Regulatory wheels are definitely turning, albeit slowly.
October 3, 2022
Given the size and global influence of the US market, all eyes were on President Biden’s much awaited crypto regulation framework published last month. But many of those waiting patiently for the Executive Order’s publication were left despondent. Just like delayed homework, the later it’s submission the better it should be. Alas, this particular piece of homework lacked the detail the global crypto community had craved. There was at least a clear directive for US agencies to collaborate when it comes to crypto oversight. This multidisciplinary or joined-up regulatory approach with regulatory and law enforcement agencies working together to maximise effectiveness (and streamline processes for VASPs) is something we welcome, and a definite trend that is emerging in APAC too.
By the comparatively slow rate that the wheels of regulation turn, September witnessed a flurry of significant regulatory updates in APAC. What has caught our attention?
We’re encouraged to see that the Monetary Authority of Singapore (MAS) and India's International Financial Services Centres Authority (IFSCA) have signed an agreement to facilitate regulatory collaboration and partnership in fintech. The agreement will promote collaboration on the development and implementation of regulatory sandboxes, and promote sharing of non-supervisory related information on fintech innovation projects. This is the first significant cross-border collaboration between Singapore and India that directly impacts the digital assets sector, and recognition of the global interconnectedness of the space.
The crypto sector in Hong Kong - and indeed everyone in Hong Kong - breathed a collective sigh of relief on news of the lifting of its stringent quarantine measures. There are differing views on the policy which we’ll avoid commenting on, and its impact far and beyond the digital assets sector has been well-documented. But its certain that the combination of quarantine measures, and more significantly a regulatory policy that eliminated retail investment in crypto has accelerated the “Crypto Exodus” that Hong Kong has seen. It is therefore a positive sign that Hong Kong’s Legislative Council appears to be considering allowing retail investment to return, as evidenced by minutes from a recent LegCo meeting.
Furthermore, Securities and Futures Commission (SFC) also co-hosted a session with Financial Services and the Treasury Bureau (FSTB) and Invest Hong Kong to address common questions and misconceptions relating to security token offerings, and invited proposals to be put forward by industry participants. This open dialogue between regulators and industry is something we have been calling for, and it is encouraging to see. We anxiously await news of who will take over leadership of the Securities and Futures Commission (SFC) as Ashley Alder departs, and hope the authorities will prioritise candidates well placed to support growth not just of traditional finance, but the fast growth potential of digital assets too.
Concrete steps have also been taken in Singapore with the Monetary Authority of Singapore (MAS) launching its “Financial Services Industry Transformation Map 2025” which details ambitious plans in digitising financial infrastructure and attracting more jobs in the fintech space.
Combined, these steady but sure steps unveiled in September across APAC mark real progress in the regulatory picture across the region. It is fitting, therefore, that we culminate the month with people from all around the world gathering in Singapore for Token2049. This has been an opportunity to showcase the wealth of talent, innovation, and growth potential for the digital assets sector in APAC, and has been an important statement of intent that APAC seeks to remain at the forefront of the global digital assets sector now.
Crypto regulations must spur and not deter development of the sector.
September 8, 2022
The ACA welcomes the International Monetary Fund’s call for a global response to crypto regulation that is co-ordinated, consistent, and comprehensive. The IMF is also right to flag that “applying existing regulatory frameworks to crypto assets, or developing new ones, is challenging for several reasons.”
Given the distinctly different profile of crypto and much faster lifecycle of crypto products versus TradFi, it would be completely impractical to impose TradFi rules wholesale on the crypto sector. However, regulators and industry participants also need to be agnostic to the genesis of regulations - there’s no point throwing out rules that work just because they were originally developed for traditional finance, nor over-burdening nascent crypto companies with onerous and unnecessary rules solely applicable to traditional finance.
Regulators have an awkward balancing act when it comes to implementing new crypto regulations. On the one hand there is an urgent need for robust guidelines for digital assets that clarify rules for all - in particular, putting in place appropriate measures to protect consumers. On the other hand regulators need to ensure that rules spur rather than deter investment and innovation in this sector which, as the IMF correctly states “have moved from being niche products in search of a purpose to having a more mainstream presence as speculative investments, hedges against weak currencies, and potential payment instruments.”
In Singapore, the Monetary Authority of Singapore off its public consultation of crypto regulations this month which presents a perfect opportunity to begin the process of developing new regulations that align with the IMF’s vision of a co-ordinated, consistent, and comprehensive global approach. In our view to do this MAS must consult far and wide to maximize understanding of this fast evolving industry within and beyond the city state. And, crucially, there needs to be a commitment that rule makers and the industry work hand-in-hand - regulators can be educated by industry partners and industry participants developing greater sensitivity to where regulators are coming from.
HONG KONG VASP REGIME: A NEW DAWN FOR GLOBAL CRYPTO REGULATION?
August 2, 2022
Hong Kong’s proposed new licensing regime for Virtual Asset Service Providers (VASPs) could set a precedent for global VASP regulation, but only if critical areas are properly addressed.
Hong Kong’s Legislative Council is in the process of reviewing amendments to its Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), which will introduce a new licensing regime for VASPs.
With crypto regulation still in its infancy, the proposed measures present a unique opportunity for Hong Kong to set a new global standard for robust, rational and flexible regulation of VASPs.
There are encouraging signs that the new framework could deliver on this vision. It looks set to provide much-needed clarity on how VASPs are defined, offer better investor protection and leave scope for VASPs to expand their future activities. Many industry players welcome these principles. If executed correctly, they will help to build trust in crypto while still giving companies room to develop their offerings.
However, the bill needs to strike a balance between creating a strong regulatory environment and reassuring VASPs that Hong Kong remains an attractive place to do business. It was therefore encouraging to hear Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue’s comments at the recent meeting of G20 finance ministers in Bali where he underlined the importance of cryptocurrency and decentralized finance stating, “the technology and the business innovation behind these developments are likely to be important for our future financial system.”
But for Hong Kong to become a leading light in global crypto regulation without deterring key industry players, a number of critical areas need to be addressed.
Question marks remain around how some of the new requirements will be executed. As it stands the new regulations will require VASPs to appoint at least two approved Responsible Officers (ROs) to supervise compliance, in much the same way as non-crypto firms are already required to do. However, few of the ROs currently approved by the Securities and Futures Commission (SFC) have speciailised crypto knowledge, and almost all come from a traditional finance background. If ROs do not fully understand the nuances of the crypto industry, it will be a challenge for them to assess risks appropriately, which could undermine all that the new regulatory regime is trying to achieve.
Industry participants are also expressing concerns about how the regulators will manage any influx of new licence applications, alongside new products and activities for existing licence holders.
Finally, there needs to be clarity on regulatory oversight. Clearly identifying what activity falls within the remit of the SFC versus that of HKMA, as well as efforts to minimize overlap between jurisdictions. Without this the new bill could simply muddy the waters and be perceived as adding unnecessary bureaucracy for VASPs.
In light of these as yet unresolved challenges, Hong Kong must be careful to avoid killing off the golden goose before it lays its eggs. The crypto industry brings much-needed innovation that could create a more advanced, efficient and fair global financial system. The blockchain technology underpinning crypto could and should herald a new age of the internet and facilitate equal access to financial services the world over.
We believe that Hong Kong can continue to be one of the global hubs for crypto innovation while maintaining a strong regulatory framework. But in order to extract the full potential of Web3 and blockchain technology in the financial world and beyond, creative approaches to regulation are needed, and it’s essential that regulators work with market participants to create solutions fit for an ever-evolving industry. Hong Kong must recognise that applying the familiar regulation models of traditional finance risks overburdening crypto-native companies, alienating Web3 visionaries and ultimately stifling innovation.
