As regulators in Asia grapple with ways of regulating the booming cryptocurrency market, experts claim the sector is beginning to self-regulate due to concerns over fraud.
South Korea is the latest country to mull a ban on bitcoin. The government in Seoul is considering making it illegal to trade any cryptocurrency or to raise digital tokens, according to local media reports.
China has already banned initial coin offerings (ICOs), while in Indonesia the use of cryptocurrency has long been discouraged. The government there is expected to roll out a blanket ban in 2018.
The hardline approach across the region will be a hindrance to those planning to use cryptocurrency and token offerings to fund trade finance lending or trade finance platforms.
Interest in ICOs for trade finance has been growing, as companies look for alternative ways to fund supply chains. ModulTrade and Populous are among those to have successfully raised capital in this way, but others have been forced to shelf plans in the face of regulator opposition.
Two payment platforms in Indonesia, Bitbayar and TokoBitcoin, which processed transactions settled in cryptocurrency, have already closed due to the stance taken by Bank Indonesia.
In two of the region’s digital hubs, Hong Kong and Singapore, cryptocurrency is not banned, but neither is it encouraged. In October, the Monetary Authority of Singapore (MAS) said it would not regulate the market, but encouraged people and businesses to beware of the risks involved.
The Hong Kong Monetary Authority has classed cryptocurrency “a virtual commodity”, leading to at least one case in which a bitcoin financing is being structured akin to a commodity trade finance deal, using the underlying currency as security.
At a forum in Hong Kong this week, fintech experts suggested that in the absence of official regulation, the space is self-regulating.
“It’s been really impressive how the industry has become more institutionalised. Six months ago, nobody was doing any KYC or AML [anti-money laundering]. Now all the ICOs on the market, the ones that you would look at, have in-depth KYC and AML. I would argue they have better onboarding and KYC than most of the banks,” Henri Arslanian, China and Hong Kong fintech lead at PwC, told an event hosted by law firm Stephenson Harwood on December 12.
He added: “With my clients, the way onboarding works now, not only do you have to send a copy of your passport or proof of address, but you often have to take a selfie with your passport, and biometric identification matches your passport with your face and tells you if it’s wrong. This is way more efficient than the little lady at the HSBC branch that certifies my Hong Kong ID.”
Arslanian said that while the ICO market is still highly active, it has normalised in recent weeks – even as the bitcoin price continues its impressive surge. The value of ICOs has come down from a peak earlier this year, to an average of between US$5mn and US$15mn per offering, and the coming year will see a flood of fraud cases against those who have acted illegally.
“There will be a lot of enforcement cases. While there’s a lot of people doing very legitimate ICOs, there was fraud, there is fraud and there will be fraud,” he said. “However there’s a genuine tranche of the market that is changing the world through token sales. I genuinely believe that this is the most exciting time to be in finance.”
Those involved in the nascent crypto trade finance market have urged regulators to take affirmative action. Only by regulating the market will they weed out the “dodgy actors”, the argument goes.
“China’s stance was good in that it stopped a lot of scammers and protected investors. It also demonstrated that some regulation was needed in this market. It is unclear today as to what regulations will be put in place or whether the ban will continue in China. However, what should be made clear is that we at Trade Finance Market will be flexible to ensure that our ICO is set up properly for all involved parties,” Raj Uttamchandani, the executive director of Trade Finance Market, a startup which is planning an ICO, tells GTR.
“ICOs represent an important and innovative way for legitimate companies to be able to raise funds and we are excited to be able to build towards a future that will benefit funders as well as global SMEs,” he adds.
Evgeny Kaplin, the co-founder of digital trade finance marketplace ModulTrade concurs, saying that “unclear regulation for the use of cryptocurrency” was the biggest challenge in arranging its November ICO, adding that the company conducted a full KYC process before the launch.