In barely one quarter, the region has come trail blazing with progressive laws.

by Edmund Yong

So here we are, another balmy summer of crypto regulations.

Everyone heaved a sigh of relief that Ethereum is not a security, and then a deep sigh of disappointment when it did not spur any market rebound. Good news often get lost in the noise, or perhaps a landmark speech from the SEC that comes with an incredibly helpful acid test for securities just does not excite the markets enough.

Meanwhile, regulators in Southeast Asia have been busy this quarter and made some major newsworthy strides. In case you missed them:

  1. The Philippines launched a Special Economic Zone at its northernmost tip, with arms wide open for crypto businesses to operate there with licenses and even a proposed offshore banking unit. Touted as the crypto world’s newest safe harbor, it already has a long list lining up for it.
  1. While most countries are still wrapping their heads around exchanges, Singapore has paced a few steps ahead and launched a consultation paper to ease its current Recognized Market Operators guidelines, to give greater access to the growing phenomenon of decentralized exchanges.
  1. Thailand showed the world how serious ICO legislation is done, complete with fines and ominous jail time for those who fail to register, stiff capital reserves and retail limits. It was even preceded by a temporary freeze on ICO activity. New entrants will have plenty of food for thought.
  1. In an interesting turn, Indonesia ruled that cryptocurrencies are a type of commodity that can be traded as futures on the stock exchange, even though it is still (and strictly so) not legal tender and cannot be used as payment instrument. This is a potential game changer for the region.

Elsewhere in the neighborhood, Vietnam is reeling from the two ICO scams by Modern Tech, easily the largest ever on record, with over US$650 million defrauded according to reports. Local authorities will intuitively tighten after something like this. Which is also what Cambodia did: It made all crypto activities subject to licensing, including microlending with tokens, which has gained popularity as a form of shadow banking at lower interest rates. Malaysia has been punctuated by a historic election outcome and a change in the central bank governor, so there could be a brief respite before regulations get their groove back.

As we round up the news, these are what the tea leaves are telling us:

  1. If you are planning to start a new exchange, start asking yourself the 5 Whys. Compliance laws are converging globally. There is no or very little space for regulatory arbitrage. The costs of acquiring a new customer is high enough (and most of them will lay dormant), but the cost of compliance checks could wipe away (all) your profits at customer level. It is no longer just the few KYC clicks for onboarding, but eventually the full gamut of AML-CFT, CDD and EDD including surveillance, statutory reporting, and security will be enforced. And no point trying to scrimp, the losses from non-compliance (in penalties, liabilities, reputation) will far outweigh the cost of compliance. Big exchanges have the margins and wherewithal for it. But small exchanges who can’t afford or don’t want to spend on compliances, can only hope they are small enough not to get caught. You might be better off just setting up an OTC desk.
  1. If you want to tokenize your business, and don’t care about the blockchain – you are not alone. The ICO conversation is diverging, and no longer to crowdsource the development a new ground breaking protocol by a few hungry bootstrappers, but as a tool for capital formation and project finance. We can try very hard to disabuse you of this notion, or convince you to justify using the blockchain, but you will barely wince. You just want the damn token. You are not reliant on crypto VCs for funding or whales who are tied down by the current slump, but can draw from your own pool of private investors and family offices who are similarly clueless as to what the blockchain does, and prefer traditional businesses they can understand. ICOs are being co-opted by main street businesses, and have become a bigger unstoppable unquenchable creature. They are in the most taboo sense of the ICO lexicon, “securitizing”. Regulators can choose to structure this energy as an economic ‘force for good’, or stop them in the tracks…

Many say that regulations have taken the fun out of the crypto. Not true. On the contrary, they help create real winners and sore losers. The crypto playground in Southeast Asia has laid down the ground rules. Let the games begin!

This article also appeared in Crypto News Asia on June 25, 2018