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Global Crypto Regulatory Landscape
What is Ocular’s take on the recent regulatory developments in the space? Is Asia more receptive towards crypto as compared to the West? What do the regulations mean for the future of crypto?
One of the key crypto themes in our 2023 thematic outlook is the rise of clearer and more robust regulations in the space. This is an understandable and timely development, given how incidents in 2022 revealed the shortcomings and loopholes in the ecosystem.
At Ocular, we have been closely monitoring updates on the regulatory front, in view of the potential impact that it could have on businesses and investors, as well as the public’s confidence towards the ecosystem.
This article summarises our research on the current crypto regulatory landscape across eight key countries/regions, namely the US; EU; UK; Singapore; Hong Kong; Thailand; Dubai; and Brazil, as of July 2023. These countries/regions were chosen as they have been very active in developing their regulatory regime. While these regulations may continue to evolve, we have observed a few trends thus far and we will be discussing our views in this article.
5 Key Takeaways
The specific regulations that each of the eight countries/regions have put in place can be found in the next section. We would like to start by sharing our key takeaways on the recent regulatory developments to provide the necessary context for understanding the details of the regulations.
1) Much progress has been made since end-2022
The first point that we would like to highlight is that policymakers worldwide are starting to pay more attention to crypto. This could be partly due to the series of unfortunate events last year that undermined public confidence in the space, but could also be due to the growth of the sector in recent years that makes it difficult for policymakers to ignore it further.
We are seeing more countries globally working on developing a regulatory framework. Besides the eight countries/regions that we will deep dive into, South Africa, South Korea and Taiwan have all announced plans to introduce new crypto regulations.
This is positive news for the sector and its development. With more eyes and scrutiny on the space, we can expect it to be less of a “Wild West”. There will be greater clarity, structure and stability in the space, which will encourage more people to be a part of it.
2) Regulators are trying to find a balance between innovation and consumer protection
Across all the countries that are planning to regulate the crypto sector, we see a common theme - ultimately, countries are trying to find the sweet spot between encouraging growth, innovation and competition in the space; and protecting consumer interests and discouraging criminal activities.
This is perhaps why we see many countries adopting a seemingly hot-and-cold approach towards crypto. On one hand, countries are regulating crypto exchanges and companies to promote consumer safety, but on the other hand, we also see them encouraging entrepreneurial crypto/web3 activities given the benefits it may bring to the financial sector and the broader economy. This is true in the West, as well as in Asia, making it difficult to argue that either side is more receptive towards Web3.
Take the US for example - we read about the lawsuits against crypto exchanges (as described in detail in the next section), but President Biden has pledged to support the responsible development of digital assets. In late June 2023, the SEC also approved the first leveraged Bitcoin Futures ETF. Recently, Blackrock has re-applied to the SEC for a spot Bitcoin ETF. Observers are optimistic that it will be approved given that (i) Blackrock has joined forces with other notable companies, including Coinbase, on the application; and (ii) Blackrock’s track record for ETF applications with the SEC has been stellar (575 approved vs. 1 rejected). If approved, it will be a significant milestone for the sector.
In Singapore, despite the regulations on the sector (as outlined in the next section), the Monetary Authority of Singapore (MAS) published a whitepaper in June 2023, proposing a common protocol to specify conditions for the use of digital money such as CBDCs, tokenised bank deposits, and stablecoins. The whitepaper was supported by the release of software prototypes that demonstrate the concept of Purpose Bound Money (PBM), which enables senders to specify conditions, such as validity period and types of shops, when making transfers in digital money across different systems. These initiatives seek to promote the ongoing development and learning of PBM, and to foster interoperability across different platforms.
Elsewhere in Asia, we see that Thailand's Securities and Exchange Commission also approved a joint venture between Binance and Gulf Energy Development to operate a digital asset exchange and brokerage, granting Binance its first license in Southeast Asia, in May 2023.
3) All eyes are on US’s regulatory regime, but there are uncertainties ahead
While countries might generally be willing to push forth crypto regulations, the specific contexts that each country is operating in might hinder the speed at which the regulations can be rolled out.
This is true even in the US, the largest market of traditional finance, with much attention on it. Today, there appears to be a deadlock as it is unclear whether crypto is a security or a commodity. This, in turn, affects which agency has the mandate to regulate the sector and the scope of regulations that could be implemented. This podcast by the Brookings Institution provides a good overview of how the US typically regulates security and commodities, and the challenges it faces in the context of crypto.
Many observers are looking to the SEC’s court case with Ripple Labs, the developer of the Ripple blockchain and the network’s XRP token, as an indication of the definition that the US plans to adopt for crypto. Recently, a judge ruled that XRP was not a security when it was listed and sold on public exchanges to retail investors; however, XRP was a security when it was sold directly to institutional investors. The main reasoning here is that institutional investors were more likely to be aware of XRP’s securities-like traits when being pitched by Ripple back then, but those who bought XRP directly on an exchange were not as clued-in.
It remains to be seen whether this ruling would provide greater clarity on the definition of crypto in the US. For starters, there is no clear outcome from this split ruling since it gives credence to the security-or-not debate on either side. The SEC has also hinted that they might file an appeal on the ruling, so this matter might not be resolved just yet. More crucially, the judge’s ruling appeared to be based on how well retail investors understood crypto in 2020 when the XRP token was listed. At that time, the market capitalisation of crypto was a fraction of what it is now and regulators were just starting to form their views of the space. This has certainly changed in recent years, so it remains to be seen if this ruling can be extrapolated to new cryptos that have been launched. Until there is a resolution on the definition of crypto, we believe that it will be challenging for the US to move significantly on any regulatory framework to govern the crypto sector.
4) The impact of regulations will vary depending on the sector but overall, it is a net positive for the ecosystem
The impact of regulations will vary depending on the sector that the business/project is in. Thus far, the bulk of the regulations have been on centralised networks and platforms, partially because it is a space that regulators may have more information on through existing reporting channels, and also because it is more easily regulated since there is a single point of contact. Decentralised projects have remained largely untouched at the moment, although that may change moving forward.
Nevertheless, as a whole, we find that clearer and more robust guidelines are a net positive for the ecosystem. A structured regulatory framework will provide clearer paths for companies to comply, and potentially act as a moat to increase adoption. This can be seen in how the US; Brazil; and Hong Kong have experienced the second, third and fifth largest increase in crypto adoption rates worldwide over the last 3 years respectively. In Singapore, 43% of the 1,500 Singaporean respondents in a 2023 Independent Reserve survey.) said they own some amount of cryptocurrencies, up 3% points from the 2022 results. For some countries, such as Dubai, regulations are an explicit part of their strategy to attract more businesses and talent. Dubai is aiming to attract 1,000 blockchain and metaverse companies and create 40,000 virtual jobs by 2030.
5) The crypto sector is a risk and an opportunity - geographic arbitrage is taking shape with ever-evolving regulation
At Ocular, we believe that we are only at the start of the journey to regulate the space. For the eight countries/regions highlighted below, there are likely to be further developments over the next few months. In the EU, there are plans to expand MiCA to DeFi; NFTs; and lending and borrowing of crypto assets. Singapore will require cryptocurrency exchanges to keep customer assets in a trust by the end of the year.
The increased attention that countries are placing on crypto regulations has proved that it is likely too late to put the genie back into the bottle. Crypto has its inherent risks as we witnessed last year, but it also represents a large opportunity with its growth and promise, for countries who want to gain a foothold in the potential future financial system and talent hub. There is a large amount of crypto innovation and wealth floating around looking for friendly grounds, and it is now up to each country to craft their own policies to capture part of the flow. The “Geographic Arbitrage” is taking shape.
Dubai and Hong Kong are great examples of places that have developed friendly crypto policies in the hopes of consolidating their statuses as global financial hubs. Other countries such as Malta was the first jurisdiction in 2018 to enact a comprehensive regulatory framework to allow the crypto sector to operate and proliferate, earning the title of being the world’s first blockchain island.
Countries without these regulations may soon start to feel that they are losing out. They will thus be incentivised to develop their own regulations to strengthen the inflow of businesses and talents. Over time, the benefits that the first-movers can reap may fade away as more and more countries get up to speed on regulations, but this will also mean that globally, there is a level playing field where regulations become the norm.
Current State of Play
Below is a summary of the recent regulatory developments (as of July 2023) in eight key countries/regions, namely the US; EU; UK; Singapore; Hong Kong; Thailand; Dubai; and Brazil.
The US has launched a series of lawsuits against crypto exchanges and companies, as elaborated below. This is in line with the roadmap that the Biden administration released in January 2023 to mitigate crypto risk, which had encouraged regulators to “ramp up enforcement” and for Congress to “expand regulators’ powers”.
On June 6, SEC charged Coinbase with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.
On June 5, SEC filed 13 charges against Binance entities and Founder Changpeng Zhao for operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities.
It also recently fined crypto exchange Kraken $30 million for its staking service, and ordered it to halt staking in the US.
The EU formally signed its landmark Markets in Crypto Assets (MiCA) regulations into law, and published it in the Official Journal of the European Union on June 9. Key highlights of MiCA include:
A crypto-asset service provider (CASP), which is any business or person that provides crypto-related services on a professional basis, including exchanges and trading platforms, portfolio managers and custody providers, will have to adhere to strong requirements to protect consumer funds and become liable in case they lose investors’ assets. They should “act honestly, fairly and professionally”, and they should ensure their security protocols are up to scratch. They also need to have a minimum amount of their “own funds”, and may be subject to additional regulation depending on their activities.
Issuers of any type of crypto-asset are required to produce a “white paper,” informing potential holders about the token. They have to be published before the asset is offered to the public, and function a little bit like the prospectus a company produces before offering its shares for sale to the public on a stock exchange. The white paper should cover information on the issuer or the entity offering the asset, as well as what project will be carried out with the capital raised, and any rights and obligations attached to the token.
Investors should be able to redeem their crypto assets at any time. This means issuers of these assets (including stablecoins) will need to have reserves that match their liabilities to holders of the token, and it needs to be insulated from other funds.
It also imposes more disclosure obligations for all crypto businesses and the implementation of anti-money laundering (AML) and data security procedures.
The UK passed the Financial Services and Markets Bill (FSMB) into law after it received royal assent in end-June 2023. The Bill gives regulators more power over the UK financial system, following UK’s exit from the EU, and seeks to support the safe adoption of crypto assets in the UK.
The Bill includes a proposal to regulate stablecoins under the country’s payments rules; amendments to treat all crypto as a regulated activity; and measures to supervise crypto promotions. On the last aspect, firms marketing crypto assets to British investors will be required to introduce a 24-hour “cooling-off period” for first-time buyers. Under the new rules which will come into effect from October 8, 2023, first-time investors will be subject to a 24-hour delay between requesting to purchase cryptocurrency and completing the purchase.
Under the Bill, the UK Treasury, Financial Conduct Authority, Bank of England, and the Payments Systems Regulator will be able to introduce and enforce rules to regulate the sector. New specific rules for the crypto sector could come shortly.
Singapore issued two consultation papers in October 2022 containing proposed regulatory measures relating to (a) Digital Payment Token Service Providers (DPTSP); and (b) certain types of stablecoin issuers, i.e. for stablecoins which are pegged to a single currency (SCS) where the value of SCS in circulation exceeds S$5 million.
For DPTSP, the proposed measures cover three broad areas:
Consumer Access. DPT service providers will be required to provide relevant risk disclosures to enable retail consumers to make informed decisions regarding cryptocurrency trading. They must also disallow the use of credit facilities and leverage by retail consumers for cryptocurrency trading.
Business Conduct. DPT service providers will be required to implement proper segregation of customers’ assets, mitigate any potential conflicts of interest which arise from the multiple roles they perform, and establish processes for complaints handling.
Technology Risks. Similar to other financial institutions such as banks, DPT service providers will be required to maintain high availability and recoverability of their critical systems.
For stablecoin issuers, the key proposed issuer requirements relate to:
Value Stability. SCS issuers must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to 100% of the par value of the outstanding SCS in circulation, and these assets must be denominated in the same currency as the pegged currency. Requirements on audit and segregation of reserves, and timely redemption at par value will also apply.
Reference Currency. All SCS issued in Singapore can be pegged only to the Singapore dollar or any Group of Ten (G10) currencies.
Disclosures. Stablecoin issuers will be required to publish a white paper disclosing details of the SCS, including the redemption rights of stablecoin holders.
Prudential Standards. SCS issuers must, at all times, meet a base capital requirement of the higher of S$1 million or 50% of annual operating expenses of the SCS issuer. They are also required to hold liquid assets which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.
In June 2023, Hong Kong launched a new licensing regime for crypto service providers to legalise retail crypto trading. Selected rules under the regime include:
All trading platforms and exchanges are to apply for a licence to sell and market to Hong Kong consumers, failing which would result in fines and jail terms. Operators should also perform client checks to ensure that retail traders from China, where crypto trading is banned, will not be accepted.
Crypto exchanges are to maintain at all times no less than 5,000,000 Hong Kong dollars ($640,000) in capital, and at the end of each month, submit the platform's available and required liquid capital, a summary of bank loans, advances, credit facilities as well as a profit and loss analysis to Hong Kong’s Securities and Futures Commission (SFC).
Exchanges must store private keys on shore, and 98% of customer funds must be kept in cold wallets, which are stored offline for security.
All tokens listed on exchanges will need to go through due diligence procedures before being listed on exchanges even if they are already listed on another platform. They will have to go through smart contract audits by independent assessors. Approved tokens on regulated exchanges need a 12-month "track record”.
The SFC said it will consult a separate review on allowing derivatives and stablecoins for retail trading.
In January 2023, the Securities and Exchange Commission (SEC) of Thailand introduced new rules for crypto custody services/virtual asset service providers (VASP) to guarantee efficient custody of digital assets. The regulations include three major requirements:
The provision of policy and guidelines for overseeing the risk management of digital wallets and private keys. The rules require VASPs to communicate with regulators regarding such policies and provide action plans to ensure compliance.
Crypto custodians are to provide policies and procedures for designing, developing and managing digital wallets and keys.
Crypto custodians are to establish a contingency plan in case of unforeseen events that may affect the wallet management system.
Dubai established the Virtual Assets Regulatory Authority (VARA) in March 2022, to regulate all activities related to the virtual assets sector throughout the Emirate, including special development zones and free zones, but excluding the Dubai International Financial Centre.
In February 2023, VARA issued its Virtual Assets and Related Activities Regulations 2023, which would apply to all virtual assets service providers (VASPs).
The Regulations cover seven licensed virtual asset activities, including advisory, broker-dealer, custody, exchange, lending and borrowing, payments and remittance, and virtual assets management and investment services.
All VASPs operating in Dubai must be licensed by VARA. To secure a license from VARA, VASPs must meet several requirements including, but not limited to:
demonstrating that the VASP has adequate financial resources to operate its business;
implementing solid customer due diligence procedures;
establishing effective policies and procedures in order to manage potential risks associated with virtual assets;
establishing adequate systems in relation to anti-money laundering and terrorist financing;
establishing effective governance controls; and
ensuring that senior management and employees are fit to carry out their assigned roles.
VASPs operating in Dubai are now subject to increased regulatory requirements. VARA will monitor all VASPs to ensure that they comply with the Regulations, and may conduct regular inspections and audits to assess VASP compliance.
The Regulations provide that the issuance of anonymity-enhanced cryptocurrencies and all virtual asset activities related to them are prohibited in Dubai.
In addition to the Regulations, VARA has released several rulebooks, including the (i) Company Rulebook; (ii) Compliance and Risk Management Rulebook; (iii) Technology and Information Rulebook; and (iv) Market Conduct Rulebook, (the “Rulebooks”). VASPs licensed by VARA must comply with the provisions of all the Rulebooks.
Brazil published a law in December 2022 increasing regulation of the crypto market and adding penalties for non-compliance.
Under the new law, virtual asset service providers (VASPs), with virtual assets defined as “a digital representation of value that can be traded or transferred by electronic means and used to make payments or for investment purposes” may only operate in Brazil with prior authorisation from a federal public administration body or entity. It creates a “virtual service provider” license, which is to be requested by digital asset companies, including exchanges and trading intermediaries.
VASPs must operate within certain guidelines, including good governance practices, transparency in operations and a risk-based approach, provision of information security and protection of personal data. They must also be in line with international AML and counter-terrorist financing standards. Non-compliance with the law could result in a fine and between four and eight years of imprisonment. Repeat offences will see the original penalties of Brazil’s AML laws increased by a third.
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