FEW dispute that Asia will be the world's engine for economic growth and innovation in the coming decades. It is no surprise then that Asia is the fastest growing market for digital currencies. Fintech is a sector that requires bold leadership, not just from entrepreneurs but regulatory agencies as well.
Hong Kong and Singapore, traditionally rivals for the title of Asia's leading financial centre, are working together to take the lead in fintech regulation. In October 2017, Hong Kong announced a partnership with Singapore to form a blockchain-based network. The Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS) signed an agreement to foster cooperation on fintech - marking a shift for the trade finance industry, moving from a largely paper-based process to a digital platform. Combined leadership in fintech is the goal. MAS has said it has "no intention" of regulating cryptocurrencies.
Yet innovation from a regulatory point of view will increasingly be of paramount importance as governments grapple with the issue of how to prudently regulate this burgeoning industry without stifling growth or creativity. Hong Kong's government still sees bitcoin not as a currency but as a commodity, leaving it untouched by financial legislation. In 2016, HKMA worked with banks like HSBC and Standard Chartered to construct a trade finance platform by using blockchain technology to digitise and share trade documents, automate processes and reduce the risk of fraud.
Singapore may possibly follow suit. In October 2017, MAS managing director Ravi Menon said his institution did not want to regulate cryptocurrencies but emphasised the need to institute further anti-money laundering controls with a view to strengthening the current controls over the financing of terrorism. Last week, Deputy Prime Minister Tharman Shanmugaratnam, who is also MAS chairman, stated in a written response to questions from MPs that "there is no strong case to ban cryptocurrency trading here".
Enter the need for smart regulations. On one hand, securities regulators want retail investors to have better access to investments that pay high returns, something that cryptocurrencies seem to promise, with attendant risks. At the same time, securities regulators around the globe, including in the US, are cracking down on initial coin offerings (ICOs), the fundraising mechanisms that feed on investors' desire for high returns like bitcoin but which often violate laws that protect investors. A look at the policies of some of the region's large economic powerhouses in the region may be instructive.
China has banned cryptocurrency exchanges and ICOs. In early January, it began to curb the activities of bitcoin miners on the mainland, forcing many to flee to Canada to do deals with Canadian power companies to source cheap electricity. China is rightly worried that these blockchain mechanisms could provide an avenue for capital flight. With its tight control over the country's economy and currency, Chinese authorities are looking to avoid major disruptions to its economy, which has the world's second largest GDP. China may yet eventually move forward with trading, but with tighter supervision or even a sovereign cryptocurrency.
South Korea is home to a booming cryptocurrency market, with the average daily trade exceeding US$1.4 billion. Last year, the South Korean Financial Supervisory Service said it did not consider cryptocurrencies to be legitimate currencies of any kind and would not seek to regulate their trade - only to change course a month later, banning bitcoin futures and derivatives as well as ICOs.
The South Korean Prime Minister also caused a selloff in late November when he expressed concern that cryptocurrencies could corrupt the country's youth. But soon after, a spokesman for President Moon Jae In had to walk back those comments, indicating no firm decision had yet been made. Regardless of this back and forth in recent months, it is likely that South Korea's regulators will eventually impose some restrictions on cryptocurrency exchanges, emulating much of China's current policy.
Japan has opted for the opposite tack, showing a very receptive approach towards cryptocurrencies. It is no surprise that Japan accounts for a large portion of bitcoin's trading volume, with an estimated 40 per cent of bitcoin trades occurring in yen. Japan has much friendlier regulations on cryptocurrencies, recognising bitcoin as a legitimate method of payment. Japanese regulators also created new rules on ICOs, requiring minimum capital standards, the segregation of customer accounts, and the monitoring of suspected criminal activity.
Singapore and Hong Kong should both regulate sales of digital tokens, given that some ICOs might fall under their definition of a security rather than a commodity. But not all ICOs will fit into this legal definition. The trick will be how best to harmonise the financial regulations of the two city states while still ensuring that their respective markets are safe for investors and secure from outside nefarious influences like drug traffickers and other transnational criminal organisations.
As details for the partnership between Hong Kong and Singapore emerge in 2018, the new fintech corridor may provide a third way of dealing with cryptocurrencies. It is important that the Singapore and Hong Kong authorities protect investors, curb any money laundering by organised crime or other nefarious private actors, and ensure transparency in the rollout of ICOs and subsequent trading of cryptocurrencies. The world will be watching.
- The writers are co-founders of the One World Blockchain Alliance.
- Michael Sung is a technology pioneer, an advisor to governments around Asia on innovation policy, and the principal of CarbonBlue Innovations, a cross-border tech transfer platform and fund headquartered in Hong Kong. James Cooper is Professor of Law at California Western School of Law in San Diego. He has advised governments on technology transfer and the rule of law.
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