Crypto-Friendly Does Not Mean Crypto-Easy

A major theme of 2023 was Asia’s continued rise as a critically important region in the crypto world. This is largely thanks to well-known digital asset hubs like Singapore, as well as the re-emergence of Hong Kong and Japan. While these jurisdictions indeed welcome digital assets, the hype around them can be somewhat misleading. Places that are commonly referred to as “crypto-friendly” or “pro-crypto,” actually have some of the toughest rules in the world. Crypto-friendly does not mean crypto-easy.

Singapore got its pro-crypto reputation thanks to its early moves to regulate the industry and a consultative approach from its regulators. But while Singapore may be all in on asset tokenization, it’s actually not “crypto-friendly” at all. Singapore’s financial regulator basically said as much. Last year, Ravi Menon, managing director of the Monetary Authority of Singapore, gave a talk called, "Yes to Digital Asset Innovation, No to Cryptocurrency Speculation.” This year he went even further, saying that cryptocurrencies “have failed the test of digital money.” Menon argued that cryptocurrencies have not performed well as a medium of exchange or a store of value. He also pointed to sharp speculative swings and significant losses by crypto investors.

It’s not just talk, either. Last year MAS issued guidelines to discourage crypto trading by the general public, which included prohibiting crypto service providers from advertising in public areas. By contrast, Singapore regulators are extremely enthusiastic about the tokenization of funds such as foreign exchange and bonds.

There’s also been a lot of excitement about Hong Kong’s re-emergence as a crypto hub. In June, Hong Kong’s Securities and Futures Commission (SFC) started accepting license applications for crypto exchanges. Hong Kong appears to be more outwardly friendly to crypto trading than Singapore. Hong Kong regulators, for example, pushed banks to take on more cryptocurrency exchanges as clients.

But again, this friendliness comes with a lot of conditions. Hong Kong still has only two licensed exchanges, with only spot trading and a limited list of tokens. Ninety-eight percent of an exchange’s assets must be held in cold wallets. Exchanges also must set up a legal entity for custody inside of Hong Kong. Operating an exchange in Hong Kong is neither simple nor cheap, as getting approved entails a team of lawyers, consultants and insurance providers. Getting a new license could cost anywhere between $12 and $20 million, CoinDesk reported.

Then there’s Japan, whose ruling Liberal Democratic Party has been clear about its intention to make Japan a Web3 capital. “While many other countries are standing still and shrugging their shoulders in the face of the cold wind, Japan is positioned to play a unique role in the crypto industry,” read a 2022 proposal from Japan’s LDP project team. Japan is no stranger to cold winds. Following the Coincheck hack of early 2018, Japanese regulators were so tough on crypto that some feared the local industry was in crisis. But when FTX collapsed in November 2022, Japan’s regulatory approach led to a major win. Japan requires crypto exchanges to segregate exchange and customer assets, and this helped FTX Japan users actually get their money back.

Japan also is among the first major economies to see stablecoin regulations go into effect, but it sets a very high bar. Only banks, trust companies and fund transfer services are allowed to issue stablecoins in Japan. The trust structure is likely to be a common path, but this requires that 100% of the assets backing the stablecoin to be kept in a trust in Japan, and are only permitted to be invested in domestic bank accounts. Given Japan’s low interest rates, this could make it very challenging for yen-based stablecoins to be profitable. But in the end, Japan’s biggest obstacle to being a destination for crypto entrepreneurs may be high taxes.

Singapore, Hong Kong and Japan have something important in common. They might not be easy on crypto, but they are relatively clear. Exchanges have an idea of what they can and can not do. Regulators in all three jurisdictions have put in the time to craft comprehensive regulatory frameworks and have also demonstrated willingness to engage with the industry. In other words, you may not like the rules, but at least you know how to find them.

This approach poses a stark contrast to the United States. Crypto advocates often criticize the U.S. government, and more specifically SEC Chair Gary Gensler, for being unfriendly toward crypto. The larger problem is not that regulations are too harsh, it’s that people are still arguing about what is a security and what is a commodity.

The result is that in the absence of a national crypto framework, people look for clarity in court decisions. The SEC has levied complaint after complaint. Many in the industry looked to the Ripple court decision in the hope that it would set a clarifying precedent. But not all companies have the time and capital to spend years battling the SEC in court. The crypto environment in the United States is decidedly unfriendly, but it’s not because the rules are too strict. It’s because no one agrees on what they are.

Global crypto regulations are clearly trending toward strictness, as we will see when Europe’s MICA takes effect next year. The extensive regulations for the 27 member states of the European Union, covering about 450 million people, are going to be anything but lax. And yes, it is possible to be too strict. That’s why it’s so important for regulators to be flexible and open to talking to the industry, so that they can make appropriate changes if overbearing rules are making it impossible for businesses to thrive.

It may be time to retire the term “crypto-friendly,” which gives the impression of ease. A more accurate term is crypto-clear. If and when the crypto market fully revives, that clarity will give places like Singapore, Hong Kong and Japan a distinct advantage.