TECHNICAL TUESDAY: Crypto gains acceptance

There have been many parts to ‘Crypto Winter’ and the decline in valuations, but two recent developments suggest that the nascent asset class is here to stay. Only in August 2022 did a bipartisan group of US senators propose federal legislation to regulate digital goods. And Coinbase, the US crypto exchange, partnered with BlackRock to give the asset manager’s institutional clients direct access to crypto.

In the US, digital assets are currently governed by a patchwork of state-level regulations, which can leave gaps in protecting consumers from fraud. The Digital Commodities Consumer Protection Act of 2022 would give the Commodity Futures Trading Commission exclusive jurisdiction over the digital commodity spot market, which senators expect will lead to more protections for consumers, market integrity and innovation.

Crypto market participants welcomed the law to provide clear federal oversight of commodity markets for digital assets. Sam Bankman-Fried, CEO of FTX, said the crypto space would find the regime – which provides extensive customer protection and oversight to detect crypto commodity markets in the US – both constructive and prosperous. Similarly, Faryar Shirzad, Chief Policy Officer at Coinbase, emphasized that a federal regulatory regime for crypto is a big deal. It ensures that the US will keep pace with the crypto policies of other jurisdictions.

According to a recent webinar jointly hosted by Regulation Asia and Nasdaq, Hong Kong and Singapore have taken the lead in building the regulatory framework required for resilience and trust in crypto markets. The Hong Kong government has included amendments to its Anti-Money Laundering and Counter-Terrorism Ordinance, which includes a new licensing regime for virtual asset service providers (VASPs). In Hong Kong, “virtual assets” refer to Bitcoin and other altcoins, as well as stablecoins and specific governance tokens.

Angelina Kwan, chief executive of Stratford Finance Ltd., said: “All existing guidelines for other financial institutions – internal control guidelines, code of conduct for fund management, regulation of automated trading services – will apply to virtual asset licensees.”

Singapore is also preparing its own legislation in a new Financial Services and Markets Act. Janice Goh, a partner at Cavenagh Law LLP, an alliance with Clifford Chance in Singapore, stressed: “There is a gap in the sense that the Payment Services Act does not regulate providers who set up shop in Singapore but do not offer services in Singapore. The new law will require all VASPs with a place of business in Singapore to be licensed.”

An investor in Singapore also successfully appealed to the courts to freeze the transfer of a non-fungible token (NFT). Goh said: “It is the first in Singapore and Asia and the first globally in the context of a commercial dispute where it recognizes an NFT as an asset.”

Institutional interest

Regulatory frameworks are necessary to gain confidence from institutional investors in the new asset class. David Kwan, head of sales and business development for Asia-Pacific at Nasdaq Market Surveillance, noted: “Many large institutional banks and investment firms have been preparing for this development for a very long time. As these types of regulations come in, we will see an increasing number market participants and crypto markets are maturing.”

Kwan then discussed how the crypto sector could learn from traditional capital markets, such as their proven risk models and controls to protect investors.

“Maybe there are changes we need to apply specifically to cryptoassets, but at the end of the day, when it comes to investors, they want the same protection no matter what asset class they’re trading,” Kwan added. “They want to make sure that when they invest in something, the market integrity is there, and this will only help to get more institutional adoption.”

According to the webcast, about 6.5% of all Bitcoin was held by institutions in June 2022 – up from zero a few years ago. Continued institutional demand was highlighted by Coinbase partnering with BlackRock to give institutional clients of Aladdin, the asset manager’s end-to-end investment management platform, direct access to crypto, starting with bitcoin. Coinbase Prime will provide crypto trading, custody, prime brokerage and reporting capabilities to Aladdin’s institutional clients, who are also clients of Coinbase.

Joseph Chalom, Global Head of Strategic Ecosystem Partnerships at BlackRock, said: “Our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to effectively manage the operational lifecycle of these assets.”

We may be experiencing a ‘crypto winter’, but as the poet Percy Bysshe Shelley wrote in his ‘Ode to the West Wind’: “If winter comes, can spring be far behind?”

For more on market surveillance, please check out a recent webinar hosted jointly by Regulation Asia and Nasdaq and Nasdaq MarketInsite’s article, “The Role of Market Surveillance: Building Trust in Crypto Markets.”