Asian regulators grapple with bitcoin and cryptocurrency regulation amid ICO growth

Stacks of bitcoins sit near green lights on a data cable terminal inside a communications room at an office in this arranged photograph in London, U.K., on Tuesday, Sept. 5, 2017. Photographer: Chris Ratcliffe/Bloomberg

Cryptocurrencies and initial coin offerings (ICOs) have continued to divide regulators worldwide and Asia is no exception. In a bid to manage and mitigate the risks associated with cryptocurrencies, regulators in the region have offered a range of reactions from outright bans to more nuanced responses.

These developments come even as the world is set to see the launch of Bitcoin futures by the Chicago exchanges CME Group and the CBOE Global Markets. The latter surprised and stunned everyone by bringing forward its launch of Bitcoin futures trading on Sunday.

The Nasdaq is also planning to introduce futures trading in the first half of 2018, with the Commodity Futures Trading Commission having approved Bitcoin futures last week. Similarly, the Tokyo Financial Exchange this week said it plans to create a working group to study cryptocurrencies in January. In Japan, the start of a working group is typically the first step towards drafting legislation.

Bitcoin, the biggest cryptocurrency by market value, has doubled its value in just the last two weeks. On Thursday morning, the cryptocurrency hit new heights, surging well above $18,000 across exchanges. It finally came to rest above $16,000 while the Coinbase exchange said it has been suffering major issues due to ‘record high traffic’.

Its growth has also sparked fears of a cryptocurrency bubble, which has been linked to the growth of ICOs worldwide and the inconsistent regulatory terrain.

ASEAN regulations

Indonesia – Southeast Asia’s largest economy – has taken a different tack, with Bank Indonesia planning to prohibit the use of all cryptocurrencies in payments. According to Indonesia’s central bank, the decision to ban the use of Bitcoin and other cryptocurrencies will come into effect in 2018 and is part of an effort to protect the sovereignty of its currency, the rupiah.

While Jakarta is interested in digital technology and the digital economy, particularly given the emergence of Indonesia as one of the largest e-commerce markets in the world, it is less enthusiastic about cryptocurrencies. This is due to their decentralised and volatile nature, as well as their impact on fundamental economic models. However, this could prove counter-productive to the goals of financial inclusion in an emerging market like Indonesia.

Most recently, the Philippines chose to regulate ICOs as they gain ground. Currently, Bangko Sentral ng Pilipinas is in discussions with the nation’s Securities and Exchange Commission (SEC) on how to oversee ICOs, which involve the issue of digital tokens.

The Philippines is seeing growth in the use of bitcoin and its counterparts due to growing remittance payments from overseas Filipino workers. Bangko Sentral estimates that remittance transactions using bitcoin are now worth about $6 million a month, three times the volume seen in 2016; Filipinos working abroad remit about $2 billion every month to their family members in the Philippines.

Singapore, which has emerged as the third largest centre for ICOs worldwide and the largest in Asia, has no plans to regulate virtual currencies such as Bitcoin and its comparables but plans to “regulate the activities that surround virtual currencies if these activities pose specific risks”, given the risk of virtual currency transactions potentially being exploited for money laundering or terrorist financing.

This will see the city-state regulate the intermediaries in virtual currency services, as well as those digital currencies or tokens that are structured like a securities products, which will then fall under the remit of Singapore’s Securities and Futures Act.

Meanwhile, Malaysia is currently in the process of formulating a regulatory framework for cryptocurrencies. From 2018, Bank Negara Malaysia will regulate intermediaries in the cryptocurrency space.

This will see organisations and persons converting cryptocurrencies into fiat money will be designated reporting institutions under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 from the beginning of 2018. Malaysia claims that this move is aimed at preventing the abuse of the system for criminal and unlawful activities, as well as ensuring the stability and integrity of its financial system.

Japan, China & India

Among Asian countries, Japan is the furthest along in its approach to cryptocurrencies, having recognised the virtual currency as legal tender in April 2017. Japan’s Financial Services Agency (FSA) has approved 11 cryptocurrency companies, among them cryptocurrency exchange Quoine, which has roots in Singapore and Japan and recently completed an oversubscribed ICO that raised $105 million.

These regulations by the FSA require that exchange operators build secure systems, segregate customer accounts and check customer identities, in addition to other KYC and AML measures.

This is in sharp contrast to China, which has effectively banned ICOs – as has South Korea – and has cracked down on cryptocurrency exchanges. This has led to many Chinese cryptocurrency players to shift their operations to Hong Kong and Japan.

In Hong Kong, digital assets are not a new asset class and offer a platform that can achieve strong outcomes. This has propelled the city into becoming a cryptocurrency centre. However, the use of public token sales to raise funds only officially entered the market around mid-2017. Increasingly, Hong Kong is seen as a favourable “hub” for token sales for several reasons, including its legal, regulatory, corporate and taxation framework.

Bitcoin is defined as a virtual commodity rather than a currency in Hong Kong, and, like other cryptocurrencies, is not regulated by financial regulatory bodies like the HKMA or the SFC. This translates to it being unlikely that there will be significant restrictions on cryptocurrencies. But it does not prevent the government from creating licensing regimes, as the HKMA is highly sceptical of Bitcoin as a decentralised virtual currency, while its guidance towards banks is publicly unknown.

In the case of India, the Reserve Bank of India (RBI) has maintained the position that those organisations and individuals dealing in virtual currencies are doing so at their own risk, as it has not licensed or authorised any enterprise to deal in cryptocurrencies.

With no established regulatory framework in place in India, the Supreme Court of India is also currently pushing New Delhi to formulate regulations, in order to fill the regulatory vacuum that is claimed to have fostered a lack of accountability in the cryptocurrency trading space in India. The country has typically adopted a “wait-and-see” stance on cryptocurrencies but has not taken any concrete steps towards regulating or prohibiting them.

However, according to an account in The Economic Times, RBI is currently working on a policy for cryptocurrencies, as well as exploring the possibility of issuing its own fiat cryptocurrency.

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