Bitcoin, the largest cryptocurrency by market value that was considered by many to be a niche asset not long ago, has leapfrogged into the mainstream in 2021, with a market cap of around US$1 trillion, joining the ranks of Tesla, Amazon and Alphabet (Google).

The rising popularity of cryptocurrencies such as Bitcoin, Ethereum and stablecoins as well as decentralized finance (DeFi) and non-fungible tokens (NFTs) has attracted the interest of institutional and retail investors. But massive price volatility and a surge in cryptocurrency scams and hacks also sounded the alarm bells for governments and regulators around the world. Nine in 10 central banks are also exploring a central bank digital currency — a digital form of their currency — according to the Bank for International Settlements.

Major regulatory moves in 2021

With the total market cap of cryptocurrencies soaring by over 250% from US$780 billion at the start of the year to over US$2 trillion, the growth of cryptocurrencies and the underlying blockchain technology is a trend that can no longer be ignored. Governments and regulators are grappling with how to handle crypto’s rise — to balance the need for consumer protection and mitigating risks, while allowing the innovation to flourish. 

Their responses have been mixed so far, from China’s crypto crackdown to El Salvador’s embrace of Bitcoin. But there’s no doubt that governments are increasingly paying close attention to crypto — and ramping up regulations.

Growing regulatory clarity

The clampdown on crypto mining in May in China — the most populous country in the world — followed by a wider ban of crypto-related activities in September, in particular, has reshaped the global crypto industry. The mass exodus of Chinese crypto mining companies to safer shores including North America, Kazakhstan and Northern Europe, has led to the once largely China-dominated crypto mining industry becoming more geographically dispersed — or in blockchain lingo, decentralized. Cryptocurrency exchanges have also shut down or moved out of China, as have many Chinese crypto entrepreneurs, who have flocked to more crypto-friendly jurisdictions like Singapore.

Other jurisdictions such as Dubai, Gibraltar and Malta have also created regimes for licensing or registration for crypto companies and seizing the opportunity to position themselves as crypto hubs. On the other hand, India, the second-most populous country in the world, which has seen growing demand for cryptocurrencies and massive growth in its crypto startup ecosystem, has been oscillating between wanting to ban and regulating cryptocurrencies.

Global regulators in the driver’s seat

Global crypto regulatory oversight, for now, remains uneven, and the Financial Action Task Force — the global anti-money laundering and counter-terrorist financing (AML/CTF) standards-setter — in its updated guidance published in October, urged countries to step up their implementation of its standards, including the travel rule to avoid jurisdictional and supervisory arbitrage.

The travel rule requires crypto companies to share specified customer information alongside a transaction. Countries that have implemented the travel rule include the United States, Switzerland and Singapore, though global implementation is still patchy. 

“Travel Rule compliance is growing rapidly every quarter,” said Pelle Braendgaard, CEO of Notabene — a platform that helps crypto companies comply with the travel rule — in an earlier interview with Forkast.News. “We are now facilitating transactions between over 50 VASPs and we expect most major VASPs to comply by Q1/Q2 of 2022.”  

See related article: FATF updates regulatory guidance for crypto industry

Stablecoins, in particular, are now squarely on regulators’ radars. The year started with Tether (USDT) and Bitfinex reaching an US$18.5 million settlement, which included a USDT trading ban in New York, with the New York Attorney General after a prolonged legal battle that began in April 2019. The European Commission is currently reviewing regulation, introduced in September 2020, on markets in crypto assets (MiCA), which includes safeguards to address potential risks to financial stability from stablecoins. In the United States, Gary Gensler, chairman of the Securities and Exchange Commission, has called stablecoins “the poker chip at the casino” and the President’s Working Group on Financial Markets has urged Congress to subject stablecoin issuers to the same level of regulatory scrutiny and legal obligations as banks. 

See related article: A look at how global stablecoin regulations are evolving

“Because of all the ongoing work at the global regulatory level, we expect that there will be a level of uncertainty and this will prevail for some time, and it is probably the largest near-term risk of this sector,” said Peiying Chua, financial regulation partner, Singapore, at global law firm Linklaters. “As a result, we should expect to see certain levels of enforcement, but we would also expect that certain regulatory principles, such as having a technology-neutral approach will apply.”

“Increased regulation may encourage growth in this industry, as investors take comfort from regulatory oversight once the rules of the road for digital assets are made clear,” Chua added. “All of this will take some time — but the developments have been positive and a step in the right direction.”

How crypto regulations in Asia are taking shape

In Asia, the regulatory frameworks run the gamut from exploratory to “strong regulation” as in the case of Singapore. The city-state has put in place regulation under its Payment Services Act (PS Act) to regulate the crypto industry primarily for money laundering and terrorist financing risks, and has issued licenses to FOMO Pay, a Singapore-based payments fintech, DBS Vickers, the brokerage arm of DBS Bank, and Independent Reserve, an Australian cryptocurrency exchange and TripleA, a cryptocurrency payments provider.

Vietnam — the top country in the world in terms of crypto adoption, according to blockchain data provider Chainalysis — has set up a research group for policy proposals related to crypto assets. The Philippines, which saw the explosive rise of blockchain game Axie Infinity in the country this year, has permitted several remittance and transfer companies to provide virtual currency exchange services. Thailand, one of the more active countries in Asia in exploring the use of blockchain and distributed ledger technology for financial services, has issued guidance on stablecoins and banned cryptocurrency exchanges in the country from providing services related to meme tokens, fan tokens and NFTs. In Indonesia, home to the world’s largest Muslim population, the National Ulema Council, the country’s religious council that is funded by the state, recently said using crypto assets as a currency is haram or forbidden for Muslims.

“On a regional level it has been a busy year for the regulators in relation to driving forward the regulatory framework for crypto assets,” Etelka Bogardi, partner at global law firm Norton Rose Fulbright Hong Kong, told Forkast.News, in an email. “In Hong Kong, we have had the consultation process which will result in a new licensing regime for virtual asset exchanges in the next legislative session. This will have far reaching ramifications in particular for those exchanges targeting the retail market.”

See related article: Hong Kong to close crypto exchanges to all but ‘professional investors’

How will crypto regulations unfold in the coming year?

Bogardi expects more regulator engagement around the regulation of stablecoins and DeFi projects in the coming year. “In addition to AML, exchanges will be looked at more closely in relation to other conduct and governance issues to ensure an orderly market,” Bogardi said. “The use of NFTs including in the e-commerce space will likely continue to develop, as will institutional interest in the digital asset space, leading to continued development of institutional-grade ancillary infrastructure services.”

Grace Chong, a fintech regulatory lawyer at global law firm Simmons & Simmons in Singapore (who has since joined Gibson Dunn as Head of Financial Services Regulatory) is also expecting regulators to increase their oversight over digital assets in 2022.

“Regulators may start focusing more on market integrity expectations and set regulations for the industry, given the rampant concerns about market manipulation and insider trading by employees and related parties,” Chong said. “Market manipulation can take many forms but may arise where false information is disseminated to influence trades, the use of market makers or other strategies in an undisclosed manner to artificially control or manipulate the price or trading volume of an asset, wash trading, trade spoofing and layering, and other examples.”

“The securities markets are closely regulated but the regulators are still struggling with the lack of tools and established solutions to properly monitor and track the digital assets market,” Chong added. “Firms also need to build trade monitoring and surveillance tools, and prioritize these items in their implementation of a compliance framework and procedures.”

“There is a very real danger that financial regulation will become a wolf in sheep’s clothing, and so there needs to be a delicate balance between innovation and regulation in the introduction and implementation of regulations in the crypto industry,” Chong said.

See related article: How Singapore is looking at Web 3.0 and DeFi as it prepares for a digital Singapore dollar