One of the significant trends in 2023 was the increasing importance of Asia as a crucial region in the cryptocurrency industry. This can be attributed to renowned digital asset centers such as Singapore, as well as the resurgence of Hong Kong and Japan. Although these jurisdictions are open to digital assets, it is important to note that the enthusiasm surrounding them can be somewhat deceptive. Places that are often labeled as ‘crypto-friendly’ or ‘pro-crypto’ actually have some of the most stringent regulations globally. Being ‘crypto-friendly’ does not imply that it is easy to engage in cryptocurrency activities.
Singapore’s crypto regulation
Singapore has gained its reputation as being ‘pro-crypto’ due to its early efforts in regulating the industry and its consultative approach towards regulation. However, despite its support for asset tokenization, Singapore is not actually considered ‘crypto-friendly.’ This sentiment was expressed by Ravi Menon, the managing director of the Monetary Authority of Singapore, during a talk titled ‘Yes to Digital Asset Innovation, No to Cryptocurrency Speculation’ last year. Menon went even further this year by stating that cryptocurrencies have ‘failed the test of digital money.’ He argued that cryptocurrencies have not proven to be effective as a medium of exchange or a store of value, and highlighted the volatility and significant losses experienced by crypto investors.
These statements are not just mere words. Last year, MAS (Monetary Authority of Singapore) issued guidelines to discourage crypto trading among the general public, which included restrictions on crypto service providers from advertising in public areas. In contrast, Singapore regulators are highly supportive of the tokenization of funds such as foreign exchange and bonds.
Hong Kong’s friendliness comes with conditions
There has been significant excitement surrounding Hong Kong’s resurgence as a cryptocurrency hub. In June, the Securities and Futures Commission (SFC) of Hong Kong began accepting license applications for cryptocurrency exchanges. Hong Kong appears to be more openly friendly towards crypto trading compared to Singapore. Hong Kong regulators have even encouraged banks to onboard more cryptocurrency exchanges as clients.
However, this friendliness comes with several conditions. Currently, Hong Kong only has two licensed exchanges that are limited to spot trading and a restricted list of tokens. Additionally, 98% of an exchange’s assets must be held in cold wallets, and exchanges must establish a legal entity for custody within Hong Kong. Operating an exchange in Hong Kong is neither simple nor inexpensive, as obtaining approval involves a team of lawyers, consultants, and insurance providers. According to CoinDesk, obtaining a new license could cost anywhere between $12 and $20 million.
Moving on to Japan’s regulatory approach, the ruling Liberal Democratic Party has made it clear that they intend to position Japan as a Web3 capital. A proposal from Japan’s LDP project team in 2022 stated, ‘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.’ Japan has faced challenges in the past, such as the Coincheck hack in early 2018, which led to strict regulations on cryptocurrencies and raised concerns about the local industry. However, Japan’s regulatory approach proved successful when FTX collapsed in November 2022, as it allowed FTX Japan users to recover their funds.
Japan is also one of the first major economies to implement stablecoin regulations, but the requirements are stringent. Only banks, trust companies, and fund transfer services are permitted to issue stablecoins in Japan. The trust structure is likely to be the common path, but it mandates that 100% of the assets backing the stablecoin must be held in a trust in Japan and can only be invested in domestic bank accounts. Given Japan’s low interest rates, this could pose challenges for yen-based stablecoins to be profitable. However, Japan’s biggest obstacle in becoming a destination for crypto entrepreneurs may be high taxes.
Singapore, Hong Kong, and Japan share an important characteristic. While they may not have lenient regulations for cryptocurrencies, they do provide relative clarity. Exchanges have a clear understanding of what they can and cannot do. Regulators in all three jurisdictions have dedicated time to develop comprehensive regulatory frameworks and have shown a willingness to engage with the industry. In other words, you may not agree with the rules, but at least you know where to find them.
Lessons for the United States
This approach presents a stark contrast to the United States. Crypto advocates often criticize the U.S. government, particularly SEC Chair Gary Gensler, for being unsupportive of cryptocurrencies. The larger issue is not that the regulations are too stringent, but rather the ongoing debate about what constitutes a security and what constitutes a commodity.
As a result, in the absence of a national crypto framework, people seek clarity through court decisions. The SEC has filed numerous complaints, and many in the industry looked to the Ripple court decision in hopes that it would establish a clarifying precedent. However, not all companies have the resources and time to engage in lengthy battles with the SEC. The crypto environment in the United States is undeniably unwelcoming, but not because the rules are overly strict. It is because there is a lack of consensus on what those rules should be.
Global crypto regulations are clearly moving towards stricter measures, as demonstrated by the upcoming implementation of Europe’s MICA (Markets in Crypto-Assets) next year. The extensive regulations for the 27 member states of the European Union, encompassing approximately 450 million people, will be far from lenient. However, it is important to strike a balance and avoid excessive strictness. This is why it is crucial for regulators to be flexible and open to dialogue with the industry, allowing for appropriate adjustments if overly burdensome rules hinder business growth.
Perhaps it is time to retire the term ‘crypto-friendly,’ as it implies ease. A more accurate term would be ‘crypto-clear.’ When the crypto market fully recovers, this clarity will provide distinct advantages to places like Singapore, Hong Kong, and Japan.