In the West, the case for regulating the crypto ecosystem rests on two premises:
• Cryptos are not used to finance everyday transactions but mainly serve as the medium for speculative—and at times criminal—investment activity, including betting on the market value of the tokens themselves.
• Insofar as cryptos are used as a medium for exchange, this is often, but not always, for financing transactions linked to illegal or illicit activities, such as smuggling and the drugs trade.
Some, although not all, Asian nations take a different approach, embracing crypto because they see benefits such as:
• low transaction costs for remittance payments from abroad (in the case of the Philippines and Vietnam) and the introduction of blockchain technology into public services;
• encouraging the inflow of capital into financial markets as part of efforts to become stronger as financial hubs (in the case of Singapore and Hong Kong); and
• preparing for a possible era when cryptos are more integrated with mainstream financial systems and the economies in which they are embedded (Malaysia and India).
The scale of adoption across the region is substantial. According to the latest data from Chainalysis, South and South-east Asia are leading global adopters of cryptos. Even China, which has severely restricted crypto activity—banning the mining of cryptos and discouraging their use for any transaction—ranks tenth in overall global adoption.
Notably, the diversity of regulatory regimes that have emerged in Asia is not determined by the economic characteristics of a country, with similar or different models in countries small and large, poorer and wealthier, and less or more diversified.
Vietnam, which topped the 2022 Global Crypto Adoption Index, allows cryptos to be owned as an investment and to serve as a payment method in a process that facilitates the transition to the digital settlement of transactions.
However, there has been an accompanying rise in criminal activities using cryptos, including hacking and cyber scams.
Malaysia has the most transparent approach. Cryptos are legal, considered securities, and regulated by the Securities Commission under the Capital Markets and Services Order 2019. However, the central bank does not regard them as legal tender or payment instruments.
Companies can raise funds with token offerings at approved and regulated crypto exchanges, and no capital gains taxes are imposed on these transactions. Exchanges are subject to corporate income tax.
Meanwhile, relatively developed financial hubs such as Singapore and Hong Kong are being forced to come to terms with digital tokens, given their growing importance in speculative finance.
Cryptocurrency trading is legal in Singapore, though the Monetary Authority of Singapore attempts to monitor and curb misleading advertising aimed at luring investors into risky investments.
There are also strict anti-money laundering (AML) and countering financing of terrorism (CFT) regulations. The approach is that crypto activity can be rendered legal and suitably regulated.
Hong Kong has long adopted a lenient attitude to cryptos. The Securities and Futures Commission (SFC) grants licences for crypto trading, with tokens falling under the definition of security or futures contracts.
Hong Kong's Financial Services and Treasury Bureau is working on a licensing regime that will require all crypto exchanges to be licensed by the SFC and ensure they comply with AML/CFT regulations.
As a result of this more relaxed stance, Singapore and Hong Kong have seen an investment boom in crypto businesses, playing host to start-ups such as investment platform Crypto and stablecoin provider Tether.
Regulators in both cities have been cautious about highly speculative crypto assets being used as a mode of payment or for speculative investment by retail investors. The monetary authorities in these jurisdictions, too, adopt stringent regulations on reserve management, AML and qualified investor norms.
However, the regulatory thrust is to encourage the development of businesses for institutional investors. In Hong Kong, there remains a risk that the city may have to harmonize its regulations with mainland China as Beijing draws it closer to the mainland, leading to an outright ban on crypto businesses.
The rapid penetration of cryptocurrencies has taken many governments by surprise. Therefore, the regulatory framework across the region will continue to be a work in progress.
In the longer term, the strong reservations about cryptos among leading central banks and the Bank of International Settlements on the grounds of risks of systematic financial instability may weigh on Asian crypto regulators as the overall global trend will likely be towards harmonization of crypto regulation.