Q1 2023 Regulatory Update
We discussed the large pendulum of back and forth between the digital asset stance that many regulators have taken around the world. Just as the technology and development of the digital asset market has often been a two steps forward, one step backward type of momentum, it seems only fair to expect the same for the regulation covering it.
Having started in 2017, OAX is no stranger to the many flip flops in the market and regulatory space, as well as within our own company as well. Crypto companies were taking root all over Hong Kong during that initial period of time, and the community was small but passionate.
Regulatory concerns were always one of the primary areas of consideration for the team despite our hopes to build in a decentralized space. While regulations have limited purview over the decentralized market, it does shape the overall sentiment within the market and the general developer landscape.
As we expect this to be quite a landmark year of proposals and approvals of regulatory frameworks, we want to pay particular attention to the happenings from regulators around the world.
We began our recap first with the EU, who has continued to defer the vote on MiCA, the latest date being set at April 2023. The framework is expected to be on track for being approved and serving as the first “comprehensive” crypto framework. But as often mentioned in the past, regulations take a long time to be established; a delay that can be felt even more when compared to the speed of which the digital asset economy changes. That being said, the EU with its 44 countries will likely be the first to step into the space of providing a wider regulatory framework for companies and investors in their market. Should the regulation get approved in April, it’s only expected to take effect in 2024.
Despite many in the market that believe the regulatory framework will be too outdated to protect investors from another FTX event, it’s unlikely that any framework at this stage will be (or should be) so detailed as to predict any and every scenario that will arise.
Flexibility to ensure that the market can still continue to thrive is necessary during the development of a new industry. Not to mention the fact in a new space it will be difficult to anticipate the natural direction and course the path to development takes.
Despite many hoping that a lenient regulatory framework would be underway, spearheaded by PM Sunak, it appears that post-FTX has dealt quite the blow to the space. Despite the PM’s pro-crypto stance, the Financial Conduct Authority which is expected to take the responsibility of regulating the crypto markets has a much more conservative view. This gap of opinion towards digital assets is a good snapshot of the varying opinions that exist around the world. Beincrypto recently published an article interviewing the Head of the All-Party Parliamentary Group (APPG) on Crypto and Digital Assets, Dr Lisa Cameron MP outlining the challenges of bridging the divide, but even more so the necessity of education that is required for those looking to regulate.
“This sector is not something that you can just pick up a handout and speak in Parliament about. You need an educational program first.” - Dr Lisa Cameron MP
The debate surrounding stablecoins and staking has been heating up in the US over the last few months, with the debate of whether digital assets are considered securities at the heart of the discussion. But over the last two months, there should be no doubt left in the industry with regards to SEC’s stance.
From focusing on Paxos for issuing BUSD, alleging that the stablecoin was considered an unregistered security (and Coinbase announcing the withdrawal of BUSD shortly after), to Kraken also announcing that they would be closing their crypto staking program after paying a $30 million fine, it’s clear in the market that US regulators are cracking down. Further implications that crypto exchanges will not be “qualified custodians” leaves questions as to the future of US based exchanges, so much so that the likes of Binance’s chief strategy officer has gone on record to warn that recent crackdowns may suffocate the industry and cost investors over time. The increased hiring of staff within the SEC points to a crackdown in this space, even before regulations are entirely clear. Raising issues with staking features leaves companies uncertain– at which point when will there be a sudden 180° change and face hefty fines as a result? Furthermore with the issues that recently arose with Silvergate Bank, Signature Bank and Silicon Valley Bank, three banks known for their crypto-friendly stance, the industry will encounter further issues with expanding and operating their day-to-day business.
The lack of clarity and willingness to take a more balanced approach has also led to additional conversations in the industry surrounding the shift of labor and talent from the US to other markets. Most recently, Coinbase shared their intentions of looking to diversify by moving some of their units to outside the US and to more crypto-friendly regulatory spaces. With the tech industry woes as a backdrop, it seems quite likely that industry players will shift their focus elsewhere. We’ve seen such trends in the past being based in Hong Kong when regulators first began discussions of strict regulatory frameworks that left quite a bit up to interpretation. Many of the startups that were based in Hong Kong began making a shift– but we’ll get more to Hong Kong in the section below!
We end our regulatory Q1 update in Hong Kong, our home base. Having published a 361-page regulatory framework last month, the consultation paper is currently being presented for feedback. In addition to the framework, everyone is also preparing for the new licensing regime to take effect in June when licensed cryptocurrency exchanges are allowed to accept retail investors trading certain tokens. We’re also expecting updates and more clarity surrounding the regulation of stablecoins by 2024 that will regulate not only the issuance of stablecoins, but how HKMA will decide to oversee this particular area.
The overall HK market has been garnering a lot of attention from the crypto space in Asia over the last few months, and likewise the government has been doing a fair bit to engage further with Web 3.0 companies to drive development. By setting aside HK$50 million, the city is looking to support innovation and expand the sector, and perhaps revive it once again when we first launched in the market.
The wide ranging perspectives of how regulators want to engage with crypto as we can see in places like the UK is also reflective of the spectrum that digital asset companies respond to regulation. While there are many companies that believe in “Do first, fix later”, OAX believes a more conservative approach is also a more responsible approach when it comes to the financial well being of the company. While many companies have rocketed to the moon for a short duration of time, the subsequent crash often would be the end of story for most.
But certain precautions must be taken while there’s a lack of clarity and supporting decentralization doesn’t mean that regulations should be ignored. Similar to the early days when OAX had to reevaluate our initial plans, we know others that have taken similar precautions as well. Those in our community that are based out of Hong Kong may have encountered an error when attempting to use the exchange from our friends at OpenSwap. While Hong Kong has opened their doors and re-established their acceptance for retail investors trading on licenced exchanges, the clarity has also allowed platforms like OpenSwap to exercise caution.
While the industry is developing, regulators, the public and the industry need to realize that they won’t be able to cover every type of eventuality, and whatever regulations are set, won’t be able to cover all everything that can potentially go wrong. But the general direction and an overall consensus will be important to growing the community in the long run, offering enough guidelines without stifling the progress of the industry. We’ve seen quite a few changes over the years at OAX and can understand how regulatory concerns may shift the company’s direction, even at the cost of one’s business plans. Unfortunately, the uncertainty that exists in the regulatory space has also resulted in a constant migratory shift of companies and developer talent looking for a space that will allow them to make inroads in the technology. The sooner clarity can be reached, the easier it will be for those in the industry to work in this space without fear of overstepping the boundaries.