Cryptocurrency speculators will do well to take note of the trend of regulators around the world slapping tougher measures on digital currencies. Regulators in Singapore, mainland China, Hong Kong and other jurisdictions have introduced measures to curb the risks associated with investing in such assets.
This means the cryptocurrency market in Singapore, Hong Kong and other jurisdictions will be more strictly regulated and less of a wild market with euphoric hopes of quick and huge profits.
Although China recently issued an outright ban on private versions of cryptocurrency, Beijing is rolling out a national digital currency, which will have huge implications given the size of China’s economy and population. Meanwhile, Asia’s two leading international financial hubs, Hong Kong and Singapore, are exercising greater caution towards cryptocurrency, while allowing the cryptocurrency market to thrive.
Authorities in China, Hong Kong and Singapore are heeding European Central Bank President Christine Lagarde, who in January called for the global regulation of bitcoin, one of the most popular cryptocurrencies, saying it has been used for money laundering in some instances, reported Reuters.
On September 24, the People’s Bank of China (PBOC) declared all cryptocurrency transactions illegal in China and banned the trading of cryptocurrency. The country also placed a ban on bitcoin mining in May 2021, forcing many firms that engaged in the activity to close operations entirely or relocate to jurisdictions with a more favourable regulatory environment.
“Recently, speculation in virtual currency has raised its head, disrupting economic and financial order, abetting illegal and criminal activities such as gambling, illegal fundraising, fraud, multi-level marketing and money laundering, which seriously threatens the financial security of the masses”, said China’s central bank.
Among the cryptocurrency-related activities forbidden by the PBOC, cross-border cryptocurrency services provided online to residents in mainland China by overseas service providers will be deemed illegal under Chinese law.
On the other hand, China is rolling out the Digital Currency Electronic Payment (DCEP) – a digital payment and processing network managed by the People’s Bank of China (PBOC) – and the digital yuan. DCEP began trials in April 2020 and has been rolled out in various Chinese cities including Shanghai, Chengdu and Beijing.
A key difference between the digital yuan and private cryptocurrencies like Bitcoin is the Chinese government will be able to monitor digital yuan transactions, while private cryptocurrencies can avoid government scrutiny.
This centralised control of a digital currency means that China’s government has the ability to freeze and close accounts – something that is nearly impossible to achieve with the more democratic cryptocurrencies, Evan Friedin said in an article published by Australian think tank Lowy Institute, adding that the DCEP gives the Chinese government increased surveillance powers over its citizens and private companies.
Given China is the world’s second largest economy with a population of 1.4 billion people, as the digital yuan increasingly replaces cash, the DCEP will have an increasingly huge economic impact.
“More likely, the long-term potential of the digital yuan will be its ability to subvert the power of the American dollar by enabling countries sanctioned by the United States, such as Iran, North Korea and possibly Afghanistan, to conduct greater business with China”, Freidin said.
Cryptocurrency exchanges operating in Hong Kong will have to be licenced by the city’s markets regulator and are only allowed to provide services to professional investors, according to Hong Kong government proposals published in May. Crypto-related businesses may also be subject to existing regulations.
In 2019, the Hong Kong Securities and Futures Commission (SFC) introduced an “opt-in regime” where virtual asset (VA) platforms could include at least one security on the platform. Once licences are granted, investors can easily distinguish between regulated platforms and those which remain unregulated.
The opt-in regime enables the trading of VAs on an exchange that is fully regulated by the SFC, thereby entitling investors to the same investor protections they would be entitled when dealing with financial services players in the regulated market, Karen Man, Global Chair of Baker McKenzie’s Financial Services Regulatory Practice, explained.
Looking ahead, Hong Kong will introduce a broader licensing regime to regulate the operation of a VA service provider, which would require most VA exchanges to be regulated by the SFC, Man predicted. Whilst the main framework for the new regime was published in May this year, it remains subject to more consultations, she added.
“The Hong Kong regulators have consistently noted that like any investment, crypto currencies and virtual assets have potential risks. The risks they have highlighted include the potential for fraud, insufficient liquidity in a specific asset type, volatility and opaque pricing, the importance of due diligence and the risks of trading on unregulated virtual asset platforms,” Man said.
Hong Kong’s increasingly rigorous stance against cryptocurrency and possibly Beijing’s outright ban on cryptocurrency have apparently driven FTX Digital Markets, a widely traded digital asset derivatives exchange, to move from Hong Kong to the Bahamas.
On September 23, FTX chief executive officer Sam Bankman-Fried told industry publication Blockworks that “the proactive stance taken by the Bahamas and its regulatory bodies on cryptocurrencies” was one of the primary reasons for his company’s move from Hong Kong to the Bahamas.
Singapore is widely regarded as one of the most liberal regimes when it comes to the cryptocurrency space. The city-state has gained a reputation as a cryptocurrency safe-haven because long-term capital gains are not taxed.
The Southeast Asian nation continues to welcome cryptocurrency. October 1, DBS Vickers, the brokerage arm of DBS Bank, Singapore’s biggest bank, secured a Singapore licence to offer digital payment token services, while Australian cryptocurrency exchange Independent Reserve became the first foreign entity to be granted one, according to local media reports.
But on the same day, the Monetary Authority of Singapore (MAS) announced that it would introduce a digital platform and enabling regulatory framework for financial institutions to share with one another relevant information on customers and transactions to prevent money laundering, terrorism financing and proliferation financing.
To underscore the risks of digital currency in Singapore, the US Department of Justice (DOJ) announced on September 27 that Virgil Griffith, a US citizen, pleaded guilty to using cryptocurrency and blockchain technology to evade US sanctions against North Korea. Griffith, who had been living in Singapore, launched projects in 2018 to provide services to individuals in North Korea by developing and financing cryptocurrency structures.
As an example of increasing legislation in Singapore over virtual payment, on January 28, MAS announced the commencement of the Payment Services Act, which expands the financial watchdog’s regulatory ambit to include digital payment token services.
“The Act, among others, addresses AML/CFT (anti-money laundering/counter-financing of terrorism) risk and imposes obligations to perform customer due diligence and transaction monitoring. The MAS is also expanding the scope of activities which may need licensing to include, for example crypto custodians and will look to recalibrate as needed”, Stephanie Magnus, Head of the Financial Services Regulatory Practice Group at Baker McKenzie Wong & Leow in Singapore, explained.
While the cryptocurrency market in Singapore is small compared to the securities and bond market, the MAS continues to adapt its rules to ensure that the regulation remains effective and commensurate with the risks posed by cryptocurrency, said Magnus.
A recent example of cautionary action by MAS concerns Binance, the world’s largest cryptocurrency exchange, with a daily average trading volume of around US$25 billion, according to crypto data service CoinMarketCap. Binance chief executive officer Changpeng Zhao lives in Singapore and ranks among the 25 richest people in the Southeast Asian state.
Here to Stay
Singapore and Hong Kong, as international financial centres, must continue to be open to international markets. Thus, these two cities are trying to remain open to cryptocurrency while exercising stricter controls on it.
In contrast, China, with a huge domestic economy, is calling the shots on cryptocurrency, which will have a global impact in the long term.