Blockchain Research

One should always take what crypto diehards say with a few shakers of salt, but especially when it comes to liberalization of China’s digital asset policies. A popular narrative right now is that because Hong Kong is reimagining itself as a crypto hub, that this experimentation will pave the way for mainland China to do the same. While a relaxation of Beijing’s crypto controls cannot be ruled out, it remains unlikely because of the associated systemic financial risk, concerns about money laundering and the central government’s preference for strong capital controls. The selection of Pan Gongsheng as the top Communist Party official at the People’s Bank of China (PBOC) adds weight to the argument that crypto liberalization remains elusive in the mainland.

It is hard to win with cryptocurrency regulation. Its absence exasperates the worst elements of the digital assets ecosystem, but when regulation finally arrives, it is often roundly criticized. Such is the case with South Korea’s first standalone digital asset bill, which focuses on investor protection.

The month of June has been a busy one for digital assets in Singapore. Several more big names have been approved for a Major Payments Institution (MPI) license, while the Monetary Authority of Singapore (MAS) published a new white paper outlining its vision for purpose-bound money. What is becoming clear about Singapore’s approach to digital assets is that the city-state wants to capture the promising aspect of these new forms of money while ring-fencing its economy and citizenry from the unsavory elements of cryptocurrency.

The Bank of China's recent issuance of $28 million in digital structured notes on the Ethereum blockchain is a significant development that has been met with both applause and skepticism. This move, the first of its kind by a Chinese financial institution, signals a potential shift in China's stance towards public blockchain-based digital assets. However, the question remains: Is China truly ready to embrace this new frontier?

Ever since lifting its Covid controls, Hong Kong has been on a mission to burnish its financial center credentials that were damaged by its long closure to the world during the pandemic as well as the political turmoil that preceded it. One key part of the city’s strategy has been to embrace digital assets even as other jurisdictions like Singapore tread a more cautious path. While much media attention has focused on Hong Kong’s dance with crypto, the former British crown colony also seems determined to roll out a central bank digital currency (CBDC).

If you were wondering how long Binance could avoid a serious regulatory storm, you have your answer: until now. The United States’ Securities and Exchange Commission (SEC) last week announced it would file 13 charges against the world’s largest cryptocurrency exchange. Charges include 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. “Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” SEC Chair Gary Gensler said in a statement. Ouch.

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?

That depends.

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.

MiCA’s impact

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.

Possible shortcomings

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

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