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Crypto Regulation Around the World, Part 2
Previously, we described the state of regulation in the crypto market from a global perspective, and specifically in two important countries: the US and Switzerland. In this article, we will look at the situation in Southeast Asia.
China is spearheading a careful strategy in the cryptocurrency and blockchain market. It is aiming to become a world leader, and may well achieve that goal, yet, at the same time, it is developing regulation designed to maintain tight control over the market. Individuals are allowed to hold Bitcoin, a “virtual commodity,” or other cryptocurrencies, but most institutionalised activities are prohibited. This includes payment services, the creation of financial institutions, or exchanges, or the operation of existing financial institutions, such as banks. According to reports, cryptocurrency mining is rumoured to be banned, however China remains a main hub for mining, thanks to its low electricity prices. In general, the gap between lack of affirmative regulation and the high level of activity on the local market, leaves a wide grey area., We see over-the-counter trading (OTC) and crypto-to-crypto exchanges face occasional raids by financial authorities, but they never actually stop operating.
Encouraging Crypto R&D
At the same time, China’s central government is encouraging research and development in blockchain and distributed ledger technology (DLT) and is advancing certain projects, the intentions of which is to make China a global leader in the field. In 2019, the Cybersecurity Administration of China implemented blockchain regulations and published a list of over 500 blockchain projects that have been registered accordingly. The businesses have been instructed to collect full information about users’ identity and provide data to the authorities in case of illegal activities.
Last year, China announced its intention to launch a yuan-based digital currency in 2020. The project has been in the development phase for a few years, but Facebook’s announcement about its Libra project allegedly pushed the Chinese to move forward with their plan. If the initiative is implemented, it will be the first Central Bank Digital Currency (CBDC) in the world — and China will be making a huge leap forward in the crypto and blockchain arena, as well as in the monetary and financial markets. The digital yuan is expected to be distributed through commercial financial institutions, just like traditional fiat money, yet, it will give the government the capability to track its use. .
China has also amended a new cryptographic law that took effect at the beginning of January. This law aims to promote commercial initiatives in the field, while, at the same time, defining strict governmental supervision and security demands. It will unify the encryption standards in China and is supposed to lay the necessary groundwork for the distribution of CBDC. There are no taxation laws governing cryptocurrencies in China, and the ban on any institutional activity in the field makes it difficult for the authorities to collect taxes on cryptocurrencies.
As an integral part of China, Hong Kong holds a unique position with some level of autonomy under the “one country, two systems” regime, and a long-standing reputation as a global financial centre with minimal intervention by the authorities. The crypto and ICOs boom that occurred in Hong Kong presented authorities with a challenge to which they reacted cautiously and ambiguously at first, leaving investors and entrepreneurs with a high degree of uncertainty. The authorities emphasised that Bitcoin cannot be considered as money and warned about the risks involved in using cryptocurrencies.
Recent events have given the crypto market a relatively more stable operating structure. In 2018, Hong Kong’s Securities and Futures Commission (SFC) started to build a regulatory framework for exchanges or fund managers, while defining cryptocurrencies or security tokens as “virtual assets”, or a “digital representation of value.” In 2019, the new regulations came into effect, giving crypto exchanges guidelines similar to those for securities brokers.
Singapore is considered one of the friendliest countries to the crypto industry. This status is not surprising, given its prestige as an advanced and open hub for businesses and financial institutions. Here too, cryptocurrencies are referred to as a “digital representation of value.” Considered an enabler for the industry’s activities, cryptocurrencies are not regulated by a specific law. The main regulator involved in the crypto market is the Monetary Authority of Singapore (MAS), the local central bank and financial regulator. Any financial institution that is supervised by MAS, including crypto businesses, must comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Singapore is experimenting with the idea of issuing CBDC, but it does not yet have a schedule.
Three main frameworks were defined:
- The Securities and Futures Act (SFA) refers to crypto exchanges, stablecoins and fundraising (such as STOs or ICOs), while giving special conditions for accredited investors.
- The Payment Services Act (PSA), which took effect this January, sets the guidelines for currencies that are considered widespread enough to be eligible to be used as tools for payment, such as Bitcoin and Ethereum.
- The Commodities Trading Act (CTA) in case of tokens that are pegged to other commodities.
Crypto and blockchain enjoy a special position in Japan, with support from users and enterprises, including the largest corporations in the country, as well as guidance by the authorities. Japan is considered a super crypto-friendly country, however there are claims that the tough regulation drives away businesses. Japan also holds the world record for the number of cryptocurrency holders, estimated to be about 6% of the entire population. The yen is the second largest fiat currency to be traded against Bitcoin (after the dollar), and Japan has the second largest volume in crypto exchanges trade after the United States.
After experiencing two of the largest hacks in cryptocurrency history, Japan’s regulatory status took a few steps forward. However, in 2017, Japan achieved a world precedent by recognising payments in Bitcoin and other cryptocurrencies, through the amended Payment Services Act (PSA). Japan was also the first country in the world to relate specifically to a cryptocurrency by law. It was first described as a “virtual currency” and later as a “cryptoasset.”
Under Careful Supervision
The Japanese Financial Services Agency (FSA) supervises crypto exchanges and grants licences to those who comply with the detailed regulations. Crypto businesses are required to identify and register all of their users. For taxation purposes, cryptocurrencies are considered miscellaneous income and are taxed at a rate of between 15%-55%. Japan has been considering issuing CBDC and recently joined a global group of central banks who are researching the idea.
Similar to other developed economies in South-East Asia, South Korea is on the global front in establishing an active crypto market, although government policies are still somewhat ambiguous and are criticised by the crypto industry. On the one hand, government officials emphasise their desire to create the relevant infrastructure for the crypto industry; on the other, especially when crypto prices rocketed at the end of 2017, some government officials considered boycotting crypto trading. The bottom line is that trading cryptocurrencies and the operation of exchanges have been permitted since 2018, under specific conditions. South Korea is still hesitating to create specific regulations for crypto, and yet, it is the third largest market for crypto exchanges, after the United States and Japan.
Conditions and Requirements
As in other countries, there are requirements for full identification of traders who wish to deal in crypto assets. Another condition is that all e-wallets be connected to bank accounts, which are managed under specific rules. For example, clients can withdraw anonymous cryptocurrencies, but are forbidden to make new deposits. The Korean Financial Intelligence Unit (KFIU) has ordered the banks to report on suspicious trading according to specific guidelines. While these conditions might be considered restrictive, one should remember that in many countries it is nearly impossible to make transactions with cryptocurrencies in banks. Crypto trading is taxed like capital gains, by various rates of up to 42%. There were recent reports that the government is considering taxing cryptocurrencies as a sort of special income, according to a fixed rate of 20%.
India is considered a relatively restrictive country when it comes to crypto. As in most other countries, there are no specific rules regarding cryptocurrencies, and people are allowed to hold them and even to operate exchanges. Yet, there are firm restrictions on the industry. For example, India’s central bank (The Reserve Bank of India — RBI) forbids all commercial banks and financial institutions from dealing with cryptocurrencies. There are ongoing discussions and rumours of a total ban on the industry. Last year, a governmental committee recommended such a ban, and lawsuits were filed against Bitcoin businesses. Crypto businesses and organisations have reacted — embarking on a long struggle at public and legal levels, to confront the RBI and overturn this government policy.
In contrast to the restrictive policies regarding crypto, blockchain technology has enjoyed a more positive approach. Among the various governmental plans to promote the use of blockchain, the RBI has constructed a “sandbox” (a software device to test new programming code) to explore the field with relevant businesses, although in the context of fintech innovation rather than that of the the crypto market. Given the crypto-unfriendly environment, this offers the huge potential of a 1.2 billion-strong market with a strong digital edge. Facebook even considered launching its Libra currency in India, but later withdrew the idea.
Coming Soon in Part Three: Europe and the rest of the world.