Asia totters on its cryptocurrency stance

In July, Tama Churchouse, a founder of Stansberry Churchouse Research and partner at blockchain group block.one, made a big claim. “Asia is truly the epicentre of the global cryptocurrency boom,” he wrote. 

He supported his argument with a chart, sourced to coinmarketcap.com, suggesting that four of the world’s top six cryptocurrencies by 24-hour trading volume were in Asia: Bithumb in Korea, Yunbi in China, OkCoin.cn also in China and Bitfinex in Hong Kong, with China’s Huobi and Korea’s Coinone also making the top 10. 

“I’m not saying that Asia is churning out more blockchain-related startups than the rest of the world, because it’s not,” Churchouse wrote. “But it’s absolutely clear that Asian money is a massive force in cryptocurrency prices.”

Six months on, everything has changed. 

Chinese exchanges have effectively been shut down, following a national ban on new initial coin offerings (ICOs) and trading that is rumoured to be about to take a more radical turn by depriving China’s market-dominating bitcoin miners of affordable electricity. 

The Korean exchanges may not be long for this world either: just a week after they were raided by the government on suspicion of tax evasion, they were stunned to hear the ministry of justice saying it plans to shut down all cryptocurrency trading in the country.

What is going on? Why, having become the driving force of cryptocurrency investment and validation, are Asian markets seeking to close everything down?

Asia’s role in the world cryptocurrency market has not been about creating the household names – unless untraceable bitcoin founder Satoshi Nakamoto is based in this region rather than the US as is commonly assumed. Rather, Asia has provided impetus through the enthusiasm of local investors and the region’s role in mining, the process through which transactions are verified and added to the blockchain public ledger. 

China is believed to be the dominant source of bitcoin mining in the world, China and Korea are understood to be two of the most active investment markets, while Japan has arguably the most sophisticated regulatory set-up.

But attitudes to cryptocurrencies seem to be changing by the day in Asia.

In January, South Korea appeared to be moving to ban virtual currencies altogether. The previous month the government had set up a task force, including the ministry of justice, the ministry of strategy and finance and the Financial Services Commission, initially with the goal of prohibiting unaccredited investors and foreigners from trading cryptocurrencies in the South Korean market.

But on January 11, things took a more robust turn. Attorney general Park Sang-ki said: “The South Korean ministry of justice is considering the closure of cryptocurrency trading to bring cryptocurrency mania and speculation under control for investor protection.” 

And minister of justice Park Sang-gi announced at a press conference: “There are great concerns regarding virtual currencies, and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges.” 

He also said: “Cryptocurrency trading is looking similar to speculation and gambling.”

There still seems to be considerable disagreement in South Korea about what is intended: some think it just means the closure of some cryptocurrency exchanges.

Indeed, the ministry of strategy and finance swiftly came out in public disagreement with the ministry of justice, saying it first heard of the supposed trading ban through the media, that it disagreed with the statement and that the task force had not agreed upon a complete ban. 

“We do not share the same views as the ministry of justice on a potential cryptocurrency exchange ban,” the ministry of strategy and finance says. 

As for the Financial Services Commission, it responded to questions in parliament by saying it was: “Considering both shutting down all local virtual currency exchanges or just the ones who have been violating the law.”

What law? Part of the problem here, as everywhere else, is working out how to apply law and regulation to a currency that is inherently borderless. Perhaps the answer is tax: the biggest cryptocurrency exchanges in the country, including Coinone and Bithumb, were raided by police and tax agencies for alleged tax evasion a week before the justice ministry’s announcement. There seems to be a tension in Korea between wanting rid of the whole thing and wanting a piece of the revenue.

North of the border

The market certainly responded, with bitcoin prices dropping 21% locally on the day the news broke (bitcoin trades at about a 30% premium in South Korea compared with other countries – the so-called kimchi premium). Globally bitcoin dropped 10% on the news and one could argue that its continued decline in the weeks since is in large part because of Korea’s influence. This is despite the fact that drafting a bill is only the start of the process in democratic South Korea: it would need a majority vote in the National Assembly to go through.

South Korea would certainly be a big loss to the industry. Last year, 4.5% of all global bitcoin transactions used the Korean won, according to CryptoCompare, and that does not take account of Korean participation in dollar purchases of bitcoin or indeed just the use of bitcoin in its own right in Korea. There are at least 14 cryptocurrency exchanges in South Korea, according to the Korea Blockchain Industry Association. 

One issue that did not get mentioned in January is the apparent love of cryptocurrencies north of the border. A cyber security provider called AlienVault said in January it had found evidence that North Korea had developed malicious software to mine Monero, another cryptocurrency known for its high level of buyer anonymity, and send it back to North Korea, specifically to Kim Il Sung University in Pyongyang. 

AlienVault said in a blog post: “Cryptocurrencies could provide a financial lifeline to a country hit hard by sanctions. Therefore, it’s not surprising that universities in North Korea have shown a clear interest in cryptocurrencies.”

Concerns have already been raised that the North could attack the South through the hacking of cryptocurrencies, although it is not clear precisely how.

South Korea’s move followed something similar in China. In September, the People’s Bank of China declared initial coin offerings to be an “illegal fundraising practice” and halted them. It also told exchanges to stop trading and told them to return funds to investors. 

It was widely assumed that this was a temporary step while China decided upon its regulatory position, but people are now taking a different view. 

Leonhard Weese, Bitcoin Association of Hong Kong

“No, I expect them to fundamentally dislike the idea of bitcoin,” says Leonhard Weese, president of the Bitcoin Association of Hong Kong. 

Certainly in January, China seemed to be moving further away from cryptocurrencies rather than closer towards them. It is targeting online platforms and mobile apps that offer exchange-like services. Having recognized that Chinese money simply left the formal exchanges and remained invested in cryptocurrencies through other avenues, China’s authorities are now targeting anything that provides market making, settlement and clearing services for centralized trading. 

And then there is mining. Leaked documents that came to light in January appear to show that China’s Leading Group of Internet Financial Risks Remediation, a regulatory group for internet finance, wants local governments to force cryptocurrency miners to make an “orderly exit” from their business. 

Earlier, it had been reported that the government was planning to limit electricity supply to bitcoin miners – mining uses a vast amount of power – and the leaked documents suggested that electricity supply and price, as well as tax, land use and environmental protection, might be used to force bitcoin miners to stop operating. 

The Leading Group was set up by Pan Gongsheng, deputy governor of the People’s Bank of China, in 2016; comments made by Pan in December suggest that the country’s ban on ICOs and its closure of local cryptocurrency exchanges are here to stay. 

The move against miners is arguably a bigger deal than the move against ICOs, as an end to mining in China would have consequences for the whole currency. Already those who deal with China’s miners are looking for other avenues. 

Euromoney spoke to people looking to diversify their affiliations with miners to places as diverse as the Philippines, Georgia and the US. Perhaps they will just move elsewhere – and not everyone thinks it is a bad thing if most of the currency’s mining power is no longer in a single authoritarian country. 

In the meantime, China has proved something of a case study of the effects of a currency so heavy on energy consumption: it is understood large concentrations of miners exist around two hydroelectric facilities, in Sichuan and Yunnan, where electricity is cheap. Some of the bigger formal mining companies, like Bitmain, are now believed to be looking elsewhere.

In a curious aside, Euromoney has spoken to bitcoin companies who have been approached to buy defunct power stations with a view to reconditioning them as a supply for bitcoin mining. It would be a strange turn of events if this ethereal currency and its backers were to find themselves owning the most substantial and immovable of assets: power infrastructure.

It is important to understand that China is not inherently against cryptocurrencies. The PBoC advertised for cryptocurrency specialists several years ago and is believed to have trialled a government cryptocurrency, likely to be similar to the one the Russian state launched last year. This is more about control and a fear of disrupting a financial system that is already worrying China (hence its belated attempts to crack down on shadow banking).

Besides, bitcoin’s most established voices doubt that any national ban makes much of a difference. “In China, where they’ve banned all the exchanges, do you think the Chinese people still don’t use bitcoin or Ethereum?” asks John McAfee, chief executive of MGT Capital Investments, a technology company that among other things is heavily involved in bitcoin mining. “You cannot stop it. Make all the laws you want.”

He is no more enamoured with the idea of governments as developers of their own cryptocurrencies: “They may issue them, but I do not think they will be adopted. It has to be adopted to have any power.”

Close eye

All of this contrasts considerably with Japan, where on April 1, 2017, the government introduced laws to recognize bitcoin as a legal method of payment. It also brought exchanges under existing anti-money laundering (AML) rules and set various capital requirements and security regulations. (India is thought likely to follow suit and has appointed a governmental committee to look into it). 

Japan is approaching this from the position of a market that has been burned once already. The collapse of Mt Gox in Japan was the worst to have hit cryptocurrencies until this January’s $530 million Coincheck hack. By 2013, Mt Gox was handling at least 70% of bitcoin transactions worldwide, so its liquidation the following year, with 850,000 bitcoins missing, was enormously damaging to the industry worldwide. 

The experience with Mt Gox helps to explain why Japan’s regulators are keen to be closely involved with the industry’s behaviour in the country. Their policies are considered favourable, but they are keeping a very close eye on what happens. 

As Euromoney went to press, Japan faced renewed trouble with cryptocurrencies when hackers stole $530 million worth of NEM coins, another digital currency, from the Japanese exchange Coincheck. 

Coincheck has said it will return most of the lost money, and Japan’s Financial Services Agency ordered improvements in the exchange’s operations and inspections of all the country’s cryptocurrency exchanges.

In late 2017, there were believed to be at least 19 companies applying for a Japanese exchange licence, with several Chinese entities believed to be among them. 

“Given how protectionist Japan is as an economy, the barriers to start a bitcoin exchange are reasonably low, so it does allow for market entrants,” says Weese. “So it’s not negative. But I don’t know if it is going to be a good model for all places in Asia or for the world.”

Claude Eguienta, whose Telcoin ICO was launched in Singapore in December, bases his company in Japan. 

“It’s been evolving very fast but in a good way,” he says. 

When China introduced its ban, it was widely agreed that one of the places to benefit would be Hong Kong. 

Charles d’Haussy, Invest Hong Kong

Asked about the impact, Charles d’Haussy, head of fintech at Invest Hong Kong, prefers to talk about Hong Kong’s own infrastructure. 

“Hong Kong has its own set of rules for cryptocurrency and ICOs,” he says. There were about 20 Hong Kong-based ICOs in 2017 and 20 more are expected in the first half of 2018: “A number that comes from practitioners, lawyers and consultants, not InvestHK.” 

There are several examples of Chinese exchanges having set up operations in Hong Kong, most obviously OKEx, which is backed by OKCoin. Given the uncertainty of the regulatory environment, OKEx and OKCoin declined an interview, as did Koreans contacted by Euromoney.

The Securities and Futures Commission (SFC) in Hong Kong put out a statement on initial coin offerings in September, attempting to clarify whether or not sales of ICOs qualified as securities, which would then put them under securities law. The short answer is that it varies, depending on whether the digital tokens are virtual commodities or represent an equity or ownership interest in a company. 

One way or another, ICOs could be regarded as shares, debentures or collective investment schemes, in all of which cases they would be securities, the SFC said. 

“The ICOs in Hong Kong are very demanding in terms of KYC [know your customer], AML and governance structure, so it is possibly challenging to do an ICO in Hong Kong,” says d’Haussy. “But it is also raising the bar in terms of quality and compliance.”

D’Haussy points out that “Hong Kong does not regulate cryptocurrencies” and urges caution for investors. In fact, he is keen to differentiate Hong Kong for moving forward with practical applications of blockchain technologies rather than being a cryptocurrency hub.

“The recent agreement between Hong Kong and Singapore on trade finance through blockchain is feeding a very strong momentum among blockchain enterprise companies,” he says. “Distributed ledger technologies offer a new trade finance infrastructure, which banks are eager to deploy.

“So one differentiation of Hong Kong from the rest of the world, and maybe the rest of Asia, is that we have true momentum and are moving to the production stage. We are leaving behind the time of the proof of concepts.” 

The Singapore-Hong Kong blockchain agreement is perhaps the best example of this, cited widely at both ends of the link, and d’Haussy says it is attracting the best practitioners in enterprise blockchain solutions from around the world (including mainland China). 

“We see most of them coming to Hong Kong and setting up,” he says. “They are building teams to deliver the Hong Kong agenda – moving the trade finance infrastructure to the blockchain.”

In any new corner of finance one can assume Singapore will be pitching, and indeed ICOs are widespread there, not so much because of the regulatory environment but the apparent lack of it. There are no specific regulations around cryptocurrencies or ICOs in Singapore. 

Characteristically, the Monetary Authority of Singapore (MAS) has focused its announcements about cryptocurrencies on warning its citizens. On December 19, it put out a statement headlined ‘MAS cautions against investments in cryptocurrencies’, including lines such as: ‘MAS reminds the public that cryptocurrencies are not legal tender’, ‘There is no regulatory safeguard for investments in cryptocurrencies’ and ‘MAS does not regulate cryptocurrencies’.

But that is the MAS doing its Singaporean paternal civic duty: warning its offspring about things that might hurt them. Actually banning ICOs of any kind is not on the table, and one would expect Singapore to be seeking to become a hub for it as it does for most niche areas of finance – provided they do not expose themselves to money-laundering risk in the process. The memory of the role of Singapore’s private banking community in the 1MDB scandal is very raw. 

The MAS has, like Hong Kong’s SFC, clarified that if an ICO is structured in the form of securities, then it has to comply with the country’s securities laws. But: “MAS has not issued new legislation specifically for ICOs,” wrote deputy prime minister Tharman Shanmugaratnam, also minister in charge of the MAS, in written comments first made in parliament in October. “We will continue to monitor the developments of such offers, and consider more targeted legislation if necessary.” 

In the same address he said that only 20 Singapore retailers accept bitcoins, a tiny total compared with Japan. 

‘Car crash’

It certainly appears that 2017 was the year when cryptocurrencies entered the mainstream, in Asia as elsewhere. 

“In every client meeting I’ve had in the last six to nine months, that subject has come up,” says John Woods, chief investment officer for Asia at Credit Suisse. “It’s not necessarily that our clients are investing in it, but there is a huge amount of interest. It’s akin to people looking at a slow-motion car crash.”

Woods says he believes there are about 2,000 cryptocurrencies out there now (Coinmarketcap tracks 1,448 at the time of writing, but it is widely known there are far more it does not track). 

“Whilst we absolutely take the view that the infrastructure supporting cryptocurrencies is credible and is likely to remain very firmly part of an operating environment right across the economy, there’s less confidence with cryptocurrencies themselves,” he says. “It’s hard to justify the price appreciation we’ve seen with a commensurate move in their popularity and day-to-day usage.” 

When clients are interested in the idea, he uses this analogy: “When we saw the gold rush, it wasn’t necessarily the large community of miners that made the money, it was the firms and individuals that sold the infrastructure, who sold the shovels to the miners. The network and services of blockchain are equivalent to that analogy.”

Asian ICOs and financial inclusion

Euromoney meets Claude Eguienta in a half-complete tower in Singapore’s Marina Bay a week before the ICO of his cryptocurrency, Telcoin.

He looks the part – and not just because of the skinny jeans cut off halfway down the shin and the Crocs beneath. Eguienta is launching his ICO, designed to insert itself in the remittance flows between unbanked migrant workers in Asia and their families by partnering with telcos and offering a far better deal than the banks do. He was once the business’s ideal customer.

He grew up poor with a single mother in the outskirts of Paris and recalls how every month he and his mother would go to the post office to cash their cheque, leaving with cash and trying to make it last, and never making any closer connection with the banking world than that. 

“I grew up unbanked. I’m the target,” he says. 

His idea is a cryptocurrency that will be distributed through people’s phones, using mobile phone operators as a point of exchange without requiring registration anywhere else. Central to his thesis is that by “phone”, he does not only mean smartphones: it will need to work on feature phones (the inexpensive older handsets) as well. 

“You cannot talk about financial inclusion otherwise,” he says.

The venture will stand or fall on the agreements it can strike with telcos – who as an incentive, will receive an allowance of coins for free that they can sell to subscribers – and the regulatory view on it. 

“For Telcoin to be where we really want it to be, we need regulations to be OK with cryptocurrencies – or OK with us at least,” he says. “You can be OK with Telcoins without being OK with every cryptocurrency.”

Eguienta’s ICO in Singapore – which succeeded in raising its hard cap of $25 million on December 12 – is illustrative of a trend of new cryptocurrencies coming though in Asia with some form of financial inclusion or social justice at their core. 

Another example is ExsulCoin, a platform designed to use cryptocurrencies to help refugees and immigrants in the resettlement process. It was launched by James Song and his investment firm, FairCap Partners, which is focused on Myanmar; the prompt for launching it was the hope to assist the Rohingya refugees.

“I realized they had very specific problems that were not particularly difficult to solve, there was just no will to solve it,” says Song. “Someone needs a pair of crutches because they cannot walk. That might cost $8. It’s not a difficult problem to solve financially, but it means one person in a household can’t earn money to provide food.”

Rohingya in the Kutupalong refugee camp in Bangladesh, just across the border from Myanmar, have very little, but Song says 30% of them have a phone and are therefore within reach of cryptocurrencies. People who own ExsulCoin can use their tokens to nominate, vote for and fund specific refugee-led projects, and can earn tokens by completing needed tasks such as the delivery of drinking water or supplies to a medical clinic. 

Recipients of tokens can also use them to pay for tutoring, mentorship or what it calls nanowork – small one-off tasks. Song hopes to provide not only standard humanitarian assistance in this way but education that will help refugees resettle and work. He also hopes that using the blockchain helps to get rid of any corruption that charities suffer and some of overheads they incur. 

The platform is expected to launch in the second half of 2018 and the obvious question that arises is how practical it will be for a refugee to redeem tokens they receive for anything of actual use. That will become apparent in time.

The other issue is whether or not anything with the volatility of a typical cryptocurrency is appropriate as a repository of value for the poor. Granted, these ICOs are not currency-like household names in the bitcoin mould but something with quite different dynamics; nevertheless backers of these ideas do acknowledge the problem.

“Volatility is an issue that the cryptocurrency community hasn’t solved yet, but it is a solvable problem,” says Song, who says he will keep a monetary reserve of tokens so that they do not get overpriced.

“It is very important. You cannot create a financial product on a cryptocurrency and ignore this issue,” says Eguienta. “But we believe we put enough work into the design of Telcoin that the volatility will not hurt our users.”

It is also hoped that cryptocurrencies can be a mechanism of financial inclusion in India. The technology entrepreneur Andrew ‘Flip’ Filipowski is an investor in Unocoin, a bitcoin exchange in the country. 

“There are certain geographies – India, Pakistan and Kenya are three I have recently spent time with – thinking that they are late to the playing field and they want to catch up,” he says. “They are interested in bitcoin and bitcoin alone: the idea of getting into the full range of cryptocurrencies is not yet developed. But it is important to give them the ability to deal with bitcoin and to transact.”