Through the twists and turns of legal battles stateside, and the mounting anticipation of pending bitcoin exchange-traded fund (ETF) applications, the digital asset industry has witnessed recalibration and progress.
There has been a marked recognition amongst global regulators that to build the guardrails to protect investors - we must collaborate. And policymakers have listened, supported and reacted.
But as regulatory frameworks evolve, they bring both challenges and opportunities for the policymakers defining the rules, and the digital asset firms servicing the growing demands of investors and the markets in which they operate.
Major players will seek to root their foundations in regions where regulators take a supportive and progressive stance to foster innovation and protect investors.
This shift therefore sees jurisdictions not only adapting to these changes, but also setting new benchmarks in regulatory approaches that can potentially inspire other markets.
Let’s take a closer look at progress across some of the key digital asset markets.
Hong Kong advances crypto regulation with strategic developments
In Asia, two jurisdictions in particular have tightened their regulatory frameworks, focusing on transparency and investor protection.
Over the last 12 months, Hong Kong has pushed forward a raft of regulatory announcements in a bid to develop a tightly regulated home for the digital asset industry. From implementing a licensing regime for virtual asset trading platforms, to working on a framework for fiat-referenced stablecoins.
A major milestone was reached with the introduction of bitcoin and ether ETFs. In December 2023, the Securities and Futures Commission, alongside Hong Kong’s Monetary Authority (HKMA) released a joint statement in which they detailed the requirements that must be met for the regulator to approve ETFs with more than 10% of holdings in crypto. Within four months of this circular, spot crypto investment products in Hong Kong received the green light.
This development not only signals market maturity within Hong Kong but also illustrates the regulator’s commitment to working alongside the industry to support demand and establish robust investor protections.
However, while some firms are optimistic about the city’s “safety first” approach, others have found the barriers for entry too high relative to the size of the market. While Hong Kong’s strategy is sound, its execution needs to be improved to better balance market growth with security. Consequently, some of the largest global crypto exchanges have announced their exits from Hong Kong, such as OKX, Bybit and Gate.io. Ultimately, regulatory processes should turn Hong Kong into a more attractive market for international players and investors, not the other way around.
On the innovation front, the HKMA launched the e-HKD pilot programme. This initiative is investigating the use cases, implementation and design issues associated with the potential introduction of a central bank digital currency – the e-HKD – in Hong Kong. These use cases span six key categories: fully-fledged payments, programmable payments, offline payments, tokenized deposits, settlement of Web3 transactions and settlement of tokenized assets. The categories demonstrate the diverse potential of digital currencies in providing more flexible, programmable and secure financial services.
While it is undecided if the e-HKD would be officially introduced, the pilot programme is an exploratory phase for the regulator to collaborate with industry stakeholders to address technological and regulatory challenges, ensuring that any future implementation aligns with Hong Kong’s financial infrastructure and market needs.
Singapore strengthens crypto ecosystem with robust regulations
Meanwhile, Singapore continues to enhance its regulatory framework for cryptocurrencies. While cryptocurrency trading and possession are legal, the Monetary Authority of Singapore (MAS) maintains a cautious approach, particularly concerning the public advertisement of crypto services. The MAS bans crypto ATM operations – which are seen as direct promotions to the public – to mitigate risks associated with the volatility of cryptocurrencies and protect retail investors.
Singapore also enforces strict anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations as detailed in the Guidelines to Notice PS-NO2. These were introduced back in January 2020 and further tightened in 2021 to prevent the illicit transfer of funds through digital payment tokens (DPTs). The regulatory scope has since been expanded to include custodial wallet services for DPTs.
Additionally, virtual asset service providers in Singapore must navigate rigorous licensing requirements under the Payment Services Act 2019. Companies must apply for a license from MAS, establish their primary location in Singapore, and demonstrate AML/CFT compliance before they’re allowed to commence business operations.
Against this regulatory backdrop, Singapore is spearheading forward-thinking initiatives like Project Guardian. This project, a distinct yet complementary approach to Hong Kong’s e-HKD program, also explores blockchain’s potential across different financial sectors and demonstrates how tokenization can significantly enhance market and transaction efficiencies.
Singapore’s proactive approach is evidenced by its collaboration with global regulators under this project. In October 2023, the MAS expanded the initiative by partnering with authorities from Japan, Switzerland, and the United Kingdom to develop global standards for digital asset markets.
This commitment underlines Singapore’s strategic vision to encourage innovation while ensuring robust regulatory practices.
Dubai attracts crypto firms with a defined regulatory framework
The UAE has signalled its intent to become a global hub for the sector by outlining clear guidelines for firms looking to operate in the region. In 2022, Dubai established the world’s first independent regulator for virtual assets, the Virtual Assets Regulatory Authority (VARA), to serve as a transparent and trusted guiding authority for the emerging world of crypto. Firms operating in the cryptocurrency space in the UAE must obtain a licence from the Securities and Commodities Authority, ensuring they meet the required AML and know-your-customer standards.
These guardrails have been welcomed by players across the digital asset and Web3 sectors who have expanded into the region. From venture capital firms like Token Bay Capital, to centralized exchanges like Crypto.com, to digital asset custodians like Hex Trust, Dubai’s regulatory environment has been magnetic in attraction.
VARA’s forward-thinking approach to regulating digital asset investments has been collaborative, with roundtables, consultations and workshops to engage with industry players and obtain feedback. This pragmatic process has allowed VARA to build their regulatory regime from scratch - without having to adapt previous legacy frameworks to fit digital assets. This has fostered a thriving crypto ecosystem and a nurturing environment for fintech innovation that equips investors with security and protection.
Europe presents unified approach through MiCA
Europe has taken a proactive stance with the introduction of the Markets in Crypto-Assets (MiCA) regulation.
This comprehensive framework is the first of its kind globally. The crypto measures aim to create a unified regulatory landscape across 27 countries in the EU, ensuring consumer protection, facilitating legal certainty for businesses and attracting more investment to the region.
MiCA takes a hardline stance on compliance with its rulebook based on existing EU rules for securities trading. Firms looking to offer crypto services – custody, portfolio management or advice - need to be authorized by one of the EU’s 27 national financial regulators. Firms offering digital assets to the public are also required to produce a white paper which clearly outlines the potential investment risks.
MiCA’s framework has been celebrated for its fresh and pragmatic take on regulation. It doesn’t attempt to squeeze crypto into existing regulatory boxes, but rather adapts existing rules to fit the innovative instruments that can be used for payments and investment.
As MiCA’s full implementation approaches in December 2024, the region’s market anticipates substantial growth opportunities for crypto firms.
Promise of progress in the United States
In the United States, the recent passage of the Financial Innovation and Technology for the 21st Century Act (FIT21) by the US House of Representatives is a landmark development, after large industry players quit the country due to regulatory crackdown and uncertainties that have made investments in the US higher risk.
FIT21 aims to clarify the regulatory responsibilities of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission over digital assets and update existing securities and commodity laws to accommodate blockchain technology applications, including decentralized protocols. It categorizes digital assets into restricted digital assets, digital commodities, and permitted payment stablecoins, each with distinct regulatory oversight.
US congressman Patrick McHenry, who chairs the House Financial Services Committee, highlighted the extraordinary achievement of securing bipartisan support for such an innovative policy, despite opposition from the SEC and the current lack of support from President Biden. The legislation reflects a thorough consideration of the existing marketplace’s critiques and the needs of policymakers aiming to improve the crypto sector.
By building the policy framework around real-world conditions and addressing key concerns from both sides of the political spectrum, FIT21 provides a much-needed structure that delineates the regulatory responsibilities of different authorities in the United States.
Clearer guardrails bring space for innovation
Positive market sentiment across crypto markets is on the rise, largely propelled by more robust regulatory frameworks. As these frameworks evolve, so too must the firms operating across the digital asset space. These clearer guardrails have given crypto firms the space to innovate and expand their service provision - above the safety net of clearer rules.
Firms that are anchored in digital assets, and deep rooted in security and compliance, are building the trusted infrastructure to drive the global adoption of digital assets and encourage institutional participation.
The future of crypto lies in the hands of those who can effectively merge regulatory compliance with innovative practices, paving the way for a secure and dynamic digital asset ecosystem.
As the lines between digital and traditional financial assets blur, policymakers face a critical challenge: how will they adapt crypto regulations to seamlessly integrate with existing frameworks while allowing blockchain providers to support a wider variety of financial assets on-chain?
Alessio Quaglini is the CEO and co-founder of Hex Trust a digital asset custodian for the banking sector.
