There has been an intense focus on cryptocurrencies over the last six to 12 months globally. This meteoric rise of cryptocurrency can be attributed to outsized retail participation, growing institutional adoption, changing regulatory landscape as well as trading opportunities brought on by the increasing demand of the new asset class. In Asia, cryptocurrencies have seen accelerated interest from both institutional and retail investors. As of 2021, there are approximately 300 million cryptocurrency users worldwide and an estimated 160 million users in Asia. Of these, 245,000 people in Hong Kong own crypto. Hong Kong has played a pivotal role in the crypto space, and the territory has continued to attract some of the world’s largest crypto exchanges, including Gemini. Tether, the world’s largest stablecoin, was launched here. Companies such as crypto exchange FTX, valued at US$18 billion and blockchain software company Block.one began as startups in Hong Kong.
However, what once earned Hong Kong its crypto bragging rights has become an awkward subject for the city’s financial regulators. In May, China reiterated its firm stance on cryptocurrency by introducing tougher bans on crypto firms, and last week hardened its stance even more. The hardline stance has threatened Hong Kong’s initial positioning as a crypto hub, with regulatory scrutiny set to continue for the time being. The onus is on crypto companies to proactively engage and build a dialogue with regulators to secure a future for crypto in Hong Kong.
It would serve crypto companies well to garner insights into the current developments on the regulatory side and join the discussion around whether cryptocurrencies present a risk to the current financial system, and ultimately how regulation can be complementary in helping them achieve their objectives.
Reassessing risk tolerance
There is a systemic risk in the finance world, a butterfly effect, where a seemingly isolated or small event can have a cascading and seismic impact. For example, we saw disastrous consequences when the U.S. housing crisis spread into a global contagion in 2008. Most people attribute the 2008 Global Financial Crisis to the greed and negligence of big banks, but the truth is a little more complicated and has more to do with unregulated loopholes. Financial regulators are concerned with systemic risk in crypto because they want to keep financial blow-ups isolated to avoid future crises and economic downturns that go with them. We’ve had some serious dislocations in the markets this year with the pandemic, but luckily they were kept isolated.
This is why China, the erstwhile capital of crypto, began shutting down crypto mining this year, following the ban on crypto exchanges five years ago. Although China is seemingly less concerned about regulation and more concerned about capital flight, it is still an extension of financial bureaucracy in a bid to mitigate risk.
There is a paradox at play here. On the one hand, cryptocurrency is built on the premise of a decentralized finance system with the aim of democratizing finance. On the other, it seems that investors are struggling to have complete trust in a system that is unregulated. While there are disagreements about how to take advantage of the opportunities that crypto offers, including avoiding the risks that are associated with crypto’s boom, consensus is building on the need to target exchanges where the cryptosphere and real world meet.
Regulation: not just a dirty word
Cryptocurrency presents an opportunity to build a transparent economy outside of the established financial system, but we must also acknowledge the challenges that need to be overcome in order to build trust. Although Hong Kong regulators have yet to take a clear stance on regulation, other parts of the world have shown us that clear-cut and tighter regulation can bring about a win-win result for both regulators and users.
Singapore, for instance, has not shied away from the crypto market, choosing to allow selected crypto-related services to operate on an exempt license while having open and frequent dialogues to build a regulatory framework that ensures the safety and security of local investors. Japan boasts the world’s most progressive regulatory climate for cryptocurrencies and recognizes Bitcoin and other digital currencies as legal property under the Payment Services Act (PSA). In many ways, Singapore and Japan are demonstrating that crypto regulation can go hand in hand with crypto recognition.
Additionally, organizations should aid in plugging the public knowledge gap on the crypto ecosystem and educate where possible. In February 2021, Gemini launched Cryptopedia, a free, open-source educational platform designed to facilitate understanding through high-quality crypto resources produced by developers across the industry. In the wider scope of Asia, resources like Cryptopedia help to address the pressing need to empower individual investors through crypto education.
Outlook for the future
While it is understandable that a cohort from the cryptocurrency industry views impending regulations like Financial Action Task Force’s crypto travel rule as a death knell to both the crypto-verse and their personal financial privacy, it’s somewhat of a myopic perspective. Ultimately the benefits that regulation brings vastly outweigh its negatives over the long run.
Traditional forms of regulation from the fiat universe do not reciprocally apply to every aspect of crypto nor to the fundamental nature of blockchain technology. The creation of fair restrictions on the technology’s use requires a fundamental understanding and cooperation of those technologies. Technology with unlimited potential should be made more accessible, regulated and beneficial for everyone.
Although there is still a lot of uncertainty over how things will play out, the increasing regulatory oversight will present an even greater opportunity for the cryptocurrency market to mature and become more legitimized in the long run.
And as the world looks to Hong Kong as a leader in fintech and crypto regulation, it is clear that players who identify and prioritize security and regulation early on will emerge at the forefront. Asia’s unique emphasis and openness towards crypto education will pave the way for increased institutional and retail adoption of crypto in the region.
Ultimately, our take is that stronger and clearer regulation will add more legitimacy to cryptocurrency as the asset class gradually matures. Gemini is in this for the long run and over time this will pay off. By no means are we encouraging the old ways of doing things, copy and pasted onto blockchain transactions. Instead, we are fully on-board with regulation as a means of helping to fight criminal activity, shore up investor confidence and throw a bone, not a spanner to the very mechanics that make crypto a desirable financial investment.