From China's on-and-off crypto bans to Japan's growing crypto adoption, let's explore the evolving landscape of digital assets in Asia.
Asia is home to some of the world's most vibrant and diverse crypto markets. Vibrant and diverse as in:
- Japan embracing a CBDC.
- China banning mining, but not really.
- Hong Kong competing for the crypto capital position.
- Singapore building a sandbox for innovation.
- India flip-flopping on regulations.
Definitely never a dull moment in the Asian crypto scene!
In this article, we will explore some of the key trends and developments shaping crypto's future in Asia and look at the countries mentioned above.
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Japan: Rules, Rules, Rules
Japan can be considered one of the most crypto-friendly developed countries in the world. It was the first country to recognize Bitcoin as a legal payment method and regulate crypto exchanges in 2017. Japan is also home to crypto exchanges like Bitflyer and Bitbank. As of March 2023, there are no fewer than 23 approved crypto exchanges in Japan.
The country aims to protect consumers but not stifle innovation at the same time. Crypto exchanges are required to register with the FSA and comply with strict rules on security, anti-money laundering, and reporting. They are also subject to regular audits and inspections by the FSA and participate in a self-regulatory organization called the Japan Virtual Currency Exchange Association (JVCEA).
Japan's crypto market is regulated, but that doesn't stop it from being active. According to a survey by Coinhills, the Japanese Yen ranked second in terms of Bitcoin trading volume by currency in February 2023, behind only the mighty dollar. Japan also has a thriving crypto community that supports various projects and initiatives, such as LayerX, a blockchain company that requires knowledge of ChatGPT.
Japan is actively exploring the potential of central bank digital currencies (CBDCs), digital versions of fiat currencies issued by central banks. The Bank of Japan (BOJ) has been conducting experiments on CBDCs since April 2021 and plans to launch a pilot program involving private sector partners later this year. The BOJ aims to test the feasibility and functionality of CBDCs for various use cases, such as payments, settlements, remittances and digital identity. This may be loathed by pro-crypto folks but aligns with Japan's by-the-rules approach to crypto.
When it comes to crypto taxation, Japan is not too friendly. Crypto gains are taxed as miscellaneous income in Japan, which means they are subject to the same tax rates as regular income. Depending on your income bracket, you could pay up to 55% tax on your crypto profits. That’s more than double the tax rate for stocks, which are taxed at a fixed rate of 20%.
Japan’s crypto taxation system may seem harsh and unfair compared to other countries that offer lower tax rates or more favorable treatment for crypto investors. However, Japan is also one of the few countries with clear and comprehensive guidelines on how crypto is taxed. The NTA has published a detailed document that explains how different types of crypto transactions are taxed and provides examples and calculations.
China: Ban First, Ask Questions Later
China used to be the hub for Bitcoin mining. Then, the country banned mining, and the crackdown forced many Chinese miners to relocate their operations overseas or sell their equipment at a loss.
However, China’s crypto-mining industry bounced back. According to Cambridge University’s Centre for Alternative Finance (CCAF), China is second in terms of the Bitcoin hash rate behind the US, with a 21% share of the global hash rate as of January 2022. China’s crypto mining situation remains uncertain. On the one hand, the country has a competitive advantage when it comes to cheap electricity from coal and hydropower sources. On the other hand, regulatory risks persist.
China is not completely opposed to digital currency as long as it happens on its own terms. The digital yuan, or e-CNY, is a testament to that. The digital yuan is designed to be a legal tender fully backed by the People's Bank of China (PBOC) and pegged to the renminbi. Unlike most cryptocurrencies, the digital yuan is not decentralized or anonymous. Instead, it is controlled by the PBOC and allows for real-time monitoring of transactions and users.
It has been in development since 2014 and has undergone several pilot tests across different cities and regions in China. The PBOC has partnered with various platforms and institutions, such as WeChat Pay to facilitate its adoption. Despite the government's best efforts, such as literally giving out free money, adoption has been slow. Two years into the launch of the e-yuan only $14 billion worth of transactions had been processed.
Still, China has been working with Hong Kong, Thailand and the United Arab Emirates on a joint CBDC project called Multiple CBDC Bridge. The project aims to explore the feasibility of using distributed ledger technology for cross-border fund transfers among different currencies.
China's main motivation for launching its own CBDC may be to challenge the dominance of the US dollar in global finance. An e-yuan with cross-border adoption would allow it to reduce its reliance on the dollar and increase its influence over international trade and monetary policy. However, the success of that endeavor is questionable.
Hong Kong: China's Escape Valve
Hong Kong is one of the most crypto-friendly jurisdictions in Asia, with a supportive regulatory environment and a vibrant community of crypto developers and exchanges. However, Hong Kong's crypto industry also faces some challenges, especially when it comes to banking access and the influence of the Mainland. Many crypto firms in Hong Kong have reported difficulties in opening local bank accounts or maintaining existing ones after the closure of two major crypto-friendly banks: Silvergate Bank and Signature Bank.
Despite these challenges, Hong Kong remains committed to fostering its fintech hub status and embracing innovation. In October 2022, the city's government proposed allowing retail investors to trade in cryptocurrencies and crypto exchange-traded funds (ETFs), which would open the market to more participants and demonstrate its determination to explore fintech with the global virtual asset community. The government also plans to review property rights for tokenized assets and explore legalizing smart contracts, which could pave the way for more use cases such as real estate security token offerings (STOs). In June 2023, Hong Kong will officially legalize crypto purchases for all its citizens. This will be a major milestone for the city's crypto industry and should attract more investors and businesses to the city.
As a key player in the global crypto ecosystem, Hong Kong is attractive to crypto businesses and investors. But it also needs to overcome some hurdles regarding banking access and regulatory uncertainty from mainland China.
Singapore: An Imperfect Hub
Singapore is another crypto-friendly jurisdiction in Asia, with a clear and progressive regulatory framework and a thriving crypto ecosystem.
Singapore is attractive for crypto due to its low tax rates, supportive government policies, strong financial center reputation, and proximity to other Asian markets. Some of the notable crypto players in Singapore include Coinbase, Crypto.com and Kraken.
However, Singapore's crypto industry also faces some challenges. While Singapore has been relatively open-minded towards crypto innovation, it has also imposed strict rules on crypto service providers to prevent money laundering, terrorism financing, fraud, and other illicit activities. For example, under the Payment Services Act (PSA), any entity that provides DPT services must obtain a license from Singapore’s monetary authorities or risk being fined or jailed.
Moreover, Singapore's crypto sector has to contend with increasing competition from other jurisdictions vying for a slice of the global crypto pie. For instance, Hong Kong's recent pro-crypto policy pivot has lured some crypto businesses away from Singapore. Other countries, such as the UAE, have also been positioning themselves as attractive destinations for crypto businesses by offering favorable tax incentives and legal frameworks.
India: The Undecided Giant
India's crypto industry faces a lot of uncertainties and confusion due to the lack of a clear and consistent regulatory framework and the frequent flip-flops by the government on its stance towards cryptocurrencies.
The country has a large population of young and tech-savvy users and a strong and active crypto community. But India's crypto industry also faces some challenges, especially when it comes to compliance with regulations and dealing with legal risks. A 2018 ban by the Reserve Bank of India (RBI) effectively cut off access to banking channels for many crypto businesses and users. However, in 2020, the Supreme Court of India called back the ban as unconstitutional (though only after a long legal battle among various stakeholders).
Since then, draft bills have been proposed by various government bodies to either ban or regulate cryptocurrencies in India. However, none of these bills have yet been officially introduced or passed by the parliament. The latest development was a stringent AML law and a preemptive ban on crypto advertising and sponsorships in the local women’s cricket league. India is also looking into cross-border integration of a CBDC, joining the ranks of many other countries.
Overall, India sits firmly in the anti-crypto corner, just short of outright banning it.
Conclusion
The stances on crypto in different Asian countries are as diverse as the continent. An honorable mention goes out to the following countries:
- Thailand, where crypto trading is legal and regulated by the SEC, which has approved four cryptocurrencies as tradable assets.
- Vietnam, where crypto adoption is among the highest in the world but trading is banned.
- South Korea, where crypto trading is legal and regulated under strict rules on crypto service providers.
One thing is certain: the future of crypto is very much tied to Asia.
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