terms of clarifying what falls within the virtual asset service provider (VASP) framework,” said Vivien Khoo, co-founder of the Asia Crypto Alliance, noting that Hong Kong and Singapore have a “fairly similar” VASP framework.

Cooperation between countries across the region will be tightened. “It will be much more difficult to engage in regulatory arbitrage now in Asia,” Khoo said.

Japan was among the earliest countries worldwide to regulate cryptocurrency exchanges, but it wasn’t because it wanted to be ahead of the curve. The agency had simply drafted Japan’s virtual currency legislation to fulfill an agreement made in 2014 with other members of the International Organization of Securities Commissions (IOSCO), according to a person close to Japan’s Financial Services Agency (FSA).

But in early 2017, when China’s government shut down some exchanges in what was crypto’s trading epicenter, Japan became one of the most dynamic places in the world for crypto. The nation had been burned once already by the hack and subsequent failure of crypto exchange Mt Gox in 2014. The $530 million hack of local exchange CoinCheck in 2018 showed a turning point for crypto politics.

In came some of the strictest consumer protection legislation worldwide, placing high demands on exchanges (some of which complain that compliance reduces their profitability), including mandates to segregate exchange and client funds, and keep most client funds in cold wallets.

The upside is that customers of FTX’s Japanese subsidiary will get their money, while those of other FTX entities suffered huge losses. Now lawmakers in Japan are trying to show companies that it is a good time to establish themselves in the country.

Japan’s politicians emphasized speeding up the regulatory process last year. In December, the country adopted an important tax change, which will be put into effect this year. Projects will be able to issue tokens without paying burdensome corporate taxes, which had essentially forced them abroad. “It’s definitely a clear signal from the Japanese government that we are pro-crypto,” Akihisa Shiozaki, Liberal Democratic Party politician and general secretary of the party’s Web3 project team, told CoinDesk.

This year, the country’s lawmakers will continue discussions on legalizing decentralized autonomous organizations (DAOs), and regulation could be issued sometime during this year’s legislative session, which ends in June. Shiozaki said the goal is to add clarity to taxation and formal legal structure by providing limited liability to members involved in crypto projects. He said that key topics under discussion relate to disclosure obligations, security offerings and internal governance rules.

“What will not happen is a strengthening or tightening of controls against crypto,” Shiozaki said.

Hong Kong’s is a different story. Limited regulation of crypto meant the city was once home to some of the biggest names in the industry, including Bitmex and, at one time, now-defunct exchange FTX.

In recent years, Hong Kong has lost its leadership. Companies were spooked when their Securities and Futures Commission (SFC) began investigating token listings. When China’s latest ban on crypto was announced, some companies wondered if the city’s autonomy was under threat. The Zero-Covid policy and long hotel quarantines dampened spirits further. Asia’s premier crypto festival, Token 2049, left Hong Kong for its rival financial hub Singapore.

A person close to the SFC told CoinDesk that if the city was really going to ban crypto, regulators would have had a heads-up early on from the powers that be across the border and would not have spent months drafting regulations. Nevertheless, there were many companies that did not get that message.

Yet throughout last year, retail investors speculated on non-fungible tokens (NFTs) and used unlicensed exchanges, the city’s richest spoken metaverse, and bitcoin machines and over-the-counter crypto shops were everywhere in town. The philosophy seemed to be to make money until regulation came in.

Companies that wanted to be compliant complained that the regulator was sitting on applications for its opt-in licensing process, sending them a question once every few months. Only one firm had a license (another had approval in principle) when Hong Kong FinTech Week rolled around.

The city’s regulators saw an influx of talent and firms, which could affect its status as an international financial center. They made a joint push to change the narrative. They announced that the city was open to crypto firms and that they would dial back plans to restrict retail from using licensed exchanges. They repeatedly emphasized the city’s autonomy, in financial regulation, from China.

The incoming VASP regime, as it stood at the start of last year, would have meant that only exchanges with licenses could operate in the city and that they could not serve retail. It was due to come into force in March 2023 (and has since been pushed back to June 2023 with applicants also facing a deadline).

Formal consultations on requirements for virtual asset service providers to offer retail services will start soon, a government source told CoinDesk.

On January 11, Hong Kong’s Securities and Futures Commission (SFC) Executive Director Julia Leung indicated that the regulator is preparing a list of tokens that retail investors will be able to invest in. Jason Chan, senior associate at law firm Dechert, told CoinDesk that it is likely that the first list of tokens that exchanges will be able to offer to retail will be very limited because the SFC will initially stick to what they are comfortable with.

The SFC is actively working on a derivatives framework, but discussions with the industry have been quite preliminary and are unlikely to result in any regulation this year. “If players want to stay in the Hong Kong market, they’re probably going to remove some of their features,” Chan said.

However, what is expected this year is stablecoin regulation, with the Hong Kong Monetary Authority issuing a discussion paper outlining its position that only licensed companies will be able to issue stablecoins and offer cross-border payments. In addition, this year will also see further announcements from the SFC regarding the issuance of security token offerings and virtual asset structured products.

It’s worth noting that at FinTech Week it wasn’t all crypto. The government announced that it would relax visa requirements to attract more talent. “The bigger picture is really Hong Kong’s position as an international financial center at the macro level,” Khoo said.

Singapore tries to score two goals. It is famously conservative and protective of consumers, but it is also eager to establish itself as a modern fintech hub.

Faced with corporate taxes on token issuance in Japan, and Hong Kong appearing less friendly, Singapore’s established regulatory framework for crypto made it seem like a more predictable home base for many firms.

After FTX’s collapse, a Singaporean Web3 startup founder told CoinDesk that for many Singaporeans, crypto exchanges are not casinos, but digital banks to increase wages and invest in yield products.

“Our banking system is too conservative to offer similar product suites to common people,” the founder said. “Or they do, but charge ridiculous fees for unnecessarily complex financial products in the form of mutual funds and other junk.” No surprise, then, that Singapore contributed the second largest share to FTX.com’s monthly unique visitors.

Last year saw the implosion of some of crypto’s biggest names in Singapore: Terraform Labs and crypto hedge fund Three Arrows Capital, which was registered there. Towards the end of the year, police in Singapore began investigating crypto lender Hodlnaut, one of the victims of the infection. These explosions added more impetus to an already present tendency to prioritize risk management and plug consumer protection gaps.

The regulator’s wheel is already in motion. The Monetary Authority of Singapore (MAS) issued key consultations, which concluded just before Christmas, on stable coins and reducing consumer harm at retail.

Consultation conclusions will probably be issued during the first half of this year. Legislative changes will come towards the end of the year or early next year, according to industry insiders. What remains to be seen is whether MAS will incorporate opinions from industry players who have raised concerns.

Among the proposed measures is to restrict companies from lending retail customers’ tokens. The aim of this measure is clear – the collapse of platforms meant that consumers had little opportunity to recover their assets, as lending and betting is currently unregulated.

As MAS considers risk disclosure requirements for lending and betting, the regulator appears to be leaning towards an outright ban, Nizam Ismail, CEO of Ethikom Consultancy and chairman of the Blockchain Association of Singapore’s Regulation and Compliance Subcommittee, told CoinDesk. “By imposing blanket bans, Singapore-based platforms will be disadvantaged by not being able to offer these features,” Ismail said.

The proposal also has implications for decentralized economics. DeFi protocols such as Automated Market Makers (AMM) offer a number of advantages, such as allowing the trading of digital payment tokens in a permissionless and automatic manner using liquidity pools instead of a traditional market for buyers and sellers, Rahul Advani, policy director, APAC, on Ripple, said. The proposed restriction “significantly reduces what you can do with DeFi.”

Banks and brokers can do securities lending and that the outstanding question is why digital assets should be treated differently, he added.

Another area of ​​concern is that MAS may expect service providers to have the same technological risk requirements as banks. “It’s going to be onerous for fintechs,” Advani said. He noted that crypto companies often rely on other service providers who may not have the level of service level agreements that MAS expects.

On stablecoins, the industry is waiting to see if non-bank stablecoin issuers are subject to the same capital requirements. It is also an open question how MAS will treat issuers of stablecoins used in the local market but not issued in the local market.

Regulations issued by MAS will of course only apply to licensed firms, who are waiting to see if new rules still enable them to remain competitive. “There is a potential risk of unlicensed and unregulated service providers becoming more attractive venues for the Singaporean public to trade digital assets,” a representative from CoinHako, the country’s leading licensed exchange, told CoinDesk.

This year, Asia is perhaps second only to the EU when it comes to pushing for clarity in crypto policy.

DIRECTION (January 26, 10:57 UTC): Corrects the name of Dechert’s Jason Chan in two instances.