Hong Kong, Singapore, and Japan’s Regulation of Cryptocurrencies: What You Need to Know

Some of the most developed financial regulations in the world are found in Singapore, Hong Kong, and Japan. Therefore, it is not surprising that talks about how to govern cryptocurrency have been ongoing for a while, even though they have diverged greatly.

Japan aggressively pursued consumer protection, but in more recent times, it has loosened the criteria for token listings and promoted a more friendly tone for businesses. While China outlawed cryptocurrency trading and tightened restrictions on mining, Hong Kong asserted its independence and said that it was open to cryptocurrency enterprises in an effort to maintain its position as a major international financial hub.

Although completing regulatory requirements may initially prove challenging for crypto enterprises, there are indicators that rules will continue to loosen. Existing market participants in Singapore are aware that rules will continue to tighten. High-profile companies registered in the city-state that collapsed last year, including Three Arrows Capital and Terraform Labs, set in motion a regulatory procedure that appears likely to lead to more stringent controls.

Vivien Khoo, co-founder of the Asia Crypto Alliance, noted that Hong Kong and Singapore have a “fairly similar” VASP framework and that 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.

There will be closer coordination amongst the nations in the region.

According to Khoo,

It will be much harder to engage in regulatory arbitrage now in Asia

Japan

Japan was one of the first nations in the world to regulate cryptocurrency exchanges, but not because it wanted to be first. According to a source close to Japan’s Financial Services Agency, the organization simply produced Japan’s body of law on virtual currencies to meet an agreement signed in 2014 with other participants in the International Organization of Securities Commissions (IOSCO) (FSA).

But after the Chinese government closed down some exchanges in what had been the hub of cryptocurrency trading in early 2017, Japan emerged as one of the industry’s most vibrant nations. The 2014 Mt Gox cryptocurrency exchange hack and ensuing catastrophe had already burnt the country once. The local exchange CoinCheck’s $530 million hack in 2018 marked a turning point in its cryptocurrency policies.

The introduction of some of the strictest consumer protection legislation in the world imposed high demands on exchanges, including the requirement that they segregate exchange and customer assets and keep the majority of customer assets in cold wallets (some exchanges complain that compliance reduces their profitability).

The benefit is that FTX’s Japan subsidiary’s clients would receive their money, although those of other FTX corporations incurred severe losses. Now, Japanese lawmakers want to convince businesses that it’s a good time to open up shop there.

Last year, the political clout of Japan supported the expediting of their regulatory procedure. A significant tax overhaul that was adopted by the nation in December will become law this year. Without having to pay onerous corporate taxes, which have practically drove projects overseas, they will be able to issue tokens. Akihisa Shiozaki, a legislator with the Liberal Democratic Party and head of the team working on the party’s Web3 initiative, said that the move was “certainly a clear statement from the Japanese government that we are pro-crypto.”

The nation’s parliamentarians will continue to consider the legalization of decentralized autonomous organizations (DAO) this year, and a regulation may be adopted at some point before the end of the legislative session in June. According to Shiozaki, the goal is to increase taxation transparency and formalize the legal system to give participants in cryptocurrency initiatives little liability. He stated that the three main topics up for consideration are internal governance regulations, security offerings, and disclosure duties.

What won’t happen, according to Shiozaki, is a tightening or strengthening of regulations around cryptocurrency.

Hong Kong

Hong Kong’s situation is unique. Because there was little regulation of cryptocurrencies, the city once hosted some of the largest names in the industry, including Bitmex and the now-defunct exchange FTX.

Hong Kong has since lost that advantage. When its Securities and Futures Commission (SFC) began scrutinizing token listings, businesses fled. Some businesses questioned whether the city’s autonomy was in danger after China’s most recent crypto prohibition was issued. Long hotel quarantines and the Zero-Covid policy further lowered spirits. Token 2049, Asia’s largest cryptocurrency festival, departed for Singapore, a rival financial center, from Hong Kong.

A source close to the SFC said that if the city were to outright outlaw cryptocurrencies, regulators would have received a heads-up from those in power over the border early on and would not have needed to spend months coming up with regulations. Many businesses, though, didn’t understand that message.

Despite this, retail investors continued to speculate on non-fungible tokens (NFT) and use unlicensed exchanges throughout last year, the wealthiest residents of the city discussed the metaverse, and there were numerous bitcoin ATMs and over-the-counter cryptocurrency stores across the city. Making money until regulation came into effect seems to be the guiding principle.

Businesses who wished to comply complained that the authority was taking its time reviewing applications for its opt-in licensing process and only periodically contacting them with questions. By the time Hong Kong FinTech Week arrived, only one company had been granted a license (another had received in-principle permission).

The city’s regulators saw a talent and corporate exodus, which could jeopardize the city’s reputation as a global financial hub. They worked diligently to alter the story. They declared that the city was welcoming to cryptocurrency businesses and that they would abandon their intentions to prevent consumers from utilizing authorized exchanges. They emphasized numerous times the city’s independence from China in terms of financial regulation.

As of the beginning of last year, the upcoming VASP regime would only have allowed exchanges with licenses to operate in the city and they could not service retail. The implementation date was slated for March 2023. (and has since been pushed back to June 2023 with applicants also enjoying a grace period).

A government source said that formal consultations over the criteria for virtual asset service providers to offer services to retail customers will shortly begin.

The Securities and Futures Commission (SFC) of Hong Kong’s Chief Executive Officer Julia Leung stated on January 11 that the regulator is putting together a list of tokens that retail investors will be permitted to buy in. The initial list of tokens that exchanges will be able to provide to retail will probably be quite small because the SFC will likely start with what they are most familiar with, according to Jason Choi, senior associate at law firm Dechert.

The SFC is actively developing a framework for derivatives, but because of the preliminary nature of the industry’s discussions, it is unlikely that any regulations would be passed this year. Players would probably eliminate part of their functions if they want to remain in the Hong Kong market, according to Choi.

Stablecoin regulation is anticipated this year, with the Hong Kong Monetary Authority publishing a discussion paper outlining its stance that only license-holding businesses would be permitted to create stablecoins and provide cross-border payments. The SFC will also make other announcements this year regarding the creation of structured products based on virtual assets and security token sales.

It’s important to remember that not everything at FinTech Week was cryptocurrency. To draw in more talent, the government declared it will simplify visa criteria. The status of Hong Kong as a global financial hub, according to Khoo, is truly the greater picture.

Singapore

In Singapore, two objectives are being squared. It is renowned for being conservative and pro-consumer, but it also wants to develop itself as a leading finance hub.

Given that Japan levied corporation taxes on the issuance of tokens and that Hong Kong was less than welcoming, Singapore’s well-established regulatory environment for cryptocurrencies seemed like a more reliable base of operations for many businesses.

After FTX’s demise, the founder of a Singaporean Web3 business said that many Singaporeans view cryptocurrency exchanges as digital banks rather than casinos where they may invest in yield products and on-ramp their income.

The entrepreneur claimed that “our banking system is too conservative to offer similar product suites to basic individuals.” Or they do, but they demand exorbitant fees for obscenely complicated financial products like unit trusts and other junk.

Therefore, it is not surprising that Singapore accounted for the second-largest portion of monthly unique visitors to FTX.com.

Some of the biggest names in cryptocurrency collapsed in Singapore last year: Terraform Labs and the Singapore-registered crypto hedge firm Three Arrows Capital. As the year came to a close, Singaporean police started looking into crypto lender Hodlnaut, one of the victims of contagion. These explosions strengthened a preexisting propensity to give priority to risk management and close consumer protection loopholes.

The wheels of the regulator are already in action. Prior to Christmas, the Monetary Authority of Singapore (MAS) released important consultations on stablecoins and minimizing consumer harm to retail.

The results of the consultations will probably be released in the first part of this year. Industry experts predict that new legislation will be passed near the end of the current year or early in the following one. It is unclear whether MAS will take into account the concerns voiced by industry participants.

Restricting businesses from loan out tokens from retail customers is one of the suggested approaches. The goal of this measure is crystal clear: since lending and staking are currently unregulated, users have little options once platforms collapsed to retrieve their money.

According to Nizam Ismail, CEO of Ethikom Consultancy and head of the regulatory and compliance subcommittee for the Blockchain Association of Singapore, the regulator appears to be leaning toward outright prohibition even though MAS is considering requirements for risk disclosures for lending and staking. Ismail stated that platforms located in Singapore would suffer from blanket prohibitions since they wouldn’t be able to provide these capabilities.

The plan has effects on decentralized finance as well. According to Rahul Advani, policy director for APAC at Ripple, DeFi protocols like Automated Market Makers (AMM) provide a number of advantages, including the ability to trade digital payment tokens automatically and without a buyer’s or seller’s market using liquidity pools. The proposed restriction “significantly limits what you can accomplish with DeFi.”

He continued,

The unanswered question is why digital assets should be regarded differently. Banks and brokers can perform securities lending.

The possibility that MAS would demand that service providers adhere to the same technology risk standards as banks is another cause for concern. That will be difficult for fintech companies, Advani added. He pointed out that cryptocurrency businesses frequently depend on other service providers, some of whom might not have the kind of service-level agreements that MAS demands.

The industry is waiting to see if stablecoin issuers who are not banks are subject to the same capital requirements when it comes to stablecoins. Another unanswered topic is how MAS would handle stablecoin issuers that are utilized on the local market but were not issued there.

Regulations established by MAS will, of course, only be applicable to licensed businesses, who are watching to see if the new rules will still allow them to compete. According to a spokesman from CoinHako, the top licensed exchange in the nation,

there is a possible risk that unlicensed and unregulated service providers become more alluring venues for the general Singapore public to trade digital assets.

Asia may have outdone the European Union this year in its efforts to clarify crypto policies.

Related

• Japan Wants Crypto Regulated Like Banks
• Singapore’s crypto future goals threatened by FTX’s collapse
• Hong Kong aims to become a hub by legalizing retail cryptocurrency trading