“LOOK EAST” FOR CRYPTO-ASSET REGULATION: SOME DEVELOPMENTS IN JAPAN, HONG KONG, DUBAI AND SINGAPORE

Winston Churchill had once spoken about the land looking bright westward but as India moves forward, it will be important above all to “Look East”.

The year 2023 was an eventful year for the crypto industry. In US, there was a heightened crackdown on this burgeoning industry. In the wake of FTX collapse towards the end of 2022, the trial of its CEO made news throughout the year. He was eventually convicted on several charges of fraud. The year ended with the largest crypto exchange in the world agreeing to pay a settlement of roughly $4 billion to the U.S. government for the charges brought against it. In addition to this, the CEO of the exchange also pleaded guilty to a felony related to his failure to prevent money laundering on the exchange and stepped down as CEO.

Although crypto industry did not have a good year in the US, it witnessed silver linings in other parts of the West. European Union brought out the Markets in Crypto-Assets Regulation licensing framework in June 2023. It will be implemented sometime in this year. These regulations will allow crypto industry companies like wallet providers and exchanges to conduct crypto business across the economic region, while requiring the customer identification, supervision and disclosures that allow for compliant and responsible market participation. The United Kingdom recently passed the Financial Services and Markets Act 2023. It classifies crypto related activities as regulated financial activity. This law would give the UK Financial Conduct Authority broad oversight of the crypto-asset space, bring stable coins under its scope as well as crypto-assets marketing promotions and more. However, in contrast with the EU’s approach of introducing a bespoke regulatory framework for crypto-assets, the UK seems inclined to adopt a phased approach in bringing crypto-assets within the existing regulatory framework.

Perhaps the sunrise of crypto-asset regulation has been most visible in the East. Some states have come up with regulatory policies and even issued licenses to service providers of crypto-asset related activities. The Dubai Virtual Assets Regulatory Authority constituted earlier in 2022, officially launched its highly anticipated licensing framework for crypto-asset service providers. It is a complex licensing regime consisting of four levels. At Provisional and Preparatory levels of Minimum Viable Product (MVP), a crypto company cannot provide crypto-asset services. It can do so from Level 3, with an Operational MVP license which allows working with institutional customers and certified investors. Operational Full Market Product license at Level 4 allows working with retail clients.

Monetary Authority Singapore (MAS) issued a consultation paper in July 2023 to seek public feedback on the draft amendments to the Payment Services Regulations 2019.The proposed amendments would require Digital Payment Token (DPT) service providers to safe keep customer assets under a statutory trust and restrict DPT service providers from facilitating lending and staking of DPTs of their retail customers. This would facilitate the recovery of the customers’ monies in the event of the service providers’ insolvency. MAS issued another consultation paper in July 2023 proposing requirements for DPT service providers to address unfair trading practices. MAS continued to issue Major Payment Institution licenses to cryptocurrency exchanges like in the previous year.

In January 2023, the Hong Kong Monetary Authority announced a mandatory licensing regime for entities carrying on regulated activity in relation to stablecoins. Regulated activities include governance, issuance, stabilization and provision of wallet services in relation to stablecoins. Such a mandatory licensing regime is expected to come into force later this year or early in 2025following a detailed consultative process.

In another development, Hong Kong’s Securities and Futures Commission (SFC) concluded consultations on Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators licensed by SFC and published Guidelines for Virtual Asset Trading Platform Operators. The guidelines include requirements for establishment of virtual asset trading platforms such as fitness, competency, and financial soundness requirements. They also outline ongoing obligations such as those relating to client take-on procedures and disclosure obligations to the client, custody of client assets, due diligence, cybersecurity, conflicts of interest, operations and internal control etc.

In Japan, the amendments made to the existing laws aimed to introduce new regulations in respect of stable coins came into effect in June2023. Earlier in the year, crypto industry received ahead start with the amendments to the Japan Virtual Currency Exchange Association (JVCEA) self-regulatory rules to establish a “Green List System”. Under this system certain member exchanges may be exempted from JVCEA Pre-Assessment in respect of certain crypto-assets designated by the JVCEA. Additionally, it provides for the “Crypto Asset Self-Check System” under which certain member exchanges may generally be exempted from JVCEA Pre-Assessment except in certain specific circumstances.

From all of the above, it is clear that these jurisdictions have been welcoming and inclusive of crypto industry with appropriate regulation. With their licensing frameworks, they have endeavored to create a clear taxonomy for crypto-assets, balancing the need to protect consumers’ interests and the need to protect the integrity of the markets. They are striving to develop an investor protection-oriented ecosystem for crypto industry. However, they continue to do so in a way that is business friendlier and promotes innovation and investment.

Back at home, the statements by MoF have put to rest the possibility of a ban on crypto-assets alongside cryptocurrencies. However, a regulatory framework is yet to come. Considering the upcoming general elections in May 2024 and a pending interim budget, it is difficult to see any further action from MoF until elections. However, relying on the outcomes of the G20 summit earlier this year under the Presidency of India, the exercise of designing a regulatory framework seems possible in the not too distant future. We believe that in the run up to the designing of such framework India must take cognizance of the developments happening in other countries. Winston Churchill had once spoken about the land looking bright westward but as India moves forward, it will be important above all to “Look East”.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.