High interest in cryptocurrencies across APAC as investors look to facilitate transactions, simplify fundraising, and earn high returns on investments
On a macro level, digital assets are appealing in that they promise to reduce the complexity associated with financial dealings, especially for cross-border transactions. From an entrepreneur’s perspective, ICOs (initial coin offerings) have accelerated and simplified fundraising, giving start-ups an alternative to the often slower, more extensive decision-making processes involved with traditional venture capital. Likewise, we are seeing funding from a broader range of investors, who have found in ICOs a more accessible way of “getting in on the ground floor” of new and exciting ventures.
The potential high returns are certainly driving much of that action in Asian markets, which are generally highly speculative to begin with. For example, ICOs were extremely popular in South Korea before the government ban on cryptocurrencies. A very different commercial environment has developed in Singapore, which is one of a handful of global ICO hubs. Very early on, Singapore regulators communicated to the market about cryptocurrencies/ICOs, providing guidelines, and emphasising its regulatory position on potential AML/CFT (anti-money laundering / counter-financing of terrorism) risks. This clarity has been critical for creating a strong framework that can support ICO investment activity in a more sustainable way.
Dynamic regulatory environment shaping evolution of cryptocurrency in APAC
The APAC region is a dynamic microcosm of the wide variety of regulatory attitudes and concerns that are evolving to shape cryptocurrency markets around the world. While some countries see more potential in digital currency than others, mostly all regulators are focusing – and starting to act – on risks that include money laundering, terrorist financing, “securities”-type fraud, and tax evasion.
At one end of the spectrum are the PBOC (People’s Republic of China) and Vietnam, where concerns have led to bans and stringent controls. Last year, China shut down all domestic cryptocurrency exchanges, while in Vietnam, in the aftermath of a massive USD658 million fraud that broke in April 2018, “all cryptocurrencies and transactions in cryptocurrencies are illegal” according to the Ho Chin Minh City police chief. And yet, in China, because over-the-counter transactions are currently still permitted, one sees Chinese nationals traveling overseas to buy bitcoin and then these so-called “mules” selling to Chinese investors back home. Meanwhile, Vietnam’s Ministry of Justice continues to study and complete a “uniform and unified legal framework on the management and handling of virtual currency, virtual property and electronic money.”
At the other end of the spectrum are Japan, Hong Kong, Singapore, Malaysia, and Thailand. In April 2017, Japan was the first country (and continues to be the only country as of this writing) to officially recognise digital currency as a legal tender payment method. Taking a different tack, Singapore and Hong Kong emerged as early leaders in the cryptocurrency exchange space. Indeed, Hong Kong is home to some of the largest cryptocurrency exchanges in the world. Hong Kong has also seen an influx of exchanges that had been banned in China’s crackdown.
Regulatory activity in all five countries reflects three main concerns: protecting investors, combating money laundering/corruption, and capturing tax revenue. For example, in May 2018, Thailand issued a new decree that among other mandates, affirmed its SEC (Securities and Exchange Commission) has the “duty and authority” to oversee and regulate all cryptocurrency transactions, including verifying the identity of clients. It also imposes a 15 percent withholding tax on gains from digital tokens and cryptocurrency trade. Earlier in the year, Malaysia adopted new AML/CFT policy guidelines that compel Malaysian virtual currency exchanges to mandate KYC (know your customer) adherence, including the collection of ID documentation. Japan, Singapore, and Hong Kong all tax digital currency activity to some degree and are starting to enforce longstanding and recent policies focusing on AML/CFT risks and investor protection. For example, in March 2018, Hong Kong’s SFC (Securities and Futures Commission) shut down an initial coin offering citing “potential unauthorised promotional activities and unlicensed regulated activities.”
Financial institutions at risk from inherently opaque nature of cryptocurrency transactions
Financial institutions face a wide variety of legal, financial, reputational – and increasingly, regulatory – risks associated with cryptocurrency. At the heart of most of this risk is the inherently opaque nature of transactions conducted with the currency.
For example, at some point, criminal enterprises or terrorist organizations may wish to convert cryptocurrency and deposit the funds into conventional bank accounts or investment vehicles. If the institution is unaware of the criminal roots of these funds – that is, if it fails to apply appropriate risk-based due diligence to meet AML/CFT standards already well established in the current banking system – it leaves itself open to not only reputational backlash, but also to significant punitive fines, sanctions, and increasingly, personal liability.
Robust compliance programs key to mitigating legal, financial, reputational, and regulatory risks
A comprehensive, robust compliance program geared for the challenges of cryptocurrency is essential for financial institutions. Many of the strategies are the same ones that financial institutions have already adopted as best practices for more conventional compliance risks: Onboarding programs that incorporate AML/KYC/CFT inquiries, proper record keeping, ongoing monitoring with regular data refresh, and enhanced due diligence for high-risk subjects can go a long way toward helping organisations mitigate cryptocurrency risks.
David Liu is head of Kroll’s Compliance business in APAC and has key insight into the Fintech/Regtech ecosystem in Asia, where he frequently speaks on the subject and also serves as an advisor for Fintech/Regtech accelerators.