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In the world of cryptoassets, one of the biggest topics of discussion is the need for greater regulatory clarity.
Since the fall of the FTX crypto exchange in November 2022, regulators and policymakers around the world have been working to ensure that rules for crypto markets are aligned with those for other financial services. Global watchdogs such as the G7 and the Financial Stability Board (FSB) have called on countries to introduce greater oversight of the cryptospace, to protect consumers and reduce the risk of financial contagion.
In theory, stronger regulation is good for innovation. Clearer rules of the road and guidelines not only achieve social goals such as protecting consumers and preventing conflicts of interest; clear regulation also ensures that market participants understand how to successfully comply. That clarity creates confidence that innovation can flourish in regulated markets.
In some cases, however, recent intense regulatory activity has had the effect of signaling to crypto market participants that their activity is unwelcome – particularly in the United States. Its aggressive regulation and lack of concrete legislative progress have led a growing number of cryptocurrency firms to indicate that they do not see the US as a welcoming place to do business.
Amid the perception of crypto hostility from the US, several other jurisdictions have positioned themselves as welcoming homes for highly regulated crypto markets. In particular, four major financial centers have emerged as leading candidates for attracting crypto innovation: Dubai, Hong Kong, Paris and London.
Far from creating “light-touch” regulatory frameworks, policymakers in these financial centers have developed well-thought-out and robust approaches to regulating the crypto space. We hope it will attract innovation in the financial sector, while ensuring that markets are highly regulated and subject to significant oversight.
Understanding the regulatory developments in each of these potential crypto hubs is essential to understanding where crypto may be headed next.
Dubai sets the pace
Among the major financial centers, Dubai moved relatively early to implement a comprehensive regulatory framework for cryptocurrencies.
As of April 30, virtual asset service providers (VASPs) – such as crypto exchanges and custodians – must apply for a license with the Dubai Virtual Asset Regulatory Authority (VARA). Its framework requires all VASPs wishing to operate in Dubai to demonstrate compliance with a range of regulatory expectations related to the prevention of money laundering and terrorist financing (AML/CFT), consumer protection, prevention of market manipulation and other measures.
Among the anti-money laundering and anti-terrorist financing requirements, applicants for a Dubai license must demonstrate to VARA that they use solutions such as blockchain analytics to identify financial crime risks across wallets and transactions, and that they can meet the requirements of the Travel Rules to share data for collection and transfer of data on initiators and users of transactions.
While the VARA regulatory framework only applies to firms wishing to operate from the Emirate of Dubai (excluding the Dubai International Financial Centre), it is part of a wider effort across the UAE to establish the country as a leader in crypto-asset innovation. The UAE has developed a blockchain strategy that aims to position the UAE as a leader in technological innovation, while regulators in neighboring Abu Dhabi have also introduced comprehensive regulation that seeks to position the UAE as a leader in attracting highly regulated participants to the crypto market.
And there are signs that the strategy is working. In September 2022, Standard Chartered Bank – which launched a crypto-asset custody business known as Zodia – praised the UAE’s proactive approach to setting regulations and on May 10 announced its plans to offer crypto-asset custody services from Dubai.
Hong Kong is made around
If Dubai established its regulatory framework for cryptocurrencies as part of a clear and concerted effort to achieve economic growth through technological innovation, Hong Kong has reached a similar end point, but in a completely different way.
Since 2018, Hong Kong’s Securities and Futures Commission (SFC) has implemented a voluntary licensing regime for crypto firms that has allowed VASPs to seek a stamp of approval from the regulator where they trade tokens that meet the definition of a security. But the SFC’s opt-in regime came with a twist: VASPs in Hong Kong were banned from offering crypto trading services to retail users, and were only allowed to serve institutional investors.
The SFC has always presented the ban on retail trading of cryptocurrencies as an attempt to protect consumers from potential harm from trading in volatile crypto products and services. However, many observers speculate that the retail restrictions are designed to appease the Chinese government, which has famously banned most crypto activity on the mainland. This policy has also led many crypto firms in the Asia Pacific (APAC) region to conclude that Hong Kong is unlikely to be a significant hub for crypto activity.
Late last year, however, the tide began to turn. In the fall of 2022, policymakers in Hong Kong signaled a willingness to reconsider the retail ban. Then, in February 2023, the SFC launched a consultation on a new regulatory framework that will allow VASPs to offer services to retail traders, provided they adhere to strict guidelines on consumer protection, market conduct and other issues.
Hong Kong’s new regulatory regime was launched on June 1 and prompted crypto industry players – including some major Asian exchanges – to announce their plans to make Hong Kong their operational hubs in the region. A financial center that once seemed closed to cryptocurrencies is now seen as a potential source of growth for the industry in troubled times.
Paris is where MiCA can be most important
In Europe, developments revolve around the upcoming implementation of the European Union Markets in Crypto-assets (MiCA) Regulation, which will require crypto-asset service providers across Europe to meet comprehensive regulatory requirements similar to those being introduced in Dubai and Hong Kong.
MiCA is due to be published in the Official Journal of the European Union this summer, but EU member states will only need to start implementing its provisions in a rolling timeframe from mid-2024 to early 2025. In anticipation, several European countries have proposed themselves as hubs from which crypto firms should base their operations in the EU. Among them were Ireland and the Netherlands – but the most proactive was France, which is seeking to establish itself as a leader in financial innovation.
MiCA’s implementation timeline has not stopped the French government from publicly positioning Paris as an attractive hub for the crypto industry in anticipation of MiCA’s rollout. In fact, a senior French regulatory official recently stated that France would welcome crypto companies seeking an alternative base to the US.
Furthermore, at the end of May, the major crypto exchange OKx announced its plans to establish a presence in Paris. Other leading crypto exchanges – notably exchange giant Binance – have also said they see France as a promising home.
London, not far behind
Across the Channel, the British government is taking steps to ensure that the UK does not fall behind the EU.
Prime Minister Rishi Sunak has made it clear that he sees a well-regulated crypto sector as central to the UK’s continued leadership in financial innovation. As part of that effort, the government is working on amendments to the Financial Services and Markets Act, which would provide the UK with a comprehensive regulatory framework for cryptocurrencies that would largely mirror the steps taken by the other jurisdictions mentioned above.
The moves have led some in the crypto industry to describe the UK – which has previously come under fire for being too hard on crypto-business applications to set up there – as a potential home for the crypto industry. Indeed, digital asset exchange Coinbase recently described the UK as a more promising place to do business than the US, where Coinbase and other industry players have felt blocked by regulators.
In the ever-changing and fast-moving crypto space, nothing is certain. But it seems increasingly likely that these four financial centers – Dubai, Hong Kong, Paris and London – will be a key part of the cryptoasset’s evolution moving forward.
Originally published by Thomson Reuters © Thomson Reuters.
Regulatory Financial Services EMEA
