US regulatory landscape is increasingly challenging
Months ago, it was assumed that U.S. regulators were still figuring out their stance. But it’s becoming increasingly clear that the U.S. would rather stonewall crypto firms than risk undermining investor protections.
Take for example SEC Chairman Gary Gensler’s comments to CNBC : “The crypto markets are undermining that trust, and I would say this: It undermines our overall capital markets.” And: “Look, we don’t need more digital currency. We already have digital currency. It’s called the U.S. dollar. It’s called the euro. It’s called the yen. They’re all digital right now. We already have digital investments.”
Regulatory activities around crypto continue to escalate in the U.S., and there is no sign of the authorities backing down. Since the FTX meltdown last year, the SEC has made allegations that major exchanges Kraken, Bittrex, Binance and Coinbase have all violated various laws.
Why crypto firms should look abroad
While the increased scrutiny may be a way to set a clear legal precedent to classify crypto as securities, bringing litigation could do more harm and obstructive impact to the markets, even the wider economy. The debate around whether crypto assets, especially altcoins, should be security remains one of the biggest concerns. And the turf war between different authorities has added yet another layer of complexity. As the U.S Congress is still figuring out new legislation, crypto firms are finding it harder to navigate the U.S. landscape amid a lack of clear guidelines on how to register, as prominently pointed out by Coinbase CEO Brian Armstrong .
While it is inarguably important to make investor protection a priority, it remains to be seen whether the SEC’s enforcement approach could backfire and cause more collateral damage at this stage. We have seen significant news like this lead to unnecessary run risks before. It was reported that within a day after SEC filed a lawsuit against Coinbase, Blockchain data by crypto intelligence firm Nansen showed that Coinbase saw net outflows totaling US$600 million over a 24-hour period.
The impact of this enforcement approach also inevitably spreads, preventing traditional companies from taking part in this nascent industry until the regulatory landscape becomes clearer. Ultimately, this presents yet another obstacle for crypto to gain mass adoption. Crypto firms will need to consider if it’s worth waiting for regulatory clarity in the U.S., or if it’s better to start exploring alternatives.
The answer to this should be a no-brainer. Crypto firms are well along their way in identifying opportunities and diversifying risks by uprooting to other regions, such as Asia and Europe. Such a move allows projects to shift their focus towards building, rather than managing regulatory risks.
Asia offers support and regulatory clarity
Compared to the U.S., Asian economies are recognizing the benefits of cryptocurrency adoption and the opportunities presented for increasing economic competitiveness.
For instance, Hong Kong has been taking a decidedly pro-crypto stance, aiming to harness Web3 for its potential for economic growth. Earlier this year, the city announced it would allow crypto firms and exchanges to apply for licenses starting June 1. By March, more than 80 crypto firms expressed interest in opening an office in Hong Kong, including my own company.
The Hong Kong Securities and Futures Commission has even extended cryptocurrency trading to retail investors, who will be able to trade Bitcoin and Ethereum in a fully compliant sandbox. That stands in stark contrast to the U.S. issuing warnings to banks about crypto-related risks.
Not only are Asian regulators embracing crypto with welcoming rules and policies, but also supporting the industry by even advocating better integration with the traditional finance community. The Hong Kong Monetary Authority also takes a forward-looking approach, recently calling on banks to provide services to cryptocurrency firms.
A shift away from the U.S. is also seen in other Asian countries. For example, after the FTX collapse last year, Thai crypto investors turned to local exchanges such as Bitkub, which now covers 75% of crypto trade in Thailand as competitors falter .
Most recently, Binance and its Thai partner Gulf Innova have also secured digital asset operator licenses in Thailand to launch a new crypto exchange . However, the SEC allegations against the exchange may now have implications on how these exchanges will be treated in other jurisdictions, such as their license application process.
Elsewhere, Circle, the stablecoin issuer, also just received an MPI license in Singapore ; whereas the SEC in February sent a Wells warning to Paxos, accusing the company of selling unregistered securities when it issues the Binance USD (BUSD) stablecoin.
Geographic shifts are already happening
The U.S. economy’s share of global GDP will be hard for crypto exchanges to ignore, regardless of the regulatory environment. But the U.S.’s share of the crypto market is already showing signs of a decline after the recent SEC actions. This could imply that the U.S. market is not considered irreplaceable. Crypto startups will begin to shift their focus to other jurisdictions for balance. This regulatory arbitrage is already happening . U.S. crypto market share remains dominant but has fallen from 85% at the start of 2023 to 70% on the day after the SEC announced its lawsuits.
Similarly, the divergence between U.S. and Asian Bitcoin supplies held or traded has also widened. According to Glassnode on-chain data reported by BeInCrypto , American entities now hold 11% less Bitcoin than in June 2022, while the supply held by Asian entities has increased by almost 10% over the same period.
If cryptocurrencies are classified as securities in the U.S. but not in other jurisdictions, no doubt crypto firms will favor these places and offer their services there. Altcoins being named securities would create issues for users who trade these tokens on centralized exchanges, and CEXs operating within the U.S. will have no choice but to move their operations.
For example, Coinbase recently announced that it had received a license to offer its services in Bermuda , with plans to set up a crypto-trading platform targeting regions outside of the U.S. Even though the exchange has noted that it would continue to focus its efforts on the U.S. markets, it’s already exploring other possibilities offshore. In turn, trading opportunities might be lost in the U.S. and for U.S. citizens.
Technological progress will happen — with or without the U.S. The future of crypto looks bright in Asia and many other jurisdictions in the world, from the Middle East to Europe and elsewhere. If crypto companies want to become leaders in their industry, they undoubtedly will want to move to friendlier shores that support their goals.
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