Blockchain Research and Insight - Kapronasia

The cryptocurrency market in Southeast Asia’s largest economy grew briskly in 2024. The value of cryptocurrency transactions in Indonesia reached Rp 475.1 trillion (US$29.6 billion) by October 2024, up 352% year-on-year, according to the country’s Financial Services Authority (OJK). Further, by the same month, there were 21.6 million crypto investors in Indonesia.

With the decision by Deutsche Bank (DB) to invest in Partior, the ambitious blockchain firm raised a total of US$80 million in its Series B funding round. The German bank joined Partior's Series B funding round as a strategic investor. Its move should be complimentary to the recent launch of dbX, DB’s next-generation correspondent banking ecosystem for financial institutional clients.

We observed with great interest as Cambodia launched a crackdown on cryptocurrency beginning on December 3. The Telecommunication Regulator of Cambodia (TRC) moved to block access to 16 cryptocurrency exchanges, among them Binance, Coinbase, and OKX. The TRC said that it implemented the restrictions because the platforms are not properly licensed by the Securities and Exchange Regulator of Cambodia (SERC).

North Korea has become the most tenacious state actor when it comes to theft of digital assets. Given its proximity to the Hermit Kingdom, a shared language and a deep understanding of how its criminal pursuits are carried out, South Korea plays a leading role in the investigation of Pyongyang’s crypto crime. In late November, South Korean police said that their investigation confirmed that hackers linked to North Korea's military intelligence agency were responsible for a large 2019 Ethereum heist.

In a growing number of countries, stablecoins appear here to stay. DeFiLlama data show that the total market capitalization for stablecoins has risen 46% this year to a new high of roughly US$190 billion, cementing a remarkable comeback from the nadir the cryptocurrencies experienced following the implosion of TerraUSD in 2022. Yet two of the world’s largest economies and its two largest by population remain wary of stablecoins. How China and India ultimately choose to approach stablecoins could have significant implications for their broader adoption.

We recently wrote about the implications of the Bank of International Settlements (BIS) possibly exiting the mBridge cross-border CBDC project it has overseen, but we did not expect the Switzerland-based entity would make its decision so soon. On October 31, BIS announced its departure from mBridge, and on Nov. 11 published an update on its official website stating that the initiative had reached the minimum viable product (MVP) stage. There was no explanation given for why BIS exited mBridge and no details provided about next steps for the project.

Given that U.S. President-elect Donald Trump has recently taken a pro-cryptocurrency stance, it was only a matter of time before someone prominent in the digital assets community found a way to spin it as positively affecting the China crypto market. Never mind that Trump is known for his mercurial nature and has only spoken about crypto in the most general terms. In this case, it is HashKey Group chairman and CEO Xiao Feng who is espousing such a viewpoint.

What happened to the digital rupee? With each passing week, it seems that India’s CBDC project is fading further into the background of the subcontinent’s financial ecosystem. In contrast to China, which is unswervingly pressing forward with the digital renminbi – irrespective of actual market demand, it should be noted – India’s financial regulators seem uncertain if they really want a digital fiat currency.

South Korea has long had an enthusiastic cryptocurrency investing community. Over the past 18 months, that community has grown briskly. Data compiled by South Korean regulators show that the number of crypto investors in the country increased 21% year-on-year in the first half of 2024 to 7.78 million, which is about 15% of the South Korea population of 52 million. During the same period, the average daily trading volume of cryptocurrencies jumped 67% to 6 trillion won while the market value of cryptocurrencies in South Korea rose 27% to 55.3 trillion won.

Ever since the China-led central bank digital currency project mBridge was launched several years ago, there have been whispers that its ultimate goal was to develop an alternative payments rail that could circumvent the U.S.-dominated international financial system. That is because mBridge aims to establish direct links between the central banks of its participants, allowing money to be sent outside of the existing correspondent banking system. It was primarily the involvement of the Bank of International Settlements (BIS) in mBridge that gave the project an appearance of neutrality. Yet with the news that BIS is considering shutting down the project, it seems clear the CBDC cross-border payments initiative cannot be separated from geopolitical tensions.

Hong Kong’s financial regulators and at least some in the industry seem to believe that the city’s future as a financial hub depends on its embrace of cryptocurrency. For the past two years, Hong Kong has been relentlessly pitching itself as a digital assets hub in an effort to regain ground lost to Singapore and mainland China. The city-state has emerged as a larger and more important fintech hub, while mainland Chinese stock exchanges are attracting companies to list that might have once chosen to go public in Hong Kong. While it can be argued that Hong Kong would be better served by focusing less on an industry that remains problematic in many respects, its big bet on crypto might end up paying off big.

The Indian government has long eyed cryptocurrencies warily, viewing them largely as contributing to money-laundering risk and challenging the central bank’s monetary authority. Though India has stopped short of outright banning digital assets – or a de facto ban like what China has – it has nonetheless made investing in them smoothly a challenging process – especially the 30% tax on gains from cryptocurrency. Nevertheless, crypto remains popular among with Indians, with a recent Chainalysis study showing that India leads the world in crypto adoption.

In the alternate reality inhabited by crypto bros, most jurisdictions are always on the cusp of a full-throated embrace of digital assets. Case in point: in late August, Tron founder Justin Sun wrote on X, “China unbans crypto. What’s the best meme for this?” Regardless of Sun’s true intentions in this post, Beijing is not only “unbanning” crypto, it is tightening oversight of the industry.

Singapore is continuing to take a measured approach to digital assets as seen by the growing prevalence of stablecoin payments in the city-state. In the second quarter, stablecoin payments reached a new high of US$1 billion in Singapore, according to data from blockchain research firm Chainalysis. With the announcement of stablecoin regulations in August 2023, Singapore  bet that these “safer” cryptocurrencies have staying power and will play an increasingly important role in the future of financial services.

It was inevitable that Hong Kong’s much-hyped cryptocurrency initiative would run into some serious challenges. We are not surprised to learn that the city’s regulators are not satisfied with the compliance level at some “deemed to be licensed” exchanges operating in the city. While demand for digital assets remains strong in many markets, and Hong Kong has a strong foundation as a financial services hub on which it can build, the crypto sector itself remains immature and prone to malfeasance while there is no global consensus on how to manage digital asset flows.

2024 might be remembered as a turning point for central bank digital currencies (CBDCs) – the year when interest in them began to significantly wane. In the case of India, while the government seems determined to push forward with the digital rupee, retail users are more circumspect. The Reserve Bank of India (RBI) highlights its estimation of 5 million digital rupee users. If we stop to consider that India has more than 1.4 billion people, then less than ½ of 1% of the population is not a particularly strong adoption rate – especially for something that has such strong government backing.

Cryptocurrency crime committed by the Democratic People’s Republic of Korea (DPRK) has become so pervasive that it requires a stronger international effort to bring under control. With that in mind, the U.S. Department of State and the Ministry of Foreign Affairs of the Republic of Korea (ROK) co-hosted an event about the issue in New York City on August 27.

Every few months, it seems that rumors start circulating in the cryptocurrency community about a possible liberalization of China’s strict digital asset controls. The rumors rarely have any basis in reality, and this time is no different. A number of cryptocurrency news sites have published stories over the past few weeks suggesting change could be afoot, citing a legal victory for Tron blockchain founder Justin Sun in Chinese court.

Hong Kong seems determined to become a major hub for digital assets and adopting a stablecoin regime is a key part of that policy. However, crypto bros hoping for a highly permissive regime appear to be out of luck. The city’s stablecoin regulations have changed very little from the ones proposed in December 2023. They require issuers of fiat currency-backed tokens to obtain a license from the Hong Kong Monetary Authority (HKMA), that stablecoins be fully backed by reserve assets “at any given point in time” and that issuers publish monthly confirmation of those assets from an independent auditor.

The hype is being separated from the reality when it comes to retail central bank digital currencies (CBDCs) in Asia, and adoption is underwhelming. Nearly five years after China launched its first digital renminbi (e-CNY) trials, only two other Asian countries actually have a functional retail CBDC: India (though it remains in a pilot stage) and Cambodia.

JPMorgan estimates that global corporates move nearly US$23.5 trillion across countries each year, equivalent to roughly 25% of global GDP. Since they rely on what the bank calls “sub-optimal wholesale cross-border payment processes,” annual transaction costs for the companies have reached US$120 billion. This is where atomic settlement comes in – and where the ambitious blockchain firm Partior – which was founded by JPMorgan, DBS and Temasek sees a large market opportunity.

For more than three years, the Bank of International Settlements (BIS) and the central banks of China, Hong Kong, Thailand and the United Arab Emirates (UAE) have been working on a cross-border central bank digital currency (CBDC) project known as mBridge. In a nutshell, the project aims to improve efficiency, speed and transparency in cross-border payments.

Taiwan’s Financial Supervisory Commission (FSC) has historically taken a hands-off approach to cryptocurrency focused on segregating the local digital assets ecosystem from the banking system – which it wants to protect from volatility and risk. As long as banks stay away from digital assets, the FSC is willing to let local crypto exchanges operate with a high degree of autonomy provided they pay their taxes and keep on the straight and narrow. However, Taiwan has since the collapse of FTX been dealing with a surge in crypto-related crime, both money laundering and fraud. Criminals are exploiting unsuspecting investors and taking advantage of limited knowledge of digital assets among the general public, lawmakers and regulators.

2023 may be remembered as the year that the Web3 bubble burst. Hype about the third iteration of the internet had reached a feverish pitch by early last year, though actual use cases remained limited. Yet amid the highest interest rates in three decades, as well as stubborn inflation, investors started to get cold feet about what is still a nebulous and nascent ecosystem underpinned by technology that many central banks do not trust.

South Korea has long had an enthusiastic cryptocurrency investing community. According to the Korea Financial Intelligence Unit (KoFIU), by mid-2024 Korea will have about 6 million crypto investors, equivalent to 11.5% of the population. At the same time, crypto related crime is rising in Korea. While the most infamous example remains Do Kwon’s multi-billion-dollar TerraUSD-Luna fraud, other, smaller scale scams are proliferating, necessitating new regulation to protect investors and both deter and penalize crime. According to the FoFIU, Korean digital asset exchanges flagged 49% more suspicious transactions in 2023 compared to 2022.

The Philippines in late March began to blocking access to Binance, the world’s largest cryptocurrency exchange by trading volume. The country’s Securities and Exchange Commission (SEC) said it received the assistance of the National Telecommunication Commission (NTC) to block access to Binance’s website and online trading platform, according to a statement published by the SEC.

The March 7 launch of Hong Kong’s wholesale CBDC project was memorable. Firstly, the enthusiasm of the city’s financial regulators for this project is strong. While painting in broad brushstrokes, they outlined some lofty objectives for the digital HKD. The project aims to develop an interoperable platform that will improve efficiency, transparency and financial inclusion in the monetary and financial systems. “We’re calling it Project Ensemble” internally, to conjure a group of items working together, Hong Kong Monetary Authority (HKMA) deputy chief executive Howard Lee said at a press conference. “We hope it will play beautifully, like music.

Since its return to China in 1997, Hong Kong has become the country’s indispensable offshore financial center, with considerable international links. It has engaged in financial innovation, such as the cultivation of the world’s premier offshore renminbi trading hub. However, Hong Kong also faces much more competition from Singapore than it did in the late 1990s, and other Asian cities like Tokyo.

Undertaking cross-border payments involving central bank digital currencies (CBDCs) is a complicated endeavor, and despite some media hype in the summer of 2023, the mBridge project of the Bank of International Settlements (BIS) and the central banks of mainland China, Hong Kong, Thailand and the United Arab Emirates (UAE) did not launch late last year. Many questions remain about the ultimate utility of using CBDCs in cross-border payments as well as any attempt to directly challenge the US dollar in global financial flows. 

With the crypto bear market receding and the possible return to a bull market, it is interesting to note that the amount stolen from crypto exchanges fell in 2023. However, the overall number of digital asset hacks still grew. Maybe it was the belief that the bear market would endure that partially deterred the cybercriminals? Probably not. As it turns out, the main reason that less crypto was stolen last year was that digital asset platforms are becoming more sophisticated in their security and responses to attacks, and are working more successfully with law enforcement than in the past.

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