How Will Crypto Regulation Work In Asia?

As we progress into 2023, the outlook for crypto in Asia is a mixed bag. Some countries, like Japan, have taken a proactive approach to regulate the industry, while others, like China, have taken a more restrictive approach.

However, one thing is clear: the crypto regulation landscape in Asia is constantly evolving, and firms operating in the region will need to stay informed in order to navigate it successfully.

One of the most mature financial centers in the world, Japan has been at the forefront of crypto regulation for several years.

In 2014, the country agreed to draft legislation on virtual currencies as part of an agreement with the International Organization of Securities Commissions (IOSCO). However, it wasn't until the Chinese government began cracking down on crypto trading in early 2017 that Japan truly became a hub for the industry.

In the wake of the high-profile hack of local exchange CoinCheck in 2018, Japan implemented some of the strictest consumer protection legislation in the world, placing high demands on crypto exchanges. These regulations include mandating the segregation of exchange and customer assets and requiring most customer assets to be held in cold wallets.

While these regulations have been a burden for some exchanges, they have also helped to ensure the safety of customers' funds. For example, customers of FTX's Japan subsidiary were able to recover their funds, while those of other FTX entities suffered significant losses.

In recent years, Japan's politicians have been working to show companies that it's a great time to set up shop in the country.

In December 2020, the country approved a tax change that will be put into law this year. Under the new rules, crypto projects will be able to issue tokens without paying onerous corporate taxes, which had forced many projects abroad.

This year, Japan's lawmakers will continue discussions on legalizing decentralized autonomous organizations (DAOs) and regulation may be issued during this year's legislative session, which ends in June.

The aim is to add clarity in taxation and formal legal structure in giving limited liability to members involved in crypto projects. Key themes under discussion relate to disclosure obligations, security offerings, and internal governance rules.

China, on the other hand, has taken a much more restrictive approach to crypto regulation. In 2017, the government shut down several crypto exchanges and clamped down on mining.

While the country is home to some of the largest crypto mining pools in the world, the government has made it clear that it views the industry with suspicion, while it conveniently rolls out its Digital Yuan.

Despite this, Hong Kong has exerted its autonomy to chart its own way, announcing that it is open to crypto firms in a bid to preserve its status as an international finance center. Hong Kong has an easier regulatory approach toward crypto and blockchain technology, which makes it an attractive destination for crypto firms.

Singapore, on the other hand, is likely to have more restrictive regulations in the future as a result of the implosion of high-profile firms registered in the city-state last year.

Last year’s implosion of high-profile firms registered in the city-state, such as Three Arrows Capital and Terraform Labs, kicked off a regulatory process that looks likely to result in more restrictive regulations.

Despite their differences, “The more developed markets in Asia are fairly advanced in providing clarity on what falls within the virtual asset service provider (VASP) framework,” Vivien Khoo, co-founder of the Asia Crypto Alliance said, noting that Hong Kong and Singapore have a “fairly similar” VASP framework.

Collaboration among countries across the region will tighten. “It will be much harder to engage in regulatory arbitrage now in Asia,” Khoo said.

Despite the challenges, there are also opportunities for crypto firms in the region. Countries like Japan and Hong Kong are looking to attract crypto firms and projects, and are making changes to their regulatory frameworks to make it easier for these firms to operate. Additionally, as the industry continues to evolve, there will likely be new opportunities for firms that are able to navigate the regulatory landscape successfully.

Overall, the crypto industry in Asia is at an inflection point. While there are certainly challenges to operating in the region, there are also opportunities for companies that are able to navigate the regulatory landscape successfully. As the industry continues to evolve, it will be important for crypto companies to stay informed and adapt to the changing crypto regulation.