Public Key Podcast

Everything You Need to Know About APAC Crypto Regulations: Podcast Ep. 59

June 6, 2023 | by Chainalysis Team

Episode 59 of the Public Key podcast is here! The regulatory landscape in jurisdictions like Hong Kong, Singapore, Japan, and Australia is changing rapidly, and we are lucky enough to be joined by our own Chengyi Ong (Head of Policy, APAC, Chainalysis) to bring us up-to-date in the APAC digital asset market. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 59.

Public Key Episode 59 preview: Is Japan the crypto regulatory standard of excellence?

It’s becoming increasingly hard to keep up with the pace of the APAC crypto regulatory landscape.

In this episode, Ian Andrews is joined by Chengyi Ong (Head of Policy, APAC, Chainalysis) to discuss Hong Kong legalizing retail crypto trading, Japan setting a high standard for crypto compliance requirements, and Singapore’s approach to digital asset regulation.   

Chengyi also sheds some light on the biggest takeaway from the FATF forum held in Japan and provides insights on how the APAC countries can remain innovative while complying with crypto regulations and not wanting to take their operations abroad. 

Chengyi highlights success stories in the region regarding consumer protection and market integrity and forecasts the extensive policy work that will go into regulating real-world asset tokenization in Asia and APAC. 

Quote of the episode

“Some of the jurisdictions in APAC were front runners in trying to grapple with some of the risks that reside in the digital asset market…Japan is probably a clear example.  So they put in place some quite strict regulations on digital asset businesses in the wake of the Mt. Gox hack, including around things like segregation and protection of customer assets, and this relatively stringent stance, I think, really helped the domestic market absorb some of the shocks of the, you know, the turbulent events of last year….Now it puts Japanese policymakers in a sound position to drive the growth and innovation agenda around web3 in a concerted way.” – Chengyi Ong (Head of Policy, APAC, Chainalysis)

Minute-by-minute episode breakdown

  • (2:15) – The impact of crypto winter on the APAC region and the widespread adoption of both crypto and DeFi
  • (9:35) – The trajectory of the Singapore cryptocurrency market and the push and pull of adopting new blockchain technology in the region 
  • (12:45) – Why is Hong Kong making all the headlines, and what is the Green Bond
  • (16:08) – The regulatory reaction to some of the biggest crypto missteps in 2022
  • (20:03) – The biggest takeaways from the Financial Action Task Force (FATF) virtual asset forum and how VASPs are progressing with the Travel Rule
  • (27:34) – What are the emerging APAC trends regarding consumer protection and market integrity 
  • (31:45) – How do countries remain innovative and not stifle innovation and keep large VASPs from taking their business abroad
  • (33:50) – Regulations and policy work around real-world asset tokenization in Asia and APAC

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Chengyi Ong  (Head of Policy, APAC, Chainalysis)

 

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Transcript

Ian:

Hello, and welcome back to another episode of Public Key. This is your host, Ian Andrews. Today, we’re going to take a deep dive into policy topics across the Asia-Pacific region. I’m joined by my colleague Chengyi Ong, who is our head of policy for APAC. Chengyi, welcome to the podcast.

Chengyi:

Thanks for having me, Ian. Happy to be here.

Ian:

I’m excited for this one. We’ve actually had a number of guests recently from different countries across the APAC region, so we’ve gotten a bit of a flavor of the unusual landscape of policy in certain countries, Malaysia being one recently, Australia. About six months ago we had Caroline [Baller 00:00:49] who was CEO of large Bitcoin Exchange in the region. But, I think it’s going to be really interesting to go deeper. Maybe to start crypto winter, Is it wintertime? I know that the seasons are reversed when we go below the equator. Is crypto winter affecting you in Asia? What are you seeing?

Chengyi:

Oh yeah, I think this is probably a bit of a global winter. I think APAC does span both the north and the southern hemispheres, but suffice.

Ian:

Thank you for correcting my geography. That was not a subject that I did well on in school.

Chengyi:

Well, it’s a global industry, right?

Ian:

Yeah, absolutely.

Chengyi:

Yeah.

Ian:

We’re seeing … Along the same lines as global trends, asset price is a little bit depressed from the peak. Where are you seeing … I mean, are there pockets of enthusiasm, optimism, activity, or is everything kind of universally depressed? Paint a landscape for us.

Chengyi:

Well, look, I think suffice to say it’s been a rough 12 months for the digital asset sector globally, Asia I think has been no exception, and really, you can see this across a variety of metrics I would say. You talked about token prices, they are what they are, but when we look at things like on chain activity, in terms of transaction volumes, web traffic to crypto websites, VC funding, they’ve all taken a hit during this period. And I guess, looking beyond the statistics you can … I mean, you get a lot of anecdotal evidence, companies quietly closing their doors, employee layoffs. I think statistics are not always great in this area, but I’m based in Singapore, which is a small city-state, but a base of operations for quite a lot of international digital asset companies. And I saw one report that estimated something like 3,700 layoffs in the year leading up to February 2023, so 12 months.

And just from crypto companies, that’s quite a lot. I think it’s been certainly a challenging macro climate, but just like you alluded to, I think if you look under the hood, it’s a much more nuanced picture. There is still a robust base of activity across different parts of the blockchain ecosystem. There’s lots of reasons to be optimistic in APAC. The Chainalysis policy team, we were recently in several APAC countries. We call it our APAC tour. But, we were meeting with both public and private sector entities. And I think there was still a good amount of energy on the ground that was very encouraging. A lot of interesting activity, whether it’s say Web3 interest from non-financial companies in Japan and Korea. We were in Australia, where two out of four major Australian banks have launched their own StableCoins. There really is still, I think, quite a good base of digital asset players just keeping their heads down and continuing to build their businesses. And there’s a tenacity, I think, about that activity that is very encouraging.

Ian:

Well, it also seems like there’s strong grassroots adoption. I mean, I think from our adoption index that we did last year, half of the top 10 roughly came from the region. Has that … I imagine there’s maybe been a little bit of a cooling of that, but I can’t imagine that it’s gone away entirely, because the global financial system constraints that I think was fueling a lot of that, like international trade, or remittances, or cross-border payments, that problem set hasn’t really changed regardless of asset prices, right? The need for being able to move money between countries still exists pretty robustly, right?

Chengyi:

Yeah, exactly. I think there are conditions, there are real world drivers in APAC that really do underpin demand for digital assets across different parts of the ecosystem. Whether you’re considering digital assets as an asset class, like in investible assets where financial markets are still developing, or you’re considering it as a new form of financial market infrastructure bypassing costly, slow cross-border payment rails to do remittances and cross-border payments more efficiently, or whether you think of it as the basis of a new mode of interaction and consumption with Web3. And I think the really interesting thing about APAC and what can drive a lot of that optimism around the use cases with digital assets in the region, really come down to a lot of the structural factors that are prominent in APAC. Economically, it is the most dynamic region in the world, and that points to growing trade and investment activity.

And then demographics, if you think about that, demographics are really on Asia’s side, right? You’ve got a large, relatively young digitally literate population. And crucially I think a growing middle class, which is expanding significantly faster than the rest of the world. And that brings in new sources of capital, and investment, and a search for new modes of consumption. And of course, financial systems in APAC really are at varying stages of development, varying levels of depth. And in some cases, that financial infrastructure is still lagging behind these core and these really burgeoning financial needs, including around things like remittances and cross-border payments portrayed. I think, yeah-

Ian:

I think just on that last point, I mean, one of the things that amazed me was in Korea, which I had the opportunity to visit last year for the first time, you had two presidential candidates. Coming from both parties, and they each had a crypto-centric, pro-crypto part of their platform they were running on, in a country where I think the widespread nature of crypto popularity was a big surprise and very interesting to me. And would you put Korea as of the major countries in the region, at the forefront, or do you see the landscape differently?

Chengyi:

Yeah, so Korea’s really interesting, and I think that across the isle, I suppose interest in crypto is something that we can really see when we’re thinking about the legislation that they’re moving through parliament, and the pace at which that’s moving through parliament. But yeah, coming back to Korea and its characteristics, I think, Korea’s a really interesting market. By some measures, it’s one of the largest crypto markets in APAC. It’s probably the largest one in East Asia in absolute terms.

It’s interesting because we see really the vast majority of activity, they’re channeled through centralized exchanges, which does suggest to us a high level of trust in these platforms. And it makes for an interesting counterpoint to markets like Hong Kong or Singapore, which are city-states with really smaller markets just constrained by population size. But there, you see in contrast with Korea, relatively high levels of DeFi engagement, and maybe that comes down to the sophistication of the user base. Maybe it comes down to something else around the availability of onshore exchanges. But, it’s quite interesting to see the different markets at similar stages of economic development was quite different structural characteristics in terms of where and how the populations engage with crypto.

Ian:

Yeah. Let’s rewind back a little bit. We skipped over your bio at the top of the conversation, but obviously before joining Chainalysis just three months ago, you were with the monetary authority in Singapore. You’ve shifted from policymaking into the heart of the crypto ecosystem here with us. I’m curious if you can share as much as you’re comfortable, perspective that you had from the inside on the policymaker side, because I think as an outsider, Singapore, there’s been a complex history with digital assets over the years that’s been, at times, full tilt adoption, very positive on the topic to less warm, maybe in reaction to some of the illicit activity, or some of the fraud that we’ve seen in recent years. But, I’d love any insider perspective you might be able to share.

Chengyi:

I don’t think this is a matter of insider perspective. Actually, when I think back about the trajectory of Singapore and its policy around digital assets, I don’t think there’s necessarily as much inconsistency as one would think from the outside. I think we saw the monetary authority of Singapore warning retail consumers about potential risks of engaging with crypto as early as 2017. That caution around consumer participation in areas where risks are high may not always be easily understood. I think that’s been relatively consistent.

Of course, just as with all countries in APAC, I think, there is sort of the need to balance between risk management on the one hand, and exploring the innovative potential of a new technology, and considering what it might yield in terms of economic activity, value added, and jobs and growth. And the emphasis that a policymaker would put on each of these limbs of that tension is obviously going to be shaped by the circumstances, and just the development of the market, and the market activity. I would say maybe some parts of this balance between risk management and growth would be more prominent at one point than the other, but I don’t think that fundamentally there is an inconsistency in the overall narrative and the overall priorities.

Ian:

Yeah, that’s a great point. The other market that has been making news lately is Hong Kong, because from what I gather, again, as the not expert between the two of us, Hong Kong was looking like it would be a near full band of digital assets. At one point in time, had been friendly to digital asset businesses, and then, we saw a number of them potentially relocate out of the country. And it seems like, from what I’ve read in the news, a near complete reversal of that policy in attempting to welcome everyone back. Give us the nuance under the headlines that I’ve been following

Chengyi:

A lot of attention in Hong Kong, and certainly, a lot of headlines which are generating a lot of optimism in the industry. I think, we have seen a lot of high level, very positive rhetoric coming out of Hong Kong. We’ve seen some quite broad-based initiatives around different parts of the digital asset ecosystem. The green bond that the Hong Kong military authority issued on behalf of the Hong Kong government recently, that was a tokenized green bond, so some of this really interesting stuff.

Ian:

Can you talk a little bit about what that is, the green bond? I’m not sure we’ve covered it on the show before.

Chengyi:

All right. What happened earlier this year, is that the Hong Kong government issued essentially a tokenized bond. This was a green bond, and the whole idea of this project was to think about asset tokenization really, and to potentially lay a blueprint for more corporate bond issuances that are tokenized. What we’re really looking forward to there, so there’s been a bond, it’s been issued. The idea is that it’s digitally native, and that it resides on the blockchain through the entire life cycle, so you’ve got sort of coupons that are paid out, and you’ve got smart contract technology there that’s enabling that. And the idea there is that you have a lot of efficiency gains. Potentially, you’ve got … Even in the primary issuance stage, shorter settlement timeframes. I think some of this has come up before in conversations in public key around asset tokenization and what some of the efficiency gains there might be.

But, I think what we’re really looking forward to seeing, at least within the policy team is the white paper that the Hong Kong monetary authority is going to put out to set out the key learnings and conclusions of their project, because there is going to be a need for that white paper to deal with questions, like how does this fit in with existing legal frameworks? How does this gel with the existing market structure, and settlement infrastructure, and the role of the central security’s depository? And I think that white paper is going to offer a sense of the level of ambition of the Hong Kong authorities and how far-reaching that they think that DLT and blockchain can be in terms of reshaping financial market infrastructure.

Ian:

Yeah, it’s fascinating to watch these projects independently spring up all around the world. Israel is doing something very similar right now. There’s a number of other countries that seem to be trying to tackle the same problem. In Hong Kong with the green bond, did they issue it on a public blockchain, or do they have a private ledger that they’re doing this on?

Chengyi:

It was a private ledger.

Ian:

Yeah, okay. That’s where most of these projects are. I think I’m going to get really excited about it when it’s on Ethereum or another chain, and denominated in the native token of the chain. That seems like it’ll be material progress. But nonetheless, this is exciting. I’m curious, in terms of policymaker reaction to the fallout of last year, my sense here in the US is that people are really just starting to come to grips with things that, for people who are in the crypto ecosystem, feel like they happened a decade ago. The Terra Luna collapse of a year ago is really just starting to be almost digested in the US policymaker and regulator circles as they start to even formulate what is a StableCoin, and how do we think about how this fits into the various financial instruments that we have oversight around? What is your sense? Who’s on the forefront of regulator or policymaker reaction to some of the missteps that we saw last year, and who’s maybe not yet picked up the bull?

Chengyi:

That’s a really good question, and it’s a really good question because APAC is such a broad region that there’s so many markets to pick from. But I think one important thing to keep in mind is that actually some of the jurisdictions in APAC were front-runners in trying to grapple with some of the risks that reside in the digital asset market well ahead of Terra Luna. I think Japan is probably a clear example, so they put in place some quite strict regulations on digital asset businesses in the wake of the Mt. Gox hack, including around things like segregation and protection of customer assets.

And this relatively stringent stance, I think, really helped the domestic market absorb some of the shock of the turbulent events of last year with Japanese customers being a little bit unique in their ability to withdraw assets held with FTX Japan reportedly. And of course, this is remarkable because now it puts Japanese policy makers in a sound position to sort of drive the growth and innovation agenda around Web3 in a concerted way, while maybe some other authorities in the region are still in the process of putting in place some of those pillars of a broader-based regulatory framework to address the risks that we saw in 2022.

Ian:

Yeah, we had the CEO of an exchange from Malaysia MX Global on the show recently, and it was fascinating to hear that in that market, they don’t have this debate that we have raging in the US right now about our digital assets, commodities, or securities. Just blanket, they’re all securities, and the exchanges who want to list them have to file the equivalent of a securities listing document in order to make them tradable.

And so, they’re putting, I think the risk management back on the exchange rather than saying the exchange is a neutral third party, which I thought was a novel approach to it. I mean, there’s definitely some downside in that it’s difficult to get new tokens listed, or bring on potentially new protocols or new chains, but maybe that’s good for consumer protection, like slowing things down just a little bit as opposed to having the latest incarnation of the PEPE token suddenly available trade across everyone. I thought that was really interesting.

Chengyi:

Your reference is a frog. I mean, it sounds like such a great idea.

Ian:

Tons of utility with the PEPE token, I’m sure.

Chengyi:

No, but I think … I mean, there are … I think you’re right in that one of the challenges with crypto is that it just in a way goes at the speed of light, right, the pace of innovation, the pace of market activity is so fast that it’s almost difficult for regulators to keep up. And that’s the challenge. How do you make a regulatory framework that’s fit for purpose that’s able to stay relevant through innovation cycles, or at least through a legislative cycle, and yet be able to be sufficiently comprehensive that you address all the key risks.

I think the approach of a lot of APAC regulators has not necessarily been to lump everything into the category of securities. There are definitions around things like digital payment tokens in Singapore, virtual assets in Hong Kong that do make clear that they’re not necessarily the same as securities, but to borrow, I suppose, a lot of the principles from securities regulation, and try to then adapt or impose them in the digital asset space, and that has a similar effect.

Ian:

Yeah. Now, I think you were just in Japan recently around the most recent FATF meeting. Anything you can share there in terms of what’s going on with the Financial Action Taskforce and digital assets? What can we expect next out of that organizing body?

Chengyi:

Oh, yeah. Well, I mean, so the Financial Action Taskforce is really the global standard set for AML/CFT standards. And so, we attended the virtual asset contact group meeting of the Financial Action Task Force, which is a regular engagement session between the public and the private sector. I think there, the strong takeaway that we got was really around the need for countries to step up implementation of AML/CFT standards for the virtual asset sector. And if you think about the overall trajectory of digital asset regulation, it really all started with the focus several years ago on illicit finance, so the use of virtual assets from money laundering and terrorism financing.

And I think this is still a priority concern, certainly on the part of the financial Action Task force. But just more broadly, I think some of the high profile emerging risks in this space that even the Financial Action Taskforce has highlighted, are things like the abuse of virtual assets for sanctions evasion, proliferation financing, including things like North Korean hacks, and money laundering.

Given the regional Nexus, of course, this is very topical for APAC, so a lot of the exhortation from the Financial Action Task Force is for countries to really step up implementation of the standards that were set some time back, and to really, really make sure that those rules are enforced on the ground. And I think we are seeing that translate into some momentum in APAC. Most markets in the jurisdiction already have some form of AML/CFT regulatory frameworks in place, and those are now being enhanced to meet international standards.

Japan, for instance, recently conducted a consultation on implementation of the travel rule for virtual assets. That’s quite an important measure that mandates the exchange of originator and beneficiary information for sanctioned screening and other purposes. And then more recently, AUSTRAC in Australia launched a consultation on the modernization of Australia’s AML/CFT regime, and that includes extending the scope of AML regulation to cover a broader range of digital asset players. Really a lot of, I would say, regulatory momentum still on that old nugget, the AML/CFT space.

Ian:

Is the biggest gap in implementation really around travel rule, or are there other pieces of the AML directives that FATF sees as lacking in major markets?

Chengyi:

I think the travel rule is part of it, because the travel rule is of course really crucial for things like sanction screening like we mentioned earlier. But I don’t think it’s just the travel rule. The FATF does put out these periodic updates on implementation progress. I think one other thing that we’ve seen where implementation is maybe not as fast as the FATF would like, is around things like risk assessments, which are, of course, the basic building block of an AML/CFT regime, so the national risk assessments, the implementation of a risk-based AML/CFT framework for virtual assets. These are areas in which I think progress is mixed. It’s patchy. There are countries that are a little bit further ahead than others.

Ian:

Yeah, I think this is something I’ve heard from regulators in a few different countries is, it’s necessary that you have transaction monitoring, or a correctly capture customer identity at account registration and verify that periodically. But that’s not sufficient to meet the obligations under the standard. And so, the risk-based approach where you have your own process of evaluation, you’re not just taking a vendor’s flag of yes or no as the complete answer. It seems like a point of maturation of the digital assets industry relative to say some of the banks that have been doing this for a little bit longer. That’s a trend that I’ve heard quite a bit about. Going back to the travel rule, it seems like that’s going to be really difficult to get started. I think people call it the sunrise problem of who-

Chengyi:

I mean it sounds like hey have a problem, right?

Ian:

Yeah, yeah, well, yeah. Everybody loves the sunrise, but this idea of this exchange of information where we’re identifying the beneficiary or the recipient of transacted funds on nearly every transaction, it requires quite a lot of infrastructure in order to do that in a way that takes into account privacy concerns. And obviously, you wouldn’t want that database suddenly being available to the North Korean hackers you mentioned earlier, right, that would be a treasure trove of information. It’s a technically complex problem, and it requires that kind of everybody participating in the ecosystem, which is a large number of entities, be operating in it before I think travel rule really has the impact that’s hoped for. Was this discussed at all in the meeting that you attended? Is there a perspective on how we get over the sunrise problem?

Chengyi:

I think … I mean, it’s an issue that the FATF has flagged. There are various challenges, I think, associated with global implementation of the travel rule. There are challenges that are technological in nature. How do you actually exchange the data? What standards do you use? And so far as different travel rule solutions providers have emerged, to what extent are different solutions interoperable? These are challenges that I think the industry as a whole continues to discuss on an ongoing basis, because they’re difficult challenges to flag. There are also, I mean, at the heart of the sunrise rule is the problems that really some countries have rolled out travel rule requirements, and others haven’t. And sometimes those requirements are slightly different in a way that makes it a little bit more challenging for a digital asset player that is global to comply.

And there really, I think one big part of the solution is really for all jurisdictions to just move forward with rolling out their AML/CFT regimes, and putting in place something similar to a travel rule. I mean, that’s the only way to get around the sunrise problem really at the end of the day. It doesn’t mean that it’ll be … It’ll still be a bumpy road, just because rules are never consistent 100% across all jurisdictions. But, if you have at least a base of that in place, then that provides a basis for moving forward.

Ian:

Yeah, I was just in Canada two weeks ago, and I think the Canadian regime on this is a bit more stringent than even the FATF requirement, and I think it’s all transactions regardless of value or something approximating that. And so, I was asking how they’re dealing with cross-border or international payments, where their obligation in Canada is different than the counterparty’s obligation in say the UK, and what does that mean for implementation of the travel rule? Does one party send information, and the other party not, because of the thresholding, and there was no good answer. We’re going to go through a period where I think everybody adopts some sort of a travel rule solution, and then they start to normalize the patchwork quilt.

Chengyi:

Yeah, exactly. And the challenge of inconsistencies in rules across jurisdictions, it’s definitely not ideal, but it is something that is as old as time, right, or at least it’s as old as global finance and national regulations. There’s always going to be these frictions around the edges. But, if you can get the fundamentals harmonized, or at least consistent across jurisdictions, it makes things a lot easier for global players.

Ian:

Yeah. I’m curious about consumer protection because I feel like this is really the area where we probably … I say we, but what I really mean is the legal frameworks, the regulatory regimes probably had the most impactful negative gap in this last cycle, right? We had lots of people who had money probably realistically couldn’t afford to lose invested into digital assets. They probably, in many cases, didn’t fully understand what they were investing in, or maybe were led to believe one thing when in fact, it was a very different thing that they had money in.

What comes to mind is the interest rate offered by Anchor Protocol, and the Terra Luna ecosystem, and the sustainability of that over time. I know a lot of people are just sort of chasing these 20% APR type rates. And I try and contrast that to any of my interactions with traditional finance where the simplest of transactions, I get a 50-page booklet of disclaimers, and legal sounding warnings that I might lose my money. Where do you see your work being done on the consumer protection side that might keep us from falling into that situation again in the future?

Chengyi:

Yeah, I think that’s a really interesting question. It’s a really good one, and it’s an interesting topic, because I think we’ve seen different approaches emerge around consumer protection in APAC. I think early last year, we saw lot of guidance or restrictions coming out around marketing, so we saw, for instance in Singapore, the MAS putting out some guidance restricting the marketing of crypto to the general public in Thailand. I think in September, the Thai Securities and Exchange Commission also put out their own set of advertising restrictions.

A lot around marketing, but then increasingly, I think what we’re seeing now is things like suitability due diligence requirements, so things like customer knowledge assessments, retail investment limits, and these are really drawing from the playbook on investor protection in traditional finance. They’re very similar to the kind of guardrails in place when you invest in a traditional investment product. I think we’ve seen this in the Hong Kong regime, in the Singapore proposals that came out last October, and we’ll probably see it continue to come up in other APAC markets.

Ian:

Sorry, a customer knowledge assessment, so I have to take a test to buy some crypto. Is that the idea?

Chengyi:

Don’t you have to take a test to buy some securities?

Ian:

No, I mean, not in the United States. I’ve never experienced that.

Ian:

On one hand, I really like this idea, right? In the US we have this accredited investor rule, which I’m not fond of, because it’s really just a means test. You have to have a certain amount of liquid asset value effectively. And so, it excludes people who might be younger and earlier in their career, fully capable of having investible, wanting to invest, and being financially capable of doing so, but they may not be at the scale that meets this means test. And therefore they get excluded from things like buying equity in privately-held companies, which is just ridiculous to me. As somebody that’s worked in startups my whole life, you can go to work at a startup, and be paid in options, but you can’t buy options in another company unless you meet this accredited investor threshold.

And so, it’s not really validating that I understand anything about how the company works, or the nature of the structure of the agreement that I’m purchasing equity in a company. All these things are largely ignored. It’s just like, well, do you have enough money? And if you have enough money, therefore, you’re assumed to be qualified to participate. I like this knowledge test, but now I’m really curious if we should get a copy of this, and link to it in the show notes so people can go take it, see if they can pass.

Chengyi:

I don’t think that these have all been developed, because I don’t think the rules are necessarily all enforced yet, but it’s not necessarily exclusionary. There are different ways that you can think about slicing this, right? If somebody doesn’t have sufficient knowledge, maybe what they need is financial advice around the product, so they just need to be guided a little bit more around what the risks are. I think this is a space in which it really is where, as a regulator, or as an industry player, you can be fairly creative in how you want to do this. And of course, the other limb to this is consumer education, right? Because can’t really test someone on something without providing sufficient material for them to understand the investment product. And I think one really interesting thing here is the Thai Securities Exchange Commission in January put out essentially a crypto academy.

Ian:

That’s amazing.

Chengyi:

Publicly available material to teach you about crypto, I mean, it sounds like … I have to say I don’t speak Thai, so I haven’t actually gone through the educational materials, but it sounds to me like an interesting approach to the matter.

Ian:

We can get one of the machine learning language translation platforms. We should dig into the test.

Chengyi:

Oh yeah.

Ian:

We could take it together. The other thing I’m hearing a lot about is the conversation around market integrity, which in digital assets is such an interesting thing. I mean, we’ve certainly done analysis and the space of NFTs and looked at some of the wash trading activity that’s certain of the marketplaces kind of encourage based on the tokenomics of the platform fees. And I think there’s any of the rug pull scams you could categorize in this market integrity, market manipulation problem space.

I would also say that I think there’s a lot of uncertainty across the digital assets ecosystem about is market manipulation actually a bad thing or a good thing? In some ways, it’s part of the culture of crypto is get people excited about, we were talking about the PEPE token earlier, and you do this sort of broad-based marketing, and people get enthusiastic, and it almost evolves the ecosystem in ways that could be interesting and popular. How are people trying to think about market integrity? Is there anything interesting happening in that space?

Chengyi:

I would say that in some of the regulatory frameworks that we’re seeing emerge, there is a tension paid to market integrity, and these are mostly in the form of obligations to try to detect front running, market manipulation, wash trading, so market abuse essentially, so detect and prevent. But, I think this is a really complicated topic, right, and just setting aside the question of whether this is a integral part of the crypto ecosystem and the crypto thesis, I think what you pointed to is a really interesting question, because there is the abuse that takes place, and that is visible on chain, which is a lot of the analysis that we’ve been doing around things like pump and dump tokens, and NFT wash trading, and then there is the type of market abuse that can take place within centralized exchanges on order books. And I think a really interesting question is, for regulators, how do you make sure that you have adequate sight of both so that you can investigate and take action against illicit actors?

Ian:

Yeah, it’s going to be a fascinating space to try and get your arms around, because the means of communication is so different, right? I mean, if we think about the reach of a platform like Twitter, or the private nature of broad communication via tool like Discord, where you can reach tens of thousands, or hundreds of thousands of people in a discord channel that is not viewable by a regulator, right, they may not have access to it, or even know it exists. Yet, you can likely move the value of an asset pretty dramatically by engaging a widespread group of people, who by the way are likely not all in the same country, right? They could be globally distributed, so outside of jurisdictional authority of a regulator in some ways. It’s very hard for me to imagine a clean solution that solves for that type of problem.

Chengyi:

No, but I think it’s a fascinating question, and it’s really something that’s not isolated to crypto or the digital asset space, right? You can see this happening in traditional equities as well. And I guess, the question really is around what are the new tools that supervisors need in order to be able to even monitor and identify shady activity that’s taking place in channels that are not traditionally within their purview, right?

And yeah, I think that speaks to the evolving role and the evolving skillset and toolbox of regulators and supervisors, which I find really interesting. And I think at least within the crypto and the digital asset space, given the tools that we have around on chain analytics, it’s going to be interesting to see how supervisors increasingly harness on chain data, and other data sources, and other new supervisory tools to get their arms around the different forms of market abuse and consumer harm that can occur in a more technologically enabled space.

Ian:

Yeah, let’s shift to a positive topic as we come to the end of our conversation today. In the news recently, I’ve read about a number of the well-known large crypto businesses exiting certain markets. We’ve seen this happen in Canada. I think Japan has seen this happen with a couple of the large exchanges that were not domestically-based, but international shuttering their operations in the country. And at least the news level analysis was, it was largely down to the complexity or difficulty to meet either the coming or now current regulatory regime, which seems unfortunate on the face of it. But I’m actually curious on the other end of the spectrum, where do you see government with enthusiasm around digital assets and actually supporting some of the innovation that’s happening in the space and embracing the future? Is there anywhere that’s doing that right now?

Chengyi:

Oh, absolutely. But maybe just to touch on what you mentioned earlier, Ian, about firms exiting spaces where regulatory requirements may be onerous. I think coming back to Hong Kong, you were asking earlier about all the hype around Hong Kong, and what’s the new ones on the ground? I think the reality on the ground is that Hong Kong has in place, or at least it’s announced that it will have in place, regulatory regime that is fairly comprehensive and fairly granular, and that sets in a way a high watermark for crypto companies. And so far, that hasn’t dented the interest in going on shore in Hong Kong, getting a license. And I think there are industry players that look for a rigorous regime where the license is essentially, carries a premium.

I don’t think that having a stringent regime in place necessarily is going to drive away activity, provided that the regulator is willing to engage with industry. Operationally, the licensing process can progress, and there’s clarity essentially over where regulation is heading. I thought that was an interesting counterpoint. Then, just coming back to this question of whether APAC governments are doing anything proactively still to support digital asset innovation, I think yes. The pipeline of pro-innovation initiatives hasn’t stopped, although I do think that maybe now, more than ever, policy makers, and central banks, and regulators are going to be focusing on initiatives that steer clear of anything that might be seen as encouraging speculative trading in digital assets.

I think there are a couple of themes. I think the blockchain is infrastructure thesis is still very prominent in a lot of these policy initiatives that we’re seeing get rolled out. We talked about Hong Kong and their issuance of a tokenized government green bond, but I think even in South Korea, the authorities recently rolled out package of measures to enable the issuance and trading of tokenized securities.

Ian:

How interesting. I didn’t see that news actually. That’s a big deal.

Chengyi:

Yeah, so it includes planned act amendments to enable legal recognition for securities issued on chain under certain conditions. And this is really aimed at, I think, making capital markets more efficient and unlocking liquidity in illiquid assets. The good thing there I think, is that when they rolled out their measures, it’s really looking beyond just the issuance of a security on chain and thinking hard about secondary trading, or distribution of the security, what sorts of platforms you need for that.

Ian:

Right.

Chengyi:

I thought that’s pretty heartening. I think the other theme here is probably around Web3. We talked about how Japan has in place, or has had in place fairly stringent rules for digital asset players, and that’s positioned it well to drive pro-innovation initiatives. The governing party, the liberal Democratic Party, has a Web3 project team that comprises of parliamentarians, and lawyers, and that consults directly with the industry to try to formulate proposals to position Japan as a hub of Web3 activity.

There’s no qualms completely unequivocal about that ambition. And they’ve put out a couple of white papers. The latest one has a range of proposals around things like a legal structure for Dows, streamlining of taxation. In a previous paper, they put out a bunch of proposals around NFTs. I think, certainly, there still is quite a lot of policy work around driving innovation, and growth, and digital assets in APAC. It’s just potentially a little bit more selective in some quarters.

Ian:

That’s great. Actually, the work in Japan around the Web3 space is fascinating too, because it sounds like that’s more focused on the non-financial aspects of digital assets, right, setting up legal framework for decentralized autonomous organizations. That’s independent of, can I go buy more PEPE coin, or speculate on the latest token, right? And same thing with NFTs, right, that looking at digital art as opposed to speculative financial instruments, so that’s heartening to see. I guess, last question and then we’ll wrap up here is, if you were running a digital asset business, what would you be doing right now just to prepare for the future regulatory landscape?

Chengyi:

That is a great question, and I’m glad that I get to deliver a response from my side of the table. I think, look, 2023 is going to be a bit of an inflection point in terms of all the regulation that is under consideration, and going to come into force through the course of the year in different markets. I think if I were an APAC-based digital asset player, I would be looking hard at the regulatory momentum in my market and thinking seriously about how to engage with regulators to shape the rules that are coming out, because this is going to be a pivotal year.

Ian:

Amazing. Great advice. Chengyi, this was such a fun conversation. I learned a ton. Hopefully our listeners did as well. Thank you for joining us today.

Chengyi:

This is great. Thank you so much for having me, Ian.

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