Blockchain technology and cryptocurrencies have gained tremendous popularity in recent years, with many governments recognizing the potential of these technologies and taking steps to regulate them. Currently, crypto laws and regulations are varying. The regulatory framework is fragmented and varied across the board.
It is common sense that there is a concern about the implications of cryptocurrency in terms of money laundering and terrorism financing. There is an urgent demand for more strict rules to protect customers from speculative trading activities and businesses from risky financial investments.
It is obvious that the tremendous rise of cryptocurrencies has taken many countries by surprise. Some have recently undertaken a regulatory approach towards cryptocurrencies, while others have not yet introduced clear legislation but are on the way preparing those.
Therefore, compliance professionals will most likely look back on 2022 as a defining year for crypto. When those ongoing trends continue, it is set to mark the point at which adoption of cryptocurrencies and regulatory reforms collide, leading to a sector that is more regulated, and increasingly mainstream.
In the following, we will examine the current state of regulations for blockchain and cryptocurrencies in the Asian region.
Regulations in China
China has been one of the most active countries in terms of regulating blockchain and cryptocurrencies.
In 2019, the Chinese government released a white paper outlining its vision for a digital currency and began testing a digital yuan.
In 2020, the government proposed new regulations for blockchain, requiring entities involved in the development and operation of blockchain to register with the government and comply with strict regulations. The regulations also require blockchain service providers to keep records of user data and to provide technical support to the government when necessary.
In September 2021, the country announced further strict measures to combat cryptocurrency adoption in China, including further scrutiny of the companies supervising the regulations.
The first ban dates back to 2013 when the country banned banks from running crypto transactions.
China applies the strictest regulation in terms of cryptocurrency.
Why is bitcoin illegal in China?
China used to host over 50% of Bitcoin mining hashing power, and mining facilities represented good revenue for the local economies. The drastic ban on mining in June 2021 with the official reason to reduce carbon emissions had a dramatic effect on the mining industry initially.
It caused a massive exodus of miners from China to more crypto-friendly countries where electricity is cheap.
Chinese giant merchant Alibaba announced it would ban all sales of cryptocurrency mining rigs.
However, the country has recently revealed plans to create a CBDC. They understand the need for a digital currency, but decentralization is not on the table.
Regulations in Japan
Japan is among Singapore one of the most crypto-friendly countries in Asia. Since the Japanese Payment Services Act passes in 2017 its government regulators recognize Bitcoin and other cryptocurrencies as a type of money and legal property.
The industry is regulated by the Financial Services Agency (FSA), which manages transactions in the country’s currency, the yen.
The country requires cryptocurrency exchanges to register with the Financial Services Agency (FSA) as cryptoasset exchange services providers (CAESPs) and comply with strict regulations (like the Guidelines for Anti-Money Laundering and Combating the Financing of Terrorism) to prevent fraud and money laundering, enforced as of February 2021.
In addition, the government has proposed regulations for virtual currency wallet services, which would require service providers to comply with strict data privacy regulations.
Japan regulates cryptocurrency under AML and CFT measures.
When issuing as one of the first countries crypto- specific regulations, it pointed to the different types of tokens subject to different types of regulation. Cryptoassets have their own regulated status in Japan, with cryptocurrencies and value transfer tokens falling under the definition of “crypto assets’’ in the Payment Services Act.
Security tokens are defined as electronically recorded transferable rights to be indicated on securities (ERTRISs) under the Financial Instruments and Exchange Act (FIEA). Providers of services linked to securities tokens are required to register as Type I Financial Instruments Business Operators (Type I FIBOs).
Stablecoins can be classified as cryptoassets. However, if a stablecoin involves a fiat payment, it can be classified as “kawasetorihik,” or a means of payment in fund remittance transactions. Money laundering requirements related to CAESPs are detailed in the Act on Prevention of Transfer of Criminal Proceeds (APTCP). Obligations include: Verifying and recording the identity of customers for certain transactions (exceeding YEN100,000 in value or regular services); recording transactions; reporting STRs to the FSA; and keeping customer information up-to-date.
Recent developments indicate that Japan is looking to bring crypto exchanges into the scope of its foreign exchange and trade law to manage sanctions risks. The FSA had previously shared that it was looking to introduce more stringent requirements in the crypto space, and had set up a dedicated unit and panel of experts to analyse crypto businesses. The FSA requested that crypto firms make their monitoring more robust, in order to identify risks in relations to sanctions with Russia.
Regulations in Singapore
Singapore is a very blockchain-friendly spot in Asia.
Cryptocurrency trading and possession of digital assets are legal in Singapore.
Back in January 2019, the Monetary Authority of Singapore (MAS), by the Central Bank of Shanghai and the financial regulator, passed a Payment Services Act (PSA), which regulates cryptocurrency exchanges and other payment service providers. The act requires these businesses to register with the MAS and comply with strict KYC and AML requirements.
The PSA prescribes the eligibility requirements for applicants to be granted a license, as well as ongoing compliance requirements for licensees.
Eligibility requirements include a minimum base Capital of S$100,000 for the Standard payment Institution license and S$250,000 for the major payment Institution license.
The license applicant is also required to have at least one executive director who is a Singapore Citizen or Permanent Resident, or else at least one non-executive director who is a Singapore Citizen or Permanent Resident and at least one executive director who is a Singapore employment pass holder. Further, the license applicant must have a permanent place of business or a registered office in Singapore, at which it must keep books of all its transactions in relation to the payment Services it provides.
Also, a payment Institution needs to appoint at least one person to be present at its permanent place of business or registered Office to address any queries or complaints.
There are seven payment Services defined in the PSA, namely: account issuance Service; e-money issuance Service; cross-border money transfer Service; domestic money transfer Service; merchant acquisition Service; DPT Service; and money-changing Service.
“E-money” is defined as “any electronically stored monetary value that is denominated in any currency, or pegged by its issuer to any currency, has been paid for in advance to enable the making of payment transactions through the use of a payment account, is accepted by a person other than its issuer and represents a Claim on its issuer, but does not include any deposit accepted in Singapore, from any person in Singapore.”
A “digital payment token” is defined as “any digital representation of value (other than an excluded digital representation of value) that is expressed as a unit, is not denominated in any currency, and is not pegged by its issuer to any currency, is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or Services or for the discharge of a debt, can be transferred, stored or traded electronically, and satisfies such other characteristics as MAS may prescribe”.
Additionally, the MAS has proposed regulations for virtual asset service providers (VASPs), which would require service providers to comply with strict data privacy regulations.
On January 4th, 2021, the PSA has been amended to keep up with changes in international standards and to better mitigate money laundering and terrorism financing risks. MAS Notice PSN02 puts in place AML/CFT controls to detect and prevent illegal activity through DPT and furthermore MAS’ AML Guidelines provide DPT service providers with guidance on the Notice PSN02 requirements.
For the reasons of ongoing monitoring, a payment service provider must set up appropriate processes in accordance with the size and complexity of the business to monitor business relations with customers and detect and report suspicious, complex, unusually large, or unusual patterns of transactions.
In 2022 Singapore passed the Financial Services and Markets Bill (FSM Bill) to bring into scope of local regulation cryptoasset service providers physically based in Singapore but which only offer services abroad. This was done to mitigate the risk of regulatory arbitrage, align to FATF standards on VASPs and manage Singapore’s reputational and AML/CFT risk. These types of businesses “will be regulated as a new class of FIs” subject to licensing and oversight by MAS. The scope of DPT service providers, which previously covered those dealing in DTs and facilitating the exchange of DTs, has also been expanded to cover the following services:
- Inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any DTs in exchange for any money or any other DTs (whether of the same or a different type)
- Accepting DTs for the purposes of transmitting, or arranging for the transmission of, the DTs
- Safeguarding of a DT or DT instrument, where the service provider has control over the DT or over one or more DTs associated with the DT instrument
- Financial advice relating to the offer or sale of DTs
The FSM Bill also introduced additional licensing requirements, gave MAS the power to carry out regulatory inspections and allowed for coordination between MAS and domestic authorities as well as foreign AML/CFT supervisors. The FSM Bill will also give MAS the ability to issue requirements on technology risk management (TRM), with a maximum penalty set at S$1 million.
MAS further clarified that it “considers all transactions relating to DT services to carry higher inherent ML/TF risks due to their anonymity and speed.” In January 2022, MAS issued Guidelines on Provision of Digital Payment Token Services to the Public [PS-G02], which set out expectations that DPTs should not market or advertise DPT service to the general public in Singapore, indicating that trading DPTs is “highly risky and not suitable for the general public.”
MAS has partnered with participants in the industry to conduct a collaborative project, “Project Ubin”, to explore the use of blockchain and distributed ledger technology for the Clearing and settlement of payments and securities. The payments network Prototype that was developed through this project would facilitate the development of a cross-border payments infrastructure, as well as customer applications. “Project Dunbar”, a project by the Bank for International Settlements Innovation Hub and central banks including MAS, which was announced on 22 March 2022 to have been completed, was said to have demonstrated that central bank digital currencies (“CBDCs”) could be used by financial institutions to transact directly with each other through a common platform.
This potentially reduces the need for intermediaries, as well as the costs and time required for the processing or cross-border transactions.
MAS is collaborating with partners in the financial industry in “Project Guardian” to explore decentralised finance, asset tokenisation, and their underlying technologies, while managing the risks
to the stability and integrity of the financial markets, especially the risks to retail Investors. This could contribute to improving liquidity and inclusivity in the financial markets, while increasing the efficiency, affordability and accessibility of financial Services.
The Government has recently issued cryptocurrency trading guidelines, passed amendments to the Payment Services Act 2019 (“PSA”), and passed the Financial Services and Markets (“FSM”) Bill, to address additional risks, including those to retail Investors and money laundering.
As for judicial developments, it is notable that the Singapore High Court has ruled that non-fungible tokens (“NFTs”) may be protected by proprietary injunctions.
Up to now, 14 digital payment token Service providers have been granted licences or in-principle approvals by MAS, with the most recent three in-principle approvals announced after the meltdown of TerraUSD and LUNA and its knock-on effects on the market. It shows Singapore’s ongoing commitment to be a leading crypto hub.
Taxation of cryptocurrency in Singapore depends on the type of activity that is being carried out. Where trading in cryptocurrency is carried out in the ordinary course of business, the profit derived therefrom would be subject to income tax. Where cryptocurrencies are purchased for long-term investment purposes, Capital gains derived therefrom would not be subject to tax as Singapore does not impose taxes on Capital gains.
Where cryptocurrencies are used to pay for goods or Services, the business providing the goods or Services would be taxed on the value of the said goods or Services. This is because cryptocurrencies are not fiat currencies and not legal tender. Furthermore, cryptocurrencies would be treated as intangible property for the purposes of income tax. Hence, transactions with cryptocurrencies being used as payment would be considered harter trade.
The Inland Revenue Authority of Singapore has indicated in its e-Tax Guide on Income Tax Treatment of Digital Tokens that the taxability of proceeds from an initial coin offering (“ICO”) depends on the type of coin being issued. If the coin is a payment token, then generally it would be treated as trading stock and the ICO proceeds would be taxable. If the coin is a utility token, then because there is an Obligation for the issuer to provide a Service in the future, the ICO proceeds would represent consideration for the Service and would be taxable when the Services are performed. If the coin is a security token, then the ICO proceeds would be treated as those arising from the issuance of Investment assets, and being capital in nature, it would not be taxable.
MAS has introduced a regulatory sandbox program to support financial institutions and start-ups with a conducive regulatory environment for technological Innovation in the rapidly evolving financial technology space.
The sandbox for each participant would have specified boundaries and duration. There would be safeguards to protect against the implications of failure on the overall financial System. Specific legal and regulatory requirements as determined by MAS will be relaxed for the participant while the sandbox is in effect. After exiting the sandbox, the participant would then have to ensure complete compliance with the full extent of its legal and regulatory requirements.
MAS is cooperating with various universities in Singapore under the Singapore Blockchain Innovation Programme (“SBIP”). The aim of the SBIP is to strengthen Singapore’s blockchain ecosystem through engaging local Companies in blockchain- related projects and business Solutions, growing and nurturing Singapore’s blockchain community and talent pool, and conducting research on blockchain scalability and interoperability.
Regulations in Hong Kong
Hong Kong has taken a similar approach to Singapore in terms of regulating blockchain and cryptocurrencies.
In 2019, the Securities and Futures Commission (SFC) issued guidelines for cryptocurrency exchanges operating in the country. The guidelines require exchanges to register with the SFC and comply with strict KYC and AML requirements. Additionally, the SFC has proposed regulations for virtual asset service providers (VASPs), which would require service providers to comply with strict data privacy regulations.
Reference: “Statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators,” Securities and Futures Commission, Hong Kong.
Thailand
The fast growth of cryptocurrency businesses and trading has marked the need for Thai authorities to regulate the industry to mitigate financial risks for investors and companies, including assets’ volatility, cyber theft, personal data leakage and money laundering.
Regulators want to prevent businesses from enabling the use of crypto as a means of payment for goods and companies, as outlined by the Bank of Thailand, the Securities and Exchange Commission and Ministry of Finance in a joint press release.
They fear the widespread adoption of crypto assets could threaten the country’s economic and financial stability. Thailand’s central bank announced will trial a central bank digital currency (CBDC) to mitigate further the threat of crypto to the country’s financial system.
Due to the rapid growth of digital assets’ adoption in the country, Thailand has imposed a 15% capital gains tax on profits from cryptocurrency trading as a way to gain some revenue from the industry.
Since 2022 the tax is applicable by the Royal Decree and the Amendment of the Revenue Code. At present, there’s no clear tax regulation that regards corporate entities.
Malaysia
In Malaysia Cryptocurrency is legal and regulated by the Security Commission (SC) under the Capital Markets and Services Order 2019.
It is considered a security and is therefore subject to Malaysia’s securities laws. Cryptocurrencies and tokens are not regarded as legal tender or payment instruments by the Bank Negara Malaysia, Malaysia’s central bank.
In October 2020, the SC published new guidelines on digital assets for crypto providers who want to raise funds through token offerings, but also for entities that want to run an Initial Exchange Offering (IEO) platform and those who intend to provide storing and custody services of digital assets.
All organisations that want to raise funds with token offerings must use approved and regulated crypto assets exchanges that facilitate initial exchange offerings (IEOs). Such exchanges are required to conduct due diligence on the issuer, who must be a Malaysian corporation with its primary business operations in Malaysia and comply with AML and CFT laws.
Two noticeable names in the cryptocurrency exchange space, Binance and eToro, are not allowed to operate in Malaysia because they don’t comply with its security laws.
At present, Malaysia does not have a tax framework for crypto businesses, and no capital gains tax is enforced to sell investments or capital assets.
However, companies with digital assets as their primary business activity may be liable for income tax, while crypto exchanges are subject to corporate income tax.
Vietnam
Vietnam is in a process of a large-scale transition into digital and electronic payments, increasingly favoring cash-less methods and encouraging apps, QR codes and e-wallets.
Within this context, cryptocurrencies appear as an attractive payment method, especially considering that one million Vietnamese are reported to be using cryptocurrencies, and the figure is only expected to move up significantly within the next few years.
With such an increase in popularity, there has been an inevitable rise in the number of criminal activities like hacks and cyber scams; hence, the need to regulate the industry with more legal implications for those who operate within crypto-related businesses.
How is cryptocurrency regulated in Vietnam? Generally speaking, Vietnam does not recognize Bitcoin and other similar cryptocurrencies as legal means of payment and actually wants to ban their use. The State Bank of Vietnam also banned cryptocurrency issuance and supply, and law-breakers face fines of up to $8,700 and imprisonment.
However, owning cryptocurrencies as an investment is tolerated for the time being. It’s only their use as a means of payment that is prohibited. The grey regulatory framework has not protected investors, especially retail investors, exposed to a high risk of fraudulent activities.
To catch up with the demand and the speed of transition more regulations are urgently necessary.
India
The government of India has significantly changed its standpoint on cryptocurrency regulation over the years.
In 2016, the country imposed a complete ban on all crypto- related activities, from mining to buying, selling and holding assets.
More recently, it has considered regulating the industry in an upcoming Cryptocurrency and Regulation of Official Digital Currency Bill, which outlines a clear distinction between cryptocurrencies and the types of crypto-related activities allowed.
The approach of the government will aim to protect both retail and institutional investors from fraudulent activities and speculative operations. Under specific guidelines, exchange platforms will be allowed to work as crypto providers for customers’ sales, purchases and storage services.
The government is also reconsidering the tax implications on cryptocurrency and exploring ways to generate revenue from crypto, and the new bill should provide more clarity on the matter.
The new regulation was expected by 2021. So far, closer scrutiny and the likely implementation of a CBDC have delayed its introduction.
Pakistan
According to the Federation of Pakistan Chambers of Commerce and Industry President Nasir Hayat Magoon, cryptocurrencies constitute investors’ assets for as much as $20 billion, urging the country to provide a regulatory framework as soon as possible.
Pakistan has adopted different approaches to cryptocurrency over the years. A statement from the central bank of Pakistan in 2018 had demanded that banks and payment providers refrain from engaging in any crypto-related activity.
In 2020, the Pakistan Securities and Exchange Commission published a document that contained guidance on a potential regulatory foundation outlined in collaboration with the Financial Action Task Force. The overall approach of Pakistan towards cryptocurrency and blockchain has since been open to the benefits of the technology and its innovative offering without the need for strict regulations.
Recently, a new ban on cryptocurrency has been discussed by the State Bank of Pakistan and the Federal Government in the aftermath of the China ban to tackle investors’ risk of using crypto exchanges like Binance who do not comply with the country’s AML regulations. The world’s largest crypto exchange was also linked to a multi-million-dollar crypto scam in the region.
Regulations in South Korea
South Korea has taken a cautious approach to regulating cryptocurrencies.
In 2017, the government banned initial coin offerings (ICOs), citing concerns about fraud and speculation.
In 2018, the government introduced regulations requiring cryptocurrency exchanges to register with the Financial Services Commission (FSC) and comply with strict KYC and AML requirements. In addition, the government has proposed regulations for virtual asset service providers (VASPs), which would require service providers to comply with strict data privacy regulations.
Regulations in North Korea
North Korea has used cryptocurrencies to evade sanctions from the West and fund its nuclear missile program. However, their regulatory framework for retail and institutional investors is very unclear to the rest of the world.
Regulations in Indonesia
In Indonesia, legally cryptocurrencies are recognized as trading commodities, not as a means of payment, and banks are forbidden to encourage the use of cryptocurrency as a form of payment. Cryptocurrencies have to comply with risk assessment, AML and CFT requirements. The country has recently experienced a rise of 280% in crypto investors, from 1.5 million to 4.2 million, and a daily trading volume of roughly $117.4 million, and has issued a “fatwa” to its Muslim population against cryptocurrency use.
Regulations in India
The government of India has considerably changed its standpoint on cryptocurrency regulation over the years. In 2016, the country imposed a complete ban on all crypto- related activities, from mining to buying, selling and holding assets.
More recently, it has considered regulating the industry in an upcoming Cryptocurrency and Regulation of Official Digital Currency Bill, which outlines a clear distinction between cryptocurrencies and the types of crypto-related activities allowed.
Generally speaking, the country’s approach will be to protect both retail and institutional investors from fraudulent activities and speculative operations. Under specific guidelines, exchange platforms will be allowed to work as crypto providers for customers’ sales, purchases and storage services.
The government is also reconsidering the tax implications on cryptocurrency and exploring ways to generate revenue from crypto, and the new bill should provide more clarity on the matter.
The new regulation was expected to be approved during the 2021 winter session of parliament. However, closer scrutiny and the likely implementation of a CBDC have delayed its introduction.
Conclusion
In conclusion, the regulatory landscape for blockchain and cryptocurrencies in Asia varies widely. Some countries like Japan and Singapore have taken a more blockchain-friendly approach, while others like China have taken a cautious approach and have focused on developing their own digital currencies. Regardless of the approach, most countries in Asia are recognizing the potential of these technologies and taking steps to regulate them to catch up with the tremendous increasing demand on blockchain technology.
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