Top global financial centers Japan, Hong Kong and Singapore have some of the most mature financial regulations worldwide. It’s no surprise, therefore, that discussions on how to regulate crypto began years ago, though they have taken very different directions.
Japan went hard on consumer protection but more recently has relaxed requirements for token listings and pushed a more welcoming message for firms. While China banned crypto trading and clamped down on mining, Hong Kong exerted its autonomy to chart its own way, announcing that it was open to crypto firms in a bid to preserve its status as an international finance center. Crypto firms may find meeting the regulatory bar to be difficult in the beginning, but the signs are that regulations will keep easing. 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, kicked off a regulatory process that looks likely to result in more restrictive regulations.
Despite their differences, “The more developed markets in Asia are fairly advanced in providing clarity on what falls within the virtual asset service provider (VASP) framework,” Vivien Khoo, co-founder of the Asia Crypto Alliance said, noting that Hong Kong and Singapore have a “fairly similar” VASP framework.
Collaboration among countries across the region will tighten. “It will be much harder to engage in regulatory arbitrage now in Asia,” Khoo said.
Japan was among the earliest countries worldwide to regulate cryptocurrency exchanges, but that wasn’t because it wanted to be ahead of the curve. The agency simply had drafted Japan's body of law on virtual currencies to fulfill an agreement made in 2014 with fellow 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 proved a turning point for its crypto policy.
In came some of the strictest consumer protection legislation worldwide, placing high demands on exchanges (some of them complain that compliance cuts into their profitability), including mandating them to segregate exchange and customer assets, and hold most customer assets in cold wallets.
The upside is that customers of FTX’s Japan subsidiary will get their funds, while those of other FTX entities suffered tremendous losses. Now, legislators in Japan are looking to show companies that it’s a good time to set up shop in the country.
Japan’s politicians put their heft behind speeding up their regulatory process last year. In December, the country approved an important tax change, which will be put into law this year. Projects will be able to issue tokens without paying onerous 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 secretary general of the party’s Web3 project team, told CoinDesk.
For a deeper dive into Japan's emerging crypto policy, read Japan Embraces Web3 As Global Regulators Grow Wary of Crypto
This year, the country’s lawmakers will continue discussions on legalizing decentralized autonomous organizations (DAO) and regulation may be issued sometime during this year’s legislative session, which ends in June. Shiozaki said that the aim is to add clarity in taxation and formal legal structure in giving limited liability to members involved in crypto projects. He said that key themes under discussion relate to disclosure obligations, security offering, 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 on crypto meant the city was once home to some of the biggest names in the business, including Bitmex and, at one time, now-defunct exchange FTX.
In recent years, Hong Kong lost that lead. Firms were scared off when its Securities and Futures Commission (SFC) started examining 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 further dampened spirits. 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 were really 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 many months drawing up regulation. Still, many firms weren’t getting that message.
Even so, all through last year retail investors were still speculating on non-fungible tokens (NFT) and using unlicensed exchanges, the city’s richest were talking metaverse, and bitcoin machines and over-the-counter crypto shops were everywhere in the city. The philosophy seemed to be to make money until regulation came in.
Companies that wanted to be compliant complained that the regulator sat on applications for its opt-in licensing process, sending them a question once every few months. Only one firm had a license (another had in-principle approval) by the time Hong Kong FinTech Week rolled around.
The city’s regulators saw an outflow of talent and firms, which could affect its status as an international finance center. They made a concerted push to change the narrative. They announced the city was open to crypto firms and that they would dial back on plans to restrict retail from using licensed exchanges. They repeatedly underscored the city’s autonomy, in financial regulation, from China.
The incoming VASP regime, as it stood at the beginning of last year, would have meant only exchanges with licenses could operate in the city and that they could not serve retail. It was set to come into effect in March 2023 (and has since been pushed back to June 2023 with applicants also enjoying a grace period).
Formal consultations on requirements for virtual asset service providers to offer services to retail will start soon, a government source told CoinDesk.
On Jan 11, Hong Kong's Securities and Futures Commission (SFC) Chief Executive Officer Julia Leung indicated that the regulator is preparing a list of tokens in which retail investors will be able to invest. Jason Chan, senior associate at law firm Dechert, told CoinDesk that it is likely the initial list of tokens that exchanges will be able to offer to retail will be very limited because the SFC will first stick to what they’re comfortable with.
The SFC is actively working on a derivatives framework but discussions with the industry have been quite preliminary and unlikely to result in any regulation this year. “If players want to stay in the Hong Kong market they are likely going to strip out some of their functions,” Chan said.
What is expected this year, however, is stablecoin regulation, with the Hong Kong Monetary Authority issuing a discussion paper laying out its position that only license-holding companies will be able to issue stablecoins and offer cross-border payments. In addition, this year will also see further announcements from the SFC on the issuance of security token offerings and virtual asset structured products.
It’s worth noting that at FinTech Week, not everything was crypto. The government announced 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 is trying to square two goals. It’s famously conservative and protective of consumers but it’s also eager to establish itself as a modern fintech hub.
Faced with corporate taxes on token issuance in Japan, and Hong Kong appearing less than friendly, Singapore’s established regulatory framework for crypto made it seem like a more predictable homebase for many firms.
After FTX’s collapse, a Singaporean Web3 startup founder told CoinDesk that crypto exchanges aren’t casinos to many Singaporeans, but digital banks for on-ramping their salaries and investing in yield products.
“Our banking system is too conservative to offer similar product suites to simple folk,” the founder said. “Or they do, but charge ridiculous fees for needlessly complex financial products in the form of unit trusts and other garbage.” No surprise, then, that Singapore contributed the second-largest chunk 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, who were registered there. Toward year’s end, Singaporean police began investigating crypto lender Hodlnaut, one of the casualties of contagion. These blowups gave more impetus to an already present tendency to prioritize risk management and close consumer protection gaps.
The regulator’s wheels are already in motion. The Monetary Authority of Singapore (MAS) issued key consultations, which closed just before Christmas, on stablecoins and reducing consumer harm to retail.
Consultation conclusions will likely be issued within 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 are restricting firms from lending out retail customers’ tokens. The aim of this measure is clear – the collapse of platforms meant consumers had little recourse to recover their assets, as lending and staking is currently unregulated.
While MAS is considering requirements for risk disclosures for lending and staking, the regulator seems to be leaning towards outright prohibition, Nizam Ismail, CEO of Ethikom Consultancy and chairman of the regulatory and compliance sub-committee for the Blockchain Association of Singapore, told CoinDesk. “By putting in place blanket bans, Singapore-based platforms would be disadvantaged in not being able to offer these features,” Ismail said.
The proposal also has implications for decentralized finance. DeFi protocols such as Automated Market Makers (AMM) offer a number of benefits, such as allowing digital payment tokens to be traded in a permissionless and automatic way by using liquidity pools rather than a traditional market of buyers and sellers, Rahul Advani, policy director, APAC, at Ripple, said. The proposed restriction “reduces what you can do with DeFi substantially.”
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. “That’s going to be onerous for fintechs,” Advani said. He noted that crypto companies often rely on other service providers which may not have the level of service-level agreements that MAS expects.
On stablecoins, the industry is waiting to see whether stablecoin issuers that are not banks are subject to the same capital requirements. There is also an open question on how MAS will treat issuers of stablecoins used in the local market but not issued in the local market.
Of course, regulations issued by MAS will only apply to licensed firms, which are waiting to see if new regulations still enable them to remain competitive. “There is a potential risk that unlicensed and unregulated service providers become more attractive venues for the general Singapore public to trade digital assets,” a representative from CoinHako, the country’s leading licensed exchange, told CoinDesk.
This year, Asia may be second only to the European Union, in pushing for clarity in crypto policies.
CORRECTION (Jan. 26, 10:57 UTC): Corrects the name of Dechert's Jason Chan in two instances.
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