The release of a white paper by the Beijing municipal government about Web3 offers a good opportunity to revisit China’s progress in this emerging area of digital finance. According to Chinese media reports, the white paper emphasizes Beijing’s intention to enhance policy support and expedite technological advancements to foster the growth of the Web3 industry. The key takeaway for us from this document is that China will push forward with its blueprint for a unique Web3 ecosystem that minimizes the role of cryptocurrency or even completely omits it.
Cryptocurrency may have originated in the G7 – if we assume Satoshi Nakamoto is Japanese – but in practice developing countries have often been the most enthusiastic about embracing decentralized virtual currencies. The reason is simple: Crypto’s promise of financial democratization has a strong appeal in countries where large segments of the population lack access to certain banking services.
This commentary was written in collaboration with Banking Circle.
Given the hype around the nascent decentralized third iteration of the internet, it is common these days to read or hear that “Web3 is the future of payments.” But is it?
This commentary was written in collaboration with Banking Circle.
It was one thing for the European Union (EU) to talk about enacting comprehensive cryptocurrency regulation: It is another to pass the corresponding legislation. That is exactly what the EU did in late April with the long-anticipated Markets in Cryptoassets (MiCA) directive. MiCA will regulate the cryptocurrency sector with common rules across all 27 of the EU’s member states.
Several years in the making, MiCA is part of a broader push by the EU to regulate digital finance more like it does the rest of financial services. Other legislation focused on this objective includes the Digital Operational Resilience Act (DORA) and the DLT Pilot Regime Regulation.
Once it goes into effect in July 2024, MiCA will classify crypto in three categories subject to different regulation based on their underlying risk: electric money tokens (EMTs), asset-referenced tokens (ARTs) – both of which are variants of stablecoins – and all others. The “others” will include non-pegged payment tokens like bitcoin.
Under MiCA, any firm providing crypto services in the EU must register in one of the bloc’s member states. Once they do that, they can operate throughout the EU. The European Banking Authority and the European Securities and Markets Authority will be responsible for ensuring compliance by crypto firms to eschew another FTX-like catastrophe.
And it is no exaggeration to say that the sudden, rapid implosion of the erstwhile US$32 billion exchange highlighted the urgency of implementing regulations for the crypto sector.
“Under the MiCA regime, no company providing crypto assets in the EU would have been allowed to be organized, or perhaps I should say disorganized, in the way FTX reportedly was,” Alexandra Jour-Schroeder, deputy director general at the European Commission’s financial-services arm, said in November, shortly after the once-massive exchange imploded.
With the adoption of a unified regulatory framework for digital assets, the EU is taking a step no other jurisdiction has to date. Chances are – barring a dramatic increase in severity of the crypto bear market – that the many crypto fence sitters will feel more pressure to act.
“It would be a surprise if other jurisdictions like the UK and the US aren’t quick to follow suit and further accelerate their crypto regulatory efforts,” Alisa DiCaprio, chief economist at enterprise blockchain firm R3, told Bloomberg.
In fact, in the lead-up to MiCA’s passage in April, crypto venture capital investment in Europe overtook that in the U.S., according to data compiled by Pitchbook. Prior to the January-March period, Europe had rarely, if ever, led the U.S. in that category.
The EU should be commended for its efforts to develop a robust and enduring regulatory framework for digital assets. It is likely that the benefits of the legislation will outweigh its shortcomings, and it could set a global standard for crypto regulations.
That said, MiCA has a few potential problem areas worthy of note. CoinDesk identified one in late 2022: Although MiCA requires companies targeting the EU market to register with a local regulator, certain exemptions exist that could be exploited.
For instance, if a company based outside the EU provides relevant crypto-asset services at the "own exclusive initiative" of a customer residing within the bloc, that company does not have to obtain authorization under MiCA. Similar provisions exist under the EU’s Markets in Financial Instruments Directive 2014 (MiFID II).
Known as “reverse solicitation,” this scenario exists for practical reasons. It is challenging for regulators to control how companies and individuals in the EU engage with overseas crypto firms and a blanket ban on such activity like China has implemented is not feasible for Europe.
EU officials say that the risk of reverse solicitation being abused could be mitigated if other jurisdictions adopt similar regulations to MiCA. Perhaps, but easier said than done. It is too early to say whether other countries will follow the MiCA model.
MiCA also imposes some restrictions on stablecoins that crypto diehards are chafing at. MiCA will require operations to maintain local reserves and face trading caps on non-euro-denominated tokens not backed by fiat currency.
Glass half full
Imperfect as it may be, MiCA represents an important step forward in the ongoing and arduous process of cryptocurrency regulation. Detractors of the legislation, which often point out it does not regulate NFTs, should recognize that effective regulation of a new asset class and its underlying technology does not happen overnight.
What MiCA will accomplish in the short run is an elevation of cryptocurrency from the financial underground to the aboveboard mainstream. Bringing crypto out of the shadows and under some centralized regulatory control will disappoint some decentralization zealots, but more importantly, it will help curb fraud, money laundering and other malfeasance that easily proliferate in the absence of proper regulation.
MiCA could also, in the long run, boost the development of a thriving Web3 ecosystem undergirded by stablecoins. For stablecoins to be adopted widely, two factors are crucial: building the proper infrastructure and implementing the right regulation. To the first point, better infrastructure is still needed to enable Web3 payments. With regards to the second, MiCA is likely to be a key part of it.
MiCA mandates that stablecoins are sufficiently backed, have capital requirements for issuers, and have issuance limits. It also focused on transparency. The clarity introduced by these rules will likely boost the confidence of consumers and business to use stablecoins, ultimately catalyzing much wider adoption throughout the EU.
Asset-backed stablecoins are ideal for Web3 payments given their stability against fiat currencies, giving banks and payments providers the ability to facilitate payments outside traditional bank rails. Stablecoins also have significant reconciliation, speed and cost advantages.
Wider adoption of stablecoins, which are cheaper and faster than other instant payment schemes, could ultimately help break down payment barriers, democratizing finance and creating new international growth opportunities for SMEs, especially in markets where correspondent banking is less mature.
This commentary was written in collaboration with Banking Circle and originally appeared on Banking Circle.
In recent years, political tumult and Covid restrictions have dented Hong Kong’s reputation as a global financial center. Yet Hong Kong faces another type of challenge now: how to best capitalize on opportunities afforded by the financial sector’s rapid digitization. That is where Hong Kong’s newfound interest in cryptocurrency derives, especially given how it has lost some ground to Singapore in wealth management and fintech.
In Asia Pacific, Japan is taking a proactive position on stablecoin regulation much as it has other elements of cryptocurrency rules since 2017. New regulations are expected to come into effect in June, while Japanese banks recently began a stablecoin experiment on an Ethereum public chain. Though certain crypto fundamentalists decry Japan’s stablecoin regulations as overly restrictive, in reality, the alternative is unattractive. UST’s spectacular implosion last year and the subsequent criminal charges brought by the United States Securities and Exchange Commission against Terraforms Labs founder are a pointed reminder of what happens when stablecoins are left entirely to “market forces.”
At long last, Taiwan plans to adopt some basic cryptocurrency regulations beyond requiring crypto firms to adhere to existing anti-money laundering legislation. The Financial Supervisory Commission (FSC) will be responsible for the regulations, though the extent of its role has yet to be decided. In all likelihood, the FSC will continue to take a hands-off approach to decentralized digital currencies due to its limited understanding of them and preference to not get heavily involved in a segment of financial services that remains well outside of the mainstream in Taiwan and thus with relatively few ties to the banking system.
A commentary in collaboration with Banking Circle.
While many countries are enthusiastic about blockchain, or distributed ledger technology (DLT), China is in a class by itself. It has a commanding share of blockchain patents, many companies operating in the space and related investment that is growing exponentially. China’s blockchain investment surged from US$14.4 million in 2017 to USD US$930 million in 2021, according to the research firms IDC and the China Commercial and Industrial Research Institute.
The cryptocurrency industry always runs ahead of regulators while the media builds its narratives based on the stories of exuberant founders and investors. This paradigm helps explain why Singapore has been perceived as the place to be for crypto – “hub” is the word of choice – for several years now even though the city-state’s government has been more modest in its ambitions.
A commentary in collaboration with Banking Circle.
It can be hard to separate the hype from reality when it comes to Web3. After all, on the one hand, it is being heralded as “the future of the internet” and on the other, its actual definition remains fluid.
We reckon Silvergate wishes it had never served as FTX’s bank. The collapse of the once mighty crypto exchange has had massive ripple effects across the entire decentralized digital currency ecosystem. In the last three months of 2022, investors pulled out US$8 billion in deposits from the bank given its heavy exposure to FTX and it posted a loss of US$1 billion in the fourth quarter of the year. Silvergate’s stock is trading at around US$5.40 a share, down 95% from a year ago.
Most Asian countries are mulling the creation of a central bank digital currency (CBDC), but only China and Cambodia have launched one. We think that CBDCs make the most sense for countries with pressing financial inclusion needs, and with that in mind, the launch of Laos’s first CBDC pilot led by the same Japanese blockchain company that developed Cambodia’s Project Bakong can be viewed as a positive development.
The United Arab Emirates (UAE) has emerged as a leading fintech hub of the Middle East, with one of the region’s most dynamic startup ecosystems. From a regulatory standpoint, it is also taking a leading role, with big plans for both cryptocurrency and a central bank digital currency (CBDC). While many countries have adopted one or the other, the UAE is one of the few that seems open to both.
China’s launch of the digital yuan has prompted a scramble in Northeast Asia among central banks to assess the merits of CBDCs. Japan, South Korea and Taiwan are all at different stages of CBDC testing that they likely never would have begun if it were not for Beijing’s determination to develop a digital fiat currency. That begs an important question: Does the rest of Northeast Asia need CBDCs? After all, the respective initiatives of Japan, South Korea and Taiwan are inherently reactive, in contrast to Beijing’s proactive approach.