Will developing nations be faster to adopt cryptocurrencies?
Who loves cryptocurrencies? Investors and Millennials are among the groups to have demonstrated most enthusiasm, while governments and regulators are probably the least welcoming. That’s hardly surprising when much of cryptocurrencies’ appeal has centred on bypassing banks and regulators.
The response from individual regulatory bodies is equally diverse, ranging from cautious but encouraging to outright hostility. The latter camp includes the Securities and Exchange Commission (SEC) in the US and the Chinese government. So which countries fall into the former category and have been proactive in adapting their own regulatory regimes?
Japan leads the way
Japan is described as having the world’s most progressive regulatory climate for cryptocurrencies and has been proactive in establishing guidelines on how virtual currency exchanges and initial coin offerings (ICOs) should be structured. The country was also the first to recognised bitcoin as legal tender, beginning March 2016. While its rules are demanding, Japan’s regulatory template is likely to be adopted by other Asian countries.
“For a long time Japan has been at the forefront of many technologies. Why? Because it has a forward view, something governments in the West certainly do not have,” says Aaron Wagener, chief operating officer for the Berlin-based non-profit MXC Foundation, developed of the Machine eXchange Coin (MXC).
“Look into research on Japanese companies and many roll out 500-year business models and plans. Imagine their peers in the west doing that! It’s exciting for the industry that a country such as Japan looks forward to nurture the crypto market as opposed to pretending it doesn’t exist. It very much does exist and shouldn’t be ignored.”
A early influence on this development was the hacking of Tokyo-based cryptocurrency exchange Mt. Gox in early 2014. At that time, the exchange accounted for 70% of all bitcoin transactions globally but suddenly stopped trading in late February. Soon after it was reported that 650,000 bitcoin – at the time worth $390m, but $6bn based on the current price – had gone missing.
The incident prompted the Paris-based international anti- money laundering (AML) organisation the Financial Action Task Force (FATF) to issue a report a year later. Guidance of Risk-Based Approach to Cryptocurrencies urged countries to license virtual currency exchanges and make them subject to the same regulatory standards as other financial institutions.
Japan responded by revising its Payment Services Act to take up the FATF’s recommendations and the updated law was introduced in April 2017. The act defines virtual currency as a form of payment and also requires any virtual currency exchange setting up operations in Japan to register with its Financial Services Act (FSA). Last September the FSA recognised 11 companies as registered cryptocurrency exchange operators and more have followed.
Japan’s virtual currency exchanges are required to be accountable to customers, which means separating customers’ assets from those of the exchange, maintain proper bookkeeping, be audited annually, file business reports and comply with know-your-customer (KYC) and AML rules. Registering as an exchange is a process of up to six months’ duration.
The requirements weren’t enough to prevent the hacking of Coincheck last January and the loss of $530m in NEM tokens, prompting the FSA to conduct spot checks of operators to expose security gaps. The incident prompted 16 Japanese exchanges to come together in in March to set up the self-regulating Virtual Currency Exchange Association (JVCEA).
In the same month, punishment notices were issued to seven exchanges and two suffered a 30-day suspension of operations. However, last week FSA commissioner Toshihide Endo said he wanted the cryptocurrency market to grow under ‘appropriate’ regulatory supervision that struck a balance between protecting consumers and promoting technological innovation.
Other Apac contenders
Elsewhere in the Asia Pacific region, Singapore – which has vied with Hong Kong as the region’s main financial hub – adopts a ‘hands-off’ approach to cryptocurrencies. Last October, the Monetary Authority of Singapore (MAS) said that it didn’t plan to regulate, but would stay alert to potential abuses from their use, such as money laundering and financing terrorist activity.
“Singapore has several advantages; it’s a small market but also one that is quite nimble and able to quickly adapt new technologies,” says Wagener. “The government has a worldwide reputation for being business-friendly and has done a fantastic job. Crypto acceptance is just a further application of this business awareness from Singapore.”
South Korea, whose conglomerates Samsung and LG have made the country a world contender in technology and consumer electronics, has also developed into a major cryptocurrency market with two exchanges – UPbit and Bithumb – among the world’s top 25. Although the country imposed a ban on ICOs in 2017 and regulated to restrict cryptocurrency trading, this was in response to hacking and fraud allegations.
The ICO ban has subsequently been rescinded and bitcoin has been awarded legal status as a remittance method. South Koreans are responsible for 14% of the bitcoin market, while the country’s capital, Seoul, has become a major global centre of the blockchain community.
Taiwan, another location to benefit as cryptocurrency capital and talent relocates from China, has also begun to raise its profile. Although there is still no clear legal framework for cryptocurrencies, the Taiwanese government is making moves to attract more players. Three months ago Taiwan formed a self-regulatory organisation (SRO) and a parliamentary group to bring together tech industry figures, legislators and policymakers for developing industry standards.
The Taiwan Crypto Blockchain Self-Regulatory Organisation (TBSRO), formed at the same time and led by legislator Jason Hsu, also aims to develop common guidelines for blockchain and crypto while limiting the need for government involvement.
Most recent addition to the list is Thailand, which has just announced Project Inthanon, a proof of concept trial for developing a national cryptocurrency. Led by the Bank of Thailand, the project involves eight other Thai banks and a technology partner and its preliminary report is due to be delivered in March 2019. Expectations are that the initiative could pave the way for an official cryptocurrency for transactions between banks and, longer term, cross-border funds transfer but will not go as far as exploring its potential as a consumer currency.
Australia is another country that has been particularly proactive in cryptocurrency regulation. In July 2017 it followed Japan in recognising bitcoin as legal tender and over the past year has issued clear guidelines on issues such as the treatment of initial coin offerings (ICOs), which are regularly updated by the Australian Securities and Investment Commission (ASIC). However, the country’s political instability is undermining advances in technology, says Wagener.
“Add to this the inability of any government to make changes and it has really become stagnant,” he adds. “That’s a shame as Australia still has an excellent opportunity within crypto especially to revolutionise areas such as the mining industry, which is a big driver in the Australian market. There’s still time to turn it around, but the crypto train is certainly continuing to move forward and time is of the essence for Australia.”
Africa and Latin America
Less obvious contenders for becoming a future cryptocurrencies powerhouse include East Africa, where Zimbabwean cryptocurrency exchange Golix has overcome opposition from the country’s top bank. Golix recently launched in Kenya and Uganda, despite warnings by both countries’ central banks about the lack of lack of investor protection and will sell its own token, GLX, as part of its upcoming initial coin offering (ICO). Further ahead, there are ambitions to expand to South Africa.
Kenya, which opened Africa’s first software testing centre in Nairobi this summer, is said to harbour ambitions of becoming the ‘Silicon Savannah of Africa’ and the region’s main centre for tech start-ups and innovation. Cryptocurrency exchange giant Binance – which shifted its base from Hong Kong to Malta in response to China’s hostility to cryptocurrencies – chose Uganda at the end of June to launch a fiat-crypto currency trading pair with the Uganda shilling and also announced the setting up of Binance Uganda.
Attitudes towards cryptocurrency regulation also vary country to country across Latin America, with Argentina, Brazil, Chile and Mexico among the more proactive. “Putting all these countries in one basket is extremely difficult, but again one issue which many share is political instability,” says Wagener.
“This has gripped many countries in the region, paralysing any efforts to revolutionise their current economic issues, so it’s difficult to consider how they could mould a new economic crypto revolution. That’s a shame, because the future of crypto is the light that potentially could help alleviate the economic turmoil in much of Latin America.”
Petroleum as a peg
Theoretically, Venezuela could be added to the list of crypto-friendly regimes but the country’s introduction of its own digital currency, the petro, is borne more of economic necessity than anything else.
Announced last December, the oil-backed currency was originally the brainchild of former president the late Hugo Chavez and designed to supplement Venezuela’s bolivar fuerte (VEF) currency and help overcome US sanctions. Petros are “pre-mined”, enabling the government to both produce and control it and are now pegged to the recently revalued ‘sovereign’ bolivar.
As Alex Tapscott, co-founder of the Blockchain Research Institute notes, Venezuela’s launch of the petro could be a lead followed by Russia and Iran, both also considering the introduction of their own state-run cryptocurrency. “Each of these countries has three traits in common: they are authoritarian – or deeply undemocratic, they have a lot of oil, and they are under sanctions,” says Tapscott.
Ecuador has the distinction of being the region’s first country to launch its own government-backed digital currency in February this year and the country’s Sistema de Dinero Electrónico (electronic money system) hosted the world’s first-ever state-run electronic payment.
The origins of this move go tight back to Ecuador’s banking crisis of the late Nineties and the country’s abandonment of its own currency in favour of the US dollar in January 2000. The government has stressed that the digital currency is intended to support its USD financial system and not replace it.
As for the region’s largest economy, Brazil saw the launch in April this year of the Brazilian Association of Cryptocurrencies and Blockchain. ABCB has been set up to spur dialogue with the government about cryptocurrencies, reflecting concern that the lack of clear regulation is hampering its potential to become a global frontrunner.
Despite this, Brazil is already home to four major cryptocurrency exchanges – Foxbit, Mercado Bitcoin, Bitcointoyou and Negocie Coins – and 15 smaller exchanges. While bitcoin transactions in Brazil totalled $160m in 2016, the figure had risen to around $2.4bn last year, with buyers ranging “from students to 60-year old bus drivers”.
Joining the ranks
Expect the number of cryptocurrency-friendly regulatory regimes to grow further. For example, the Jerusalem Post recently reported that Israel is reviewing the possibility of a state-backed cryptocurrency. According to the paper, the Bank of Israel (BOI) and Israel’s Finance Ministry are reviewing possible digital token version of the shekel.
Much of the idea’s attraction is the potential of using blockchain technology to combat tax evasion by tracking a citizen’s transactional data in real-time while also enabling faster transactions. With cracking down on tax dodging also high on the agenda of many governments, a growing number of countries will be thinking along similar lines.