The Taiwan Banker

Singapore looks set to be Asia’s cryptocurrency hub, with Hong Kong, South Korea and Taiwan opting for more conservative approaches to decentralized digital currencies Since the rise of the four Asian tiger economies more than half a century ago, Taiwan and South Korea have evolved into export powerhouses while Hong Kong and Singapore have become major financial centers. With their importance to global capital flows, the erstwhile British Crown Colonies were initially both poised to become cryptocurrency hubs. Hong Kong got off to a fast start as the headquarters of some prominent crypto exchanges and the launchpad for Tether, the world’s largest stablecoin. But China’s draconian crypto crackdown has taken a toll on the industry in Hong Kong. Slowly but surely, the industry is reducing its Hong Kong footprint. The latest heavyweight to depart is the crypto derivatives exchange FTX, which in September announced it would move its headquarters to the Bahamas. In Singapore, the situation could not be more different. The city-state aims to steadily integrate cryptocurrencies into its existing financial system because of their emergence as an ascendant asset class. For a financial center like Singapore, crypto is an opportunity more than a risk, although proper care must be taken to curb illicit flows. Like its US and European counterparts, the MAS is choosing to regulate crypto exchanges on anti-money laundering (AML) and due diligence measures, but not their trading activities. Singapore is “interested in developing crypto technology, understanding blockchain, smart contracts and preparing ourselves for a Web 3.0 world,” Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), told Bloomberg in November, referring to the latest generation of online services. “We think the best approach is not to clamp down or ban these things,” he added. Around 170 applicants have applied to provide digital payment token services since Singapore’s Payment Services Act went into effect in January 2020. Roughly 90 service providers are operating under an exemption from holding a license, including Binance, the world’s largest cryptocurrency exchange. To comply with the law, Binance in late October banned its users in Singapore from depositing fiat money, trading or purchasing crypto on Binance.com. Further, Binance announced in mid-December that it had withdrawn its application to the MAS to operate a regulated cryptocurrency exchange in Singapore. Binance.sg will be shut down by February 13. Australia’s Independent Reserve is one of the first firms to be granted preliminary approval by the MAS operate as a regulated provider of digital payment token services. The company has been offering digital asset exchange and over-the-counter trading services to individuals and institutions in the city-state since late 2019. Despite high expectations for Singapore’s crypto business, decentralized virtual currencies are not yet legal tender in the city-state, and are instead labeled as goods that can be used for exchange. Meanwhile, Singapore’s crypto trading market is still small. In 2020, the combined peak daily trading volume of three major cryptocurrencies quoted in the Singapore dollar - bitcoin, ethereum and XRP2 - was just 2% of the average daily trading volume of securities on the Singapore Exchange, according to data compiled by the Singaporean government. Further, the Blockchain Association of Singapore reckons that crypto makes up less than 0.01% of the assets in funds managed by MAS-regulated fund managers. South Korea tightens oversight of crypto Compared to Singapore’s gradual embrace of crypto, South Korea is more agnostic. Indeed, South Korean regulators are not keen to establish the country as a crypto hub. In February, Bank of Korea Governor Lee Ju-yeol said that crypto assets like bitcoin have no intrinsic value. In recent months, Seoul has signaled that it will regulate virtual currency more strictly, even if that stymies investment opportunities for crypto-loving South Koreans. Daily turnover at local South Korean crypto exchanges exceeds US$20 billion, more than thrice the daily volume of retail investors’ stock trading. As of September 24, all virtual asset management providers, including cryptocurrency exchanges, were required to register with the Korea Financial Intelligence Unit (KFIU) to operate in the country. The KFIU is the division of Korea’s Financial Services Commission (FSC) responsible for combating money laundering. Legislation passed in March requires that crypto firms partner with banks to ensure trading accounts are held by real people. However, banks are not eager to take on the risk that comes with the territory, leaving most of South Korea’s 200+ crypto exchanges in a quandary. As of late September, just 10 had secured the necessary partnerships with banks that allow them to be registered as virtual asset service providers. Among them are the four biggest players: Upbit, Bithumb, Coinone and Korbit. These exchanges have close ties with major banks such as Shinhan, Nonghyup and the digital lender K bank. Lee Chul-ie, the head of the No. 5 South Korean exchange Foblgate, told The Financial Times in May, “We are facing an existential crisis.” Given banks’ reluctance to work with the exchange, “we may have to take our business offshore,” he said. Going offshore would be following in the footsteps of China’s crypto exchanges, which exited the country in the wake of the crackdown that began in late 2017. Beijing later blocked access to the exchanges’ websites from the mainland. The law passed in March 2021 also requires crypto exchanges operating in South Korea to obtain a security certificate from the country’s internet security agency. As of May, just 20 exchanges had received such certificates. Finally, to the chagrin of crypto investors, Seoul plans to introduce a 20% capital gains tax on crypto profits of more than 2.5 million won (US$2,105). The tax was originally slated to be implemented in 2022 but pushed back to 2023, likely for political reasons. South Korean lawmakers are eager to court voters in their 20s and 30s – who are more likely to be cryptocurrency investors and opposed to the tax – ahead of the presidential election in March 2022. Taiwan’s gradualist crypto policy For its part, Taiwan has taken a gradualist approach to cryptocurrencies. Regulations are relatively permissive about the participation of retail investors in the market, and there are a number of crypto exchanges operating in the country. The largest and most prominent is Maicoin, established in 2014. Yet the crypto market in Taiwan remains relatively small, due in part to a public perception that decentralized digital currencies make for a risky investment (true in certain regards) and the generally risk-averse profile of the typical Taiwanese investor. Taiwan has seen its share of high-profile crypto scams that have contributed to this image problem for cryptocurrencies. A bitcoin ponzi scheme in Taichung swindled US$50 million out of more than 1,000 unsuspecting investors. In September, Taiwanese police arrested 14 people over a crypto investment scam that allegedly defrauded more than 100 people out of about NT$150 million over the past year. Thorough regulations could help Taiwan safely develop crypto as an asset class in Taiwan. There have been some steps in that direction recently. To prevent cryptocurrencies from being used in money laundering, Taiwan’s cryptocurrency exchanges have been required since July 1 to report transactions valued at more than NT$500,000. Companies that fail to comply with the new regulations may be fined of up to NT$10 million. In mid-November, Taiwan moved forward with its plan to create a comprehensive regulatory framework for cryptocurrencies. There were two key policy developments. First, the Ministry of Economic Affairs (MOEA) formally classified cryptocurrencies as “virtual currency platforms and trading businesses.” Previously, they had been considered “software design services.” Second, the MOEA designated the Financial Supervisory Commission (FSC) as the regulator in charge of overseeing the cryptocurrency industry. Taiwan’s cautious approach to crypto may disappoint some enthusiasts of decentralized digital currencies, but it is shaping up to be consistent with how the country regulates the broader financial services industry. The focus is on preventing financial crime and protecting investors while facilitating healthy market activity. That is insufficient for Taiwan to become a crypto trading hub, but there is always room to adjust regulations if market demand significantly rises.