Blockchain Research and Insight - Kapronasia

In February, Indian finance minister Nirmala Sitharaman said that the Reserve Bank of India (RBI) would launch a central bank digital currency in the 2022-23 fiscal year. In her budget speech, she said that introducing a digital rupee would give a big boost to the digital economy and lead to a more efficient and cheaper currency management system. Yet since then, there has been no obvious progress on India’s CBDC project, and even some measured pushback against the idea.

South Korea’s new president Yoon Suk-yeol entered office planning to make his country friendlier to cryptocurrency. During his campaign, Yoon said, “To realize the unlimited potential of the virtual asset market, we must overhaul regulations that are far from reality and unreasonable.” Though Yoon likely remains keen to carry out his campaign promises about crypto, it will be no easy task. He faces conservative, crypto-skeptical financial regulators, a parliament controlled by South Korea’s main political opposition, the Democratic Party of Korea, and now the fallout over the abrupt collapse of the TerraUSD stablecoin.

The Philippines is taking a different approach to crypto than many other Asian countries, most notably in a tentative acceptance of the use of decentralized digital currencies for payments. Thailand, Vietnam and Indonesia have all banned crypto for payments outright, while Singapore has licensed just a handful of companies to use digital assets for payments.

North Korea’s resilience is often surprising to outside observers. After all, Pyongyang is the only communist East Asian country to not formally launch economic reforms. It is impoverished and isolated. Further, U.S.-led sanctions imposed from the mid-2000s have made it harder for North Korea to conduct international trade. However, North Korea has developed a formidable cybercrime capability in order to evade the sanctions, and it is increasingly targeting digital assets whose decentralized nature make them vulnerable to determined hackers.

The use of decentralized virtual currencies is growing expeditiously in Indonesia and Southeast Asia’s largest economy has the highest crypto adoption rate in the world along with Brazil, according to a new study by crypto exchange Gemini published in early April. The report found that 41% of Indonesians aged between 18 and 75 years old with an income of more than $14,000 per year own crypto assets.

The need for comprehensive regulation of decentralized virtual currencies in Australia is greater than ever as crypto ownership in the country steadily rises. New research by Roy Morgan shows that 1 million Australians aged 18 and up own at least one cryptocurrency with the average crypto investment in the country roughly AU$20,000. Unsurprisingly, Bitcoin and Ethereum are the most popular cryptocurrencies with investors, though some also hold Ripple, Cardano, Dogecoin, Shiba Inu, Solana, Binance Coin, Litecoin, Cronos and others.

There is more than one way to drastically curtail crypto activity in a country. China’s approach has been largely effective, but is generally not applicable elsewhere. In the case of India, which has a very different political system than China, blanket bans could face legal challenges while being difficult to enforce. A better approach is to tax the heck out of crypto transactions, which regulators and some politicians almost certainly hope will reduce the attractiveness of the asset class.

When it comes to the cryptocurrency policies of Asia’s regulators, it pays to not be overly sanguine. While most regulators in Asia are happy to let crypto evolve as a regulated asset class, payments are another story. Thailand is the latest Asian country to crack down on using crypto for payments.

On March 23, Thailand’s Securities and Exchange Commission on Wednesday banned the use of cryptocurrency for payments, effective April 1. That means no bitcoin or any other crypto can be used to purchase goods and services.  Digital assets payment operators will be given a grace period through the end of April to cease providing payment services. Trading of digital assets for investment purposes will be not affected by the SEC’s ban on payments.

South Korea’s people have long been more enthusiastic about crypto than the country’s regulators and politicians. 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 last year, that 15.2 million Koreans have accounts and 5.6 million registered users of crypto actually trade. Yet heading into Korea’s recent presidential election, the country was tightening oversight of cryptocurrencies in a manner detrimental to market growth.

Could Malaysia become a crypto hub in Asia? A recent CoinDesk article made that case, pointing out that some of the necessary ingredients are already there, such as a common law system and institutional use of English. Further, Malaysia's crypto ownership rate of 19.9% is above the global average of 15.5%, according to Finder’s latest Cryptocurrency Adoption Index.

With CBDC hype subsiding – at least in most advanced economies – Japan’s plans for a digital yen are coming into focus and unsurprisingly, Tokyo is in no rush to launch a digital fiat currency even if it sees some upside to the idea in the long term. Japan has no compelling policy reasons to quickly roll out a digital yen, regardless of what China is doing. And in fact, Beijing spent about six years getting the digital RMB ready and it remains in the pilot stage.

Remember when more crypto was traded in China than any other country in the world? Though it was less than five years ago, it seems like a lifetime ago. In 2021, China accelerated a long-running crackdown on decentralized virtual currencies, banning just about everything crypto-related but possession. While some diehard crypto enthusiasts in China may carry on, Beijing has made crypto trading more trouble than it is worth for most Chinese. With crypto out of the way, Beijing can now concentrate on developing its own blockchain ecosystem.

Why ban crypto when you can discourage its use by taxing it heavily? That seems to be at least part of the rationale behind India’s plan to forego a ban on decentralized virtual currencies but tax income from digital assets at a flat 30% rate with no deductions or exemptions. At the same time, India plans to go ahead with a digital rupee by early 2023.

Somewhere in between the El Salvador and China approaches to crypto is a middle road, neither a full-throated embrace nor a strict ban. Call it crypto agnostic. Thailand appears to be taking that road, allowing the digital assets business to grow organically, while gradually implementing regulations as needed. For Thai regulators, the priority is not developing a regional hub for decentralized virtual currencies – that is more of a Singapore project and something Japan has considered – but simply ensuring they are used in a manner beneficial for the country’s economy and overall society.

Earlier this week the People’s Bank of China e-CNY digital wallet showed up on Android and Apple App stores in China in what appears to be the government’s next push to get people to use the somewhat underused digital currency. Previously, the PBOC's e-CNY digital wallet app was only available as a ‘side-loaded’ app meaning that it had to be loaded manually by the user rather than installed through one of the official stores. This is a relatively trivial task on an Android phone where you just click on a .APK file, but somewhat more difficult in the Apple ecosystem.

2021 has been a pathbreaking year for decentralized digital currencies. They have made more headway into the mainstream financial system than in any previous year. The Indian government has been watching these developments closely and has quietly walked back its erstwhile anti-crypto stance. A blanket ban of crypto no longer makes sense for India, as it would be both detrimental to financial inclusion and cashless payments objectives, while offering questionable benefits for combating money laundering and terrorism financing.

Taiwan’s financial sector is known for its conservatism, so it is no surprise that the island has not embraced cryptocurrency. Yet, to their credit, nor have Taiwan’s regulators taken an overly harsh approach to decentralized digital currencies. Unfortunately, the lack of regulatory clarity that initially allowed crypto to gain a foothold in Taiwan is not sufficient for the island to become a hub for the industry.

Australia may be reaching its crypto inflection point. Canberra has never repudiated crypto but nor has it embraced decentralized virtual currencies. However, as other countries in the Asia-Pacific region like Singapore and Japan step up their efforts to become crypto hubs, Australia is realizing that decentralized digital currencies offer it an opportunity as well. A report published by Australia’s Senate in late October recommends that the country alter its laws to make them more amicable to crypto.

One after another, Asia’s major economies are developing their crypto policies. Singapore and Japan have decided to embrace decentralized digital currencies, albeit in a step-by-step manner. South Korea is less sanguine, although it is stopping well short of China’s near-blanket ban. As for India, it once seemed to be moving in the direction of a crypto ban, but that seems less feasible by the day given the industry’s burgeoning expansion and the potential benefits of that growth for the overall Indian economy.

Southeast Asia is fast warming to central bank digital currencies (CBDCs) with Laos the latest country in the region to signal its intention to develop one. What makes Laos’s situation unique is that the same Japanese company that developed Cambodia’s retail CBDC, Project Bakong, will be involved in exploring the possibility for a digital kip (the Laotian currency).

Japan is one of the top contenders for the Asia crypto crown. The only other jurisdiction that can challenge it is Singapore. Hong Kong is no longer in the running given the city's close links with mainland China and Beijing's tough approach to decentralized digital currencies. But before Japan can solidify its status as an Asian crypto hub, it first needs to figure out how to better regulate crypto to protect investors and safeguard against malfeasance.

Australia has yet to make up its mind about crypto. On the one hand, it allows crypto exchanges. It has dozens of them. Finder estimated that 17% of Australians own cryptocurrency in a June survey. There are no regulations banning the holding or trading of cryptocurrencies. However, Australia’s incumbent financial institutions are ambivalent about decentralized digital currencies and generally stay away from them.

It seems that just about every major Asian economy is warming to the idea of a CBDC now, and India is no exception. Shaktikanta Das, governor of the Reserve Bank of India (RBI), said recently New Delhi may be ready for digital rupee trials by year-end.

Southeast Asia is home to some of the world’s fastest growing economies and is rapidly adopting digital financial technology, including blockchain-based solutions. Thus, it is only natural that central banks in the region are starting to think about a possible role for digital fiat currencies. The first country to make the jump to a CBDC is Cambodia, and it will definitely not be the last.

Try as it might, the cryptocurrency industry has not yet been able to shake its reputation for being not quite above board. The rebellious, underground side of crypto has won it many devoted fans – just not usually among financial regulators. But what if crypto – like many segments of Asia’s fintech industry – found a home in Singapore?

The crypto party may be over in South Korea, where the government is less than ecstatic about the widespread use of decentralized virtual currency in its economy. Unlike Japan, a crypto pioneer that has always been tolerant of decentralized digital currency, South Korea sees it as somewhere in between an annoyance and systemic financial risk. Seoul is now moving to curtail crypto’s influence in the country through strict regulation and higher taxation.

Bitcoin mining was one of the last vestiges of China’s experimentation with decentralized virtual currency. Until recently, China was the world’s bitcoin mining center. For the crypto faithful (and the agnostics who profited from mining), it was great while it lasted. But now regulators have decided mining in China should go the way of trading. Several weeks ago Kapronasia wrote that the crackdown was just warming up. Sure enough, provincial authorities are turning up the heat. What began in Inner Mongolia – it shut down 35 mining firms between January and April – has spread to Xinjiang, Qinghai and Yunnan.

It was only a matter of time before bitcoin mining landed in China’s crosshairs. Beijing identified decentralized digital currency as a systemic financial risk in 2017 – for its use in skirting capital controls and links to money laundering - and promptly hobbled key parts of the crypto ecosystem, shutting down all exchanges and banning initial coin offerings. Mining does not pose the same immediate risks to the Chinese financial system, but its enormous power usage could crimp Beijing’s efforts to curb its carbon emissions – a major central government policy objective. With that in mind, the prospects for bitcoin miners in China look dim indeed.

The hype about China's digital yuan can obscure the reality, especially in the cross-border space. The most adamant supporters of China’s CBDC argue that it poses a challenge to the US dollar’s role as the world’s dominant international currency because, well, it is digital, has a technological edge and thus will perhaps redefine global payments rails. This argument exaggerates the benefits of digitization while overlooking the fundamentals of the dollar's paramountcy. 

China is leading the world in CBDC development, prompting speculation that DCEP (digital currency, electronic payment) is on its way to becoming the digital equivalent of the U.S. dollar. The reality is more nuanced. To be sure, China's digital fiat currency is at a more advanced stage than any other major country's CBDC, and China has many potential applications for it domestically. When it comes to cross-border use, however, many questions remain about the digital yuan.

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