DDespite the market turmoil in 2022, cryptocurrency adoption continues to grow, with regulators developing more comprehensive frameworks for this nascent asset class.
Like other financial markets, cryptocurrencies are vulnerable to market manipulation and abuse by fraudulent actors, and strong This highlights the growing need for comprehensive monitoring programs.
As crypto markets evolve, how are Asia's regulatory approaches evolving and what role does market oversight play in building resilience and trust in the crypto world? was the topic discussed in a recent webinar co-hosted by Regulation Asia and Nasdaq.
Same challenge, different market
Indeed, confidence in the cryptocurrency market from both institutional and retail investors has fluctuated. That's not just because the plunge in prices and collapse in confidence in 2022 appears to have dashed hopes that the market is moving beyond the intense volatility that characterized the early days.
According to data from the US Federal Trade Commission (FTC), losses from crypto fraud in 2021 were 60 times higher than in 2018. From the beginning of 2021 to his mid-2022, investors and traders were defrauded of more than US$1. a billion. Although the structure of cryptocurrencies means that once stolen assets are lost, they cannot be recovered, but there are many things you can do to stop the theft at the source.
Although cryptocurrencies have acquired a certain mystique (often born of misunderstanding), the nature of cryptocurrency fraud is not new. The FTC report found that nearly half of crypto investors who were scammed said the theft “began with an ad, post, or message on a social media platform.”
“The malicious behavior we observe in these types of markets is no different than what we see in more traditional markets,” said David Kwan, head of Asia Pacific sales and business development at Nasdaq Market Surveillance. he said. “As a surveillance technology provider aimed at protecting investors and maintaining market integrity, we have seen cases of identity theft, wash-trading and money laundering… So why[the industry]Can’t we apply the same oversight and the same protection systems to cryptocurrencies?” [as traditional markets]Ultimately, whether or not to apply certain monitoring or integrity protocols to protect investors depends on the market itself and whether the market has a responsibility to protect investors.? That's the only way the industry will grow. ”
Similarly, companies wishing to enter the virtual asset service provider (VASP) space do not need to look beyond the existing policies and procedures of traditional financial institutions to begin with. The Internal Control Procedures, established in 2014 in both Hong Kong and Singapore, are a “good guide” for establishing the infrastructure, security, and procedural rules needed to establish a virtual currency exchange.
Angelina Kwan, chief executive officer of Stratford Finance, said: “I would urge people to go back to basics. There will be some anomalies with crypto assets…but for the most part it's the same business.” .
regulatory leader
At the regulatory level in Asia, Hong Kong and Singapore are understandably playing a leading role in creating the necessary framework to build resilience and confidence in the crypto market.
The Hong Kong government has published proposed amendments to the Money Laundering and Anti-Terrorism Financing Ordinance (AMLO) in the Official Gazette, including a new licensing regime for VASPs.
Companies that wish to operate a VASP (currently limited to exchanges and exchange-like services, but may expand to include over-the-counter operations in the future) are required to comply with the Securities and Futures Commission (SFC). A license from is required.
In the case of Hong Kong, the term “virtual assets” currently applies to Bitcoin and other altcoins, stablecoins and certain governance tokens, but will expand to include non-fungible tokens (NFTs) in the future. may be.
“All existing guidelines for other financial institutions (FIs), such as internal control guidelines, codes of conduct for fund management, and regulations for automated trading services, apply to virtual asset license holders,” Stratford’s Kwan said. Stated.
“SFC is working on developing a licensing system and hopes to have it in place by the third or fourth quarter of 2022, with full transition by March 2023.”
Stratford University's Kwan noted that the bill promises to be more than just a cut-and-paste process. There are provisions covering the use of fraudulent or deceptive devices and market manipulation in virtual asset trading.
“This is actually a very big piece of legislation, and you can imagine all the paperwork and training that has to be put in place over the next six months,” said Stratford University's Kwan.
Strengthening of cryptocurrency regulations
Meanwhile, Singapore is also preparing its own legislation to strengthen the emerging crypto landscape, which is already covered to some extent by the Payment Services Act, which has been in force since January 2020.
The new Financial Services and Markets Bill, approved by Parliament in April 2022, will strengthen regulation and fill the gaps left by the Payment Services Act.
Janice Goh, partner at Cavenagh Law LLP, which is affiliated with Singapore's Clifford Chance, said: “The Payment Services Act means that it does not regulate providers who set up shop in Singapore but do not provide services in Singapore. There is a gap,” he said. “The new law will require all VASPs with a presence in Singapore to obtain a license. This is consistent with the framework proposed in Hong Kong.”
This is in response to what the Monetary Authority of Singapore (MAS) considers to be a “reputational risk” to Singapore from potential bad actors based in the city and targeting poorly regulated jurisdictions. be.
The bill also focuses on digitalization, which has the potential to transform the city's financial sector and disrupt the existing regulatory framework designed for more traditional transactions and services. .
Under the bill, financial institutions will be subject to fines of more than S$1 million for serious cyber-attacks or disruption of essential financial services.
However, Koh points out that there are important differences between the two structures.
Hong Kong's law promises to be more comprehensive, at least initially, as it will require VASPs to put in place policies to prevent market manipulation. Singapore's proposal does not cover this.
“Therefore, if Singapore's legal regulators wish to go after VASPs for market manipulation, they will first need to process and prove that the crypto assets are in fact securities under the Securities Act.” he said. “Hong Kong's provisions will be even broader…and it will be very interesting to see what enforcement actions Hong Kong regulators can take under these broader market manipulation provisions. .”
Some important steps have already been taken. In Singapore, for example, investors successfully petitioned the court to freeze the transfer of rare NFTs.
“This decision is very good news,” Mr Koh said. “This is a first in Singapore and Asia, and a first in the world to recognize NFTs as assets in the context of commercial disputes.”
Growing interest from institutional investors
The net effect of these regulatory actions will, of course, be to gain the confidence of institutional investors, draw more institutional investors into the market, and tap significant pent-up demand among large financial institutions. It should be liberating.
“Many large institutional banks and investment firms have been preparing for this development for a very long time,” Nasdaq's Kwan said. “When this type of regulation is introduced, the number of market participants will increase and the cryptocurrency market will mature.”
“There are many lessons to be learned from the practices and experience of more traditionally established capital markets…and we are applying the same proven risk model to new crypto exchanges and operators to protect investors. Perhaps there are changes that need to be applied specifically to crypto assets, but ultimately when it comes to investors, it depends on which asset class you trade. They want the same protections regardless of who they are. They want to make sure that the integrity of the market is maintained when they invest in something, and this is something that is being introduced to more institutions. It’s just helpful.”
As of June 2022, approximately 6.5% of all Bitcoin is held by institutional investors, up from virtually nothing a few years ago. This trend was fueled by high-profile purchases from companies like Tesla, Square, and MicroStrategy.
Enhanced monitoring
However, it will be easy for the cryptocurrency market to gain mainstream adoption among retail and institutional investors, especially due to the difficulties in monitoring and enforcement in a market based on the concepts of immutability and borderless anonymity. Probably not.
“One of the challenges for regulators and exchanges is that they don't know who they're dealing with,” Nasdaq's Kwan said. “In this regard, Nasdaq has to really support market participants as well as regulators in cross-market discussions.”
“We have spent a lot of time educating startups who have never worked in traditional market areas and don't know the full requirements in terms of monitoring what's bad and what's good. Ta.”
In this particular line of work, many VASPs are inexperienced and unprepared for the rigors of regulated finance.
“I don’t think crypto companies are really thinking about execution costs yet,” Stratford’s Kwan said. “It’s much better to put in place oversight, know the market and try to take those steps before you get slammed by regulators.”
At the moment, investigations and enforcement activity in Asia is relatively sparse, but the situation is almost certain to change. In the United States, the Securities and Exchange Commission nearly doubled the size of its crypto assets and cyber enforcement division and imposed billions of dollars in fines. History suggests that regulators in the Asia-Pacific region will follow suit, so stakeholders will be keeping an eye on Hong Kong and Singapore authorities' activities in the coming months and years. right.
“My guess is that we may see a limited number of enforcement cases in the near future,” Coe said. “However, as regulatory regimes establish and mature and the number of retail investors increases, we expect APAC regulators to monitor everyone's actions very closely to protect investors.”
To this end, market participants will need to work closely with regulators to strengthen oversight. For example, Nasdaq integrates data from multiple exchanges in Asia-Pacific and around the world to “get a cross-section of many different markets and be able to understand what's going on,” Nasdaq said. Kwan said.
“From a surveillance perspective, the technology is there.”
But there are still significant gaps in that surveillance network, especially when it comes to monitoring apps and social media, which can be the first signs of trouble.
“Everything that's happening in the market is probably forewarned 10 minutes in advance on Reddit, Twitter and other social media,” says Stratford's Kwan. “So if you're not on social media, you're falling behind in the crypto-native world. [Maybe] Maybe someone can come up with an app that can actually extract this information as part of an integrated monitoring tool. Perhaps this is something regulators should also consider. ”
No matter how turbulent the market is, interest and demand from financial institutions is unlikely to wane.
“At the end of the day, this is an investable asset and the appetite for trading and investing exists, despite the controversy surrounding Terra, Luna and other potential cryptocurrencies,” Nasdaq's Kwan said. That momentum is only going to increase.” “So we continue to grow.”
