One thing is for sure though: The sudden collapse of what was once the world’s second-largest crypto exchange by trading volume will have far-reaching knock-on effects in the Asia-Pacific region, home to some of the world’s most avid crypto investors. Research by crypto payments gateway firm Triple A finds that of the 320 million owners of crypto globally, 130 million are in Asia. Of the top five crypto-owning countries, three are in Asia: India, Pakistan and Vietnam. Asia is also home to two prominent financial centers seeking to be crypto hubs: Singapore and Hong Kong.
Other Asia-Pacific countries, such as South Korea and Australia, with devoted crypto investors, have been mulling introducing more regulations to nudge cryptocurrency closer to their respective mainstream financial systems. FTX’s demise will present them with some tough decisions. They must decide whether more comprehensive regulation or tighter restrictions would be best.
At the same time, Asia’s most prominent crypto skeptics will likely view FTX’s collapse as validation of their tough approaches to decentralized virtual currencies. More momentum could build to restrict further the use of crypto in these countries, irrespective of what the crypto community does to try and mitigate the fallout from FTX’s collapse.
One of the great ironies about cryptocurrency in Asia is that its two largest economies, China and India, which account for almost half of the world’s population, have significant crypto investment communities, but regulators who are among the most skeptical of any in the region about decentralized virtual currencies. The demise of FTX will increase regulatory skepticism in both countries. However, the impact will likely be more directly felt in India, which does not already have a crypto ban like China.
Binance co-founder and CEO Changpeng Zhao, who never lacks for opinions, said at a crypto conference last week, “To be honest, I don’t think India is a very crypto-friendly environment,” adding that India’s high taxes on crypto transactions make it difficult for investors to make money. He’s got that right: That’s why New Delhi implemented them. Rather than enact a crypto ban that might be legally dubious and could be successfully challenged in court, Indian regulators chose to reduce the profitability of crypto transactions through taxation. Since the imposition of a 30% tax on income from digital assets, effective April 1, trading activity on India’s major crypto exchanges has fallen sharply.
Indian regulators are likely to feel validated by their strict approach to digital assets following the demise of FTX. The Reserve Bank of India (RBI) has repeatedly warned Indians about the risks of crypto investing, beginning in 2013. Now RBI officials have more evidence that what they have been saying all along is true.
As for India’s crypto investors, they were already facing a bear market before FTX collapsed. Though exchanges Zebpay, Bitbns, and WazirX saw a respective decline of 40%, 32%, and 14% in spot trading volumes the day after the FTX collapse occurred, spot volume rose in subsequent days.
India’s crypto startups say they have systems to prevent an FTX-like incident. We would say that seeing is believing and that we hope for investors’ sake and theirs that they are right.
Moreover, if India’s crypto community wants to improve the regulatory environment for their industry, they will have to do a better job of persuading the Indian government of how decentralized digital currencies are beneficial for the country. To date, lawmakers from the country’s parliamentary finance committee have been unsatisfied with the industry's focus on advocacy. What lawmakers want to see from the crypto industry is a model for regulation, names of crypto-related companies “solving native Indian problems” and clear plans to address risks tied to cross-border terrorism and money laundering.
The opportunity in the crisis
Unsurprisingly, crypto believers see an opportunity in this crisis. They say it is time to create more comprehensive regulation for cryptocurrency. Since Singapore has made clear it does not want to serve as a crypto retail trading hub, Hong Kong could accelerate its plans to build regulatory infrastructure for the digital assets industry. At the city’s recent Fintech Week, the Hong Kong government unveiled a new licensing regime focused on facilitating retail investment in cryptocurrency.
Yat Siu, co-founder and chairman of venture capital and gaming firm Animoca Brands, recently told The South China Morning Post that he sees Hong Kong “stepping up in the wake of this latest crisis in the crypto industry.” Proper regulations could “help correct what has so far gone wrong in the market,” he added.
Perhaps, but how is Hong Kong going to do that when mainland China remains opposed to cryptocurrency? Though the city is governed under the one country, two systems framework, it is hard to see Beijing encouraging Hong Kong to develop an industry it has sought to eradicate on the mainland. For crypto to thrive in Hong Kong, the central government would have to rejig its official stance on digital assets or explicitly draws a line between industry activity on the mainland and in the former British crown colony in an official statement and/or policy document.
Otherwise, how can risk-averse institutions like banks relaunch crypto projects in Hong Kong? Some mainland banks, strictly banned by Beijing from any involvement with cryptocurrency assets at home, are reportedly considering launching related businesses in Hong Kong. We bet that they wait for regulatory clarification before proceeding.
At the same time, Hong Kong-based crypto exchange AAX is teetering on the brink, though it initially insisted its suspension of withdrawals on November 14 was unrelated to FTX’s implosion. Regardless of the real reason AAX suspended withdrawals, doing so in this jittery market environment fomented fear among investors, some who sought to get their money back by withdrawing it from the exchange.
That puts AAX at risk of a capital deficit and so the exchange is looking to gather more investments to resume normal operations. “While this is clearly a very difficult environment in which to raise new capital, the amount is not large by market standards,” AAX said in a statement. Should AAX fail to raise the capital it needs to continue operations, Hong Kong’s crypto aspirations could suffer a setback.
Staying the course
For countries in the APAC region that have committed to regulating cryptocurrency, the FTX crisis is accelerating their plans. In South Korea, for instance, regulators emphasized the importance of having a digital assets regulatory framework in place during a recent meeting of the country National Assembly, citing not only FTX’s collapse but also the demise of TerraUSD-Luna and Celsius. South Korea had the highest exposure to FTX of any country in Asia, according to CoinGecko, its 297,229 unique monthly users accounting for 6.1% of the exchange’s users in Asia. Additionally, about 200,000 investors in South Korea are estimated to have invested in TerraUSD and Luna.
South Korean regulators believe that these failures in the crypto sector illustrate the importance of having a regulatory mechanism in place to prevent unfair trade and protect user assets. With that in mind, they are currently preparing a comprehensive regulatory framework, the Digital Asset Basic Act, expected to be finalized next year. The act will be formed from 13 crypto legislative proposals currently before the National Assembly.
Regulators are moving to act out of necessity. Though not one of Asia’s largest crypto markets, South Korea nonetheless has plenty of digital asset enthusiasts. By one estimate, in 2021 one in three South Koreans either invested in crypto or was paid in digital assets. A study by the Korean government’s Financial Intelligence Unit (FIU) found that South Korea’s cryptocurrency market value was estimated at 55 trillion won (US$45.6 billion) as of the end of 2021, that 15.2 million Koreans have accounts and 5.6 million registered users of crypto actually trade.
South Korean digital lender K Bank, once moribund due to inadequate capitalization, has swung to profitability entirely on the back of its tie-up with leading South Korean crypto exchange Upbit. K Bank’s net profit reached a record 25.6 billion won (US$18.2 million) in the third quarter, up 52.4%. year-on-year.
Meanwhile, digital lender Kakao Bank, which has 20 million users, has inked a deal with Upbit competitor Coinone to begin providing withdrawal and deposit accounts for users of the South Korean crypto exchange beginning this month.
The tie-ups of digital banks with crypto exchanges, which has occurred due to millennial and Gen Z customers’ affinity for digital assets, necessitates that South Korea move expeditiously to enact comprehensive regulation for the cryptocurrency industry. Otherwise, a liquidity crunch or other crisis at a local exchange could have harmful effects on the broader banking system.
Like South Korea, Australia also views the FTX collapse as a reason to enact thorough digital assets regulation. Some crypto proponents in Australia believe the country could become a global leader in crypto regulation after the government pledged to introduce custodial and exchange legislation to prevent Australian investors from abruptly suffering crippling losses with no recourse as they did following FTX’s demise. Australian investment advisory firm KordaMentha estimates that 30,000 Australian investors have funds frozen on the FTX exchange.
Crypto is a niche but growing asset class in Australia. The Australian Taxation Office found that more than 800,000 Australian taxpayers transacted in digital assets in the three years to April 2022. Australia’s crypto transactions rose 63% year-on-year in 2021.
Australia’s Department of the Treasury has signaled it will open consultations to safeguard crypto custody arrangements and regulate exchanges next year, following the current “token-mapping” consultation process suggested by Liberal Senator Andrew Bragg. Australia is focusing on custody given the tendency of some crypto exchanges to use customer deposits to trade and lend – as banks and market makers do. As long as crypto exchanges have this type of business model, they will need proper oversight. If Australia could develop custody regulations by 2023, it would be one of the global leaders in that area of digital assets regulation.
At the same time, some crypto market players are concerned that Australia’s digital assets regulation could be too restrictive. If regulations end up being too tight, then Australia’s crypto business will most likely move offshore as has happened in markets like Japan.
“Otherwise, you’ll just see regulatory arbitrage, which is exactly what FTX did, which is the exact reason that they failed – because they’re based out of Bahamas with most of their business offshore,” Kraken Australia’s managing director Jonathon Miller told Stockhead.
Proceeding with caution
Perhaps the most impactful element of FTX’s collapse in the APAC region will be how it instills doubt about crypto’s viability in countries that previously supported the digital assets sector. This appears to be the case with Singapore, once lauded by crypto evangelists as a trailblazer for its relative openness to the industry.
On the one hand, Singapore’s sovereign wealth fund Temasek has written down its entire US$275 million investment in FTX. The Singaporean state investor said it had conducted “extensive” due diligence on FTX over an eight-month period in 2021, but that it is “not practicable to eliminate all risks.”
The overall impact on Temasek’s portfolio will be limited. The portfolio had a net value of US$294.1 billion as of March 31, with the FTX investment accounting for 0.09% of the total. Temasek has no other direct exposure to crypto either. That said, we suspect Singapore’s sovereign wealth fund will probably eschew new digital assets investments for the foreseeable future.
Meanwhile, the Monetary Authority of Singapore (MAS) appears to be taking this opportunity to go on the offensive against crypto retail investing yet again. On November 21, it issued a statement that it said is intended to address misconceptions in the wake of FTX’s collapse. The statement emphasized, among other things, that because FTX was licensed offshore and not regulated by MAS, the Singaporean central bank could not protect local users of the exchange by ringfencing their assets or ensuring FTX backed their assets with reserves.
Further, the statement said, “The most important lesson from the FTX debacle is that dealing in any cryptocurrency, on any platform, is hazardous,” adding that “there is no protection for customers who deal in cryptocurrencies. They can lose all their money.”
The MAS is certainly not mincing its words. Is this not an explicit rebuke of Singaporeans engaging in crypto retail investing, then we do not what is. If Singapore further distances itself from crypto, it will undoubtedly have knock-on effects across the region given the city-state’s importance as a financial center.
It is unsurprising that crypto heavyweights are criticizing Singapore’s approach to crypto retail investing. Vitalik Buterin, co-founder of the Ethereum blockchain platform, told The Straits Times that the city-state’s distinction between crypto and blockchain is “weird” and that without crypto, “blockchains that you’re going to have are just fake and nobody’s going to care about them.” For his part, Coinbase Global Inc.’s Chief Executive Officer Brian Armstrong has said that Singapore’s rejection of crypto retail investing is incompatible with its aspirations to be a web3 hub.
Time will tell if they are right. However, we cannot blame the MAS for not wanting Singapore to become a hub for the most volatile and often unsavory aspects of the cryptocurrency industry.