As clichéd as it sounds, the new year will ring in law and order. And loopholes too!
by Edmund Yong
New Year resolution for 2019 –
Sound smarter by quoting dead philosophers like Aristotle: “Law is order, and good law is good order.”
And so it begins. Regulatory momentum will continue from 2018 and bring order to the maturing state of crypto. It will grow up and embrace institutional players. It will become inhospitable for anarchists. There will be no more wandering in the wilderness (and given current market weakness, no more bull worship or golden calves either). Like the commandments, new laws will be received and cast in stone. They are here to stay and will make their presence felt. Crypto will have its come-to-Moses moment in 2019.
That said, we will wrap up this series on regulatory positions, because the space between regulated and unregulated is a mirage. It is a lot less interesting to talk about regulations nowadays. It is already here or coming soon, so let’s man up and deal with it. Everything will be regulated, it’s just a matter of time and degree. Compliance used to be a sales pitch, now it’s basic hygiene. Staying on blurred lines used to be great for business, now it’s a handicap. The market opportunities are brighter on the right side of the law.
Here are some common themes to help you make sense of what’s afield. The process of bringing law and order to crypto can be messy (check India), so a bit of perspective helps:
- Inertia is not the same as inaction. Inertia can be perceived as slack but regulatory inaction is actually a strategy, a steady measured hand for a young capricious industry, regardless of your frustration (it is a gold rush for you but the regulators have no hurry). Thailand issued its Royal Decree back in May 2018 but they still have not issued licenses yet at time of writing, only provisional ones for the exchanges. The much-awaited appointment of an ICO portal, similar to a listing sponsor, did not come through in Nov 2018 due to “security concerns”.
By chance in that same month, the widely-hyped STO (security token offering) platform Neufund was also going to launch its first project in Germany but had to pull back for an audit at the regulator’s (BaFin) request. Meanwhile the Philippines was expecting ICO regulations by end of Q4 last year after SEC issued its consultation paper in Aug, but got deferred at the request of “different shareholders.” There was also an instance mid-last year when the international media got prematurely excited about Cambodia’s national cryptocurrency until regulators stepped in with restraint.
- Many are called but few are chosen. Getting yourself licensed is great but demand far outstrips the supply. Almost 200 exchanges are knocking on the FSA doors in Japan for its elusive licenses, where only 16 have been given out so far. Elsewhere, loose counts show 150+ in South Korea, 30+ in Singapore, 50+ in Malaysia – markets where licensing criteria is not even formalized (yet). Even though crypto penetration rate is circa 10% of the population (and that’s being generous), we are averagely looking at one exchange operator for every few hundred thousand peeps.
The vast majority of applicants will be curtailed, and then what? Consolidation… Everyone wants to get a foot in the door, get their hands on any form of license, and jump at the highest bid. Meanwhile with the glut, the horse trading and M&A jockeying among exchanges are already happening behind the scenes. Most of these so-called exchanges are not organized bourses but ragtag startups (currency converters, remitters, payment processors et al.) that will become pickings on the street.
- To sandbox or not to sandbox. Do you want a test bed for your products with defined perimeters and surveillance, or is it faster to test it out on your own? Innovation moves fast and regulation will always play catch-up to it. Innovation has a high tolerance (or even necessity) for failure by virtue of ‘creative destruction’ but regulations have to get it almost right on the first inning. Therefore, sandboxes are useful in this regard but they should not slow innovation down, if not they will just be bypassed. How many crypto firms do you know actually went through a sandbox?
Vietnam announced one for fintech in Sep 2018 despite dithering on its broader regulatory approach according to sources. Malaysia was planning one for alternative trading systems (ATS) in early 2018 but seemed to have changed tack. Singapore is now offering a new Sandbox Express version. Thailand went straight to legislation on digital assets admirably! While the rules are relaxed in a sandbox, there is no guarantee of success or state support. Not all activities are sandboxable (e.g. AML) and there are other governing bodies too that need to share oversight.
- One economy, two financial systems. The crossing over has begun and they are closing ranks. Crypto exchanges are being owned by large public companies (even traditional banks), and crypto exchanges are buying up public listed companies. ‘Reverse ICOs’ by listed entities are trending. Jay Mart PLC did it in Thailand early on in Feb 2018 through a subsidiary. It is now recognized and regulated by SGX (Singapore Exchange Ltd). After the Futures Exchange Supervisory Board (Bappebti) acceded Bitcoin’s status as commodity, Indonesia could soon have its own Bitcoin futures.
The future digital economy will be a chimeric fusion of these two systems: A future where crypto is not subversive but serves the economy. The position is stated best by the Philippine SEC: “part of the promise is technology will allow smaller companies to raise funds in a safe manner,” and thus the regulator’s role is to create a “permissive legislative apparatus”. SMEs contribute more than half of GDP in some Southeast Asian nations, so let them be enterprising in drawing funds for themselves. This can even be a source of FDI. Why ban them when you can tax them!
Finally, some friendly advice for the eager beavers out there with STOs.
(PS: We are going to be trolled for this. Hate mail can be sent to email@example.com)
- There is no prize for claiming to be the first. No, there really isn’t. Unless you count your own press release, which speaks only for yourself and ingratiates an audience of one. We get the whole chest-thumping thing – “Hey look at me, I am the first public STO in this or that, here or there!” But are you a licensed securities broker, dealer and issuer? Not just in your own country? Are your tokens freely and legally tradeable around the world? Will your tokens be listed on a regulated exchange? Not just a hypothetical plan 2-3 years down the road? If you cannot confidently answer these questions, then why bother? You only draw the regulators’ spotlight to yourself. Unless you have their smiling seal of approval, which most don’t, then you are just doing the entire industry a disservice. Please stop.
First mover advantages are so last century (Myspace, Netscape, Blackberry, BitInstant were firsts too). Your competitors will rather sit back and watch, as the first one through the door gets shot at – first. Investors don’t care whether you are the first, they just want to make money; the news desks won’t care since every other STO claims to be first in something. So yeah, you don’t have to be first to make a lasting impression. Regulators are skittish right now and the industry will benefit from a concerted push rather than lone rangers. Worse, many of them are foreign STOs selling to locals leaving the local industry to bear the brunt of any regulatory backlash.
Since we started the article with a dead philosopher, we may as well end with one from a fellow ancient Greek. Arcesilaus: “Where you find the laws most numerous, there you will find also the greatest injustice.”
To paraphrase: Laws will unavoidably come with loopholes. More laws mean more loopholes. Laws will not really turn the anarchist away, but just turn the anarchist into the arbitrageur. Laws are also prone to regulatory capture and power differential. Make no mistake: Laws turn the bad guys into good, but what is good could also be ugly.
Such is the wisdom of old.
2018: Goodbye freedom!
2019: Baby, I’m just getting started.