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Ep 11: Regulation Beyond the US and EU
40 Plays1 year ago
Explore global blockchain policies beyond the EU and US in this episode, moderated by Lee A. Schneider of Ava Labs. Our guests, Joey Garcia from Xapo Bank, Jongbaek Park of Bae Kim & Lee, Manmeet Singh from Blockseed Ventures, and Urszula McCormack of King & Wood Mallesons, take us on a journey through legal frameworks in Hong Kong, Singapore, the Philippines, Gibraltar, Japan, Australia, Argentina, and more. They debate whether the EU’s MiCA regulation is truly setting a global standard or if other regions are advancing more rapidly in the crypto-legal landscape.
Find out more in our explainers at owlexplains.com
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Transcript
Introduction to the Avalanche Summit
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny. I am Silvia Sanchez, Project Manager of Owl Explains, and I am super excited to share this special episode with you. This episode comes from one of the panels we recently hosted at the Avalanche Summit in Barcelona, our first in-person event as Owl Explains, in which we gathered many wise owls from all over the world, seeking to build a better internet. We hope you enjoy it as much as we did.
00:00:36
Speaker
Thank you all. We've got a really terrific panel here. I'll have each of the panelists introduce themselves, and then we'll get started. So Joey, introduce
Joey's Role at Zappa Bank and UN Involvement
00:00:45
Speaker
yourself. Yep, sure. I'm a director of Zappa, the Zappa Bank, where I head up regulatory affairs. And I'm also the specialist consultant to the United Nations. I deal with the training and assessments of regulatory authorities all over the world and what they're doing on vast related standards.
00:01:02
Speaker
Let's make men meet. Hi, I run Blockchain Adventures. We invest in blockchain businesses from an early stage, and I'm also on the board of the Blockchain for Europe. Ursula. Hi, Ursula McCormack. I'm a regulatory lawyer at Kingwood Malices, an international law firm, and I head up the global crypto practice.
00:01:26
Speaker
I'm pleased to be here. I'm a partner lawyer at BKL, which is Korean law firm. I have advised on several aspects of crypto scene. So I have delivered several speech and presentation on several types of conferences and seminars in Korea. And I'm very pleased to be here.
00:01:52
Speaker
So everybody's always talking about the United States and what's going on with Gary Gensler and blah, blah, blah Congress and this and that. Forget about the United States. We're not talking about the United States on this panel and forget about Europe in the UK, where actually there's a whole world out there, billions of people out there that are not in any of those places.
00:02:12
Speaker
And so we've got this great panel of experts talk with us about what's going on in other places in the world. Maybe for the first question, I'll ask each of you to talk about one or two jurisdictions that you're familiar with and what sort of the key issue or issues is in each of those jurisdictions. So Ursula, why don't we start with you since you're wearing a white shirt?
00:02:35
Speaker
I'm wearing a white shirt, excellent.
Hong Kong's Crypto Regulation: High Client Asset Protection?
00:02:37
Speaker
I'm also wearing a colorful skirt. So it's a theme of the rest of the world is that there's a lot going on, but somehow it works. So look, yes, there is a lot that's going on. The markets that I cover, Hong Kong and Australia, are really interesting in demonstrating the sort of differing approaches. And I was also in Dubai earlier this week, catching up with some of the contacts who are now in VARA, the Virtual Assets Regulatory Authority, and happy to share with you some of the trends.
00:03:05
Speaker
Hong Kong has a regime that goes live on the 1st of June. It is a regime that has been shouted from the rooftops and you'll see a lot of really strong government signaling around the welcoming of Web3 to Hong Kong. Hong Kong has been for a very long time a very welcoming place
00:03:25
Speaker
for crypto, despite its many other issues. That from one June, there'll be a regime that regulates automated exchanges, so matching platforms that custody assets. And that's a really critical thing to know is that's it. And it
00:03:42
Speaker
isn't covering necessarily anything else from a virtual asset sector perspective. But if you were in that regime, you have some of the most stringent regulation in the world. The SFC is the regulator, it's the securities regulator, and it expects you to run that as if it would the Hong Kong Stock Exchange, the New York Stock Exchange, any other stock exchange.
00:04:02
Speaker
So things like no proprietary trading, no derivatives. It's very much a purer system. And on top of that, the level of client asset protection is extraordinarily high. All assets need to be on trust in an SPV that is its own regulated entity. And at 100% level, 97% of those assets need to be in cold storage. And you need to have insurance or compensation fund on top of that
00:04:33
Speaker
expecting a total loss scenario and then capital liquidity on top of that. So it is far and above away anything beyond what a bank would be subject to or any other. So incredibly stringent once you're in and as much as there is, you know, really great interest and that's a really good thing from a Hong Kong perspective, it will only be a few that make it. It's a very stringent regime. But it does mean that there's a lot left in terms of experimentation without necessarily being regulated.
00:05:02
Speaker
In contrast, if you look at Dubai, covers a lot of stuff, a lot of different activities in relation to virtual assets, but is a little bit, I would say, easier. And in hearing directly from Vara earlier this week, they expect to be one of the largest regulators in the world, as in having a lot of people within their purview.
00:05:23
Speaker
Australia is a little bit further behind, although many of the lawyers on the ground will tell you that most of the instruments, including most, if not all the stablecoins, are financial products already. So there's a really high level of enforcement activity, but they're taking their time and thinking, why do we regulate at all? And have undertaken a token mapping exercise and really staging that process very carefully. So I'll pause there and pass on. Great. Okay. John Beck.
Crypto Regulation in Korea vs. Japan
00:05:54
Speaker
Yeah, first, regarding Korean regulation, in Korea, the investor market is so hard. But in contrast to that, the regulation seems slow.
00:06:15
Speaker
Because so far there is no regulation except AMN Act in Korea. But quite recently, the Korean Parliament passed the subcommittee of Parliament passed the crypto asset protection, investor protection act. So it is on the way of being resolved by the plan recession of the parliament. And in addition to that,
00:06:45
Speaker
In February, a Korean regulator announced a guideline on security token offerings in Korea. Its aim is to legalize security tokens through amending the relevant acts like the Capital Market Act and the Electronic Securities Act.
00:07:10
Speaker
And in the meantime, before the amendment of the relevant acts, the FSC will grant regulatory send boxes for STO project with innovative effect. That's the whole picture of that. And then let me add some regulations in Japan.
00:07:34
Speaker
Japan, traditionally Korean regulation followed Japan's in general sense, but with the crypto scene, it's quite different.
00:07:51
Speaker
I think Japan is ahead of Korea in terms of the regulation on crypto assets. A few years ago, they already admitted the crypto asset to be used as a means of payment. And then they utilized already STOs.
00:08:15
Speaker
And then quite recently they made some regulations on stablecoins as well. Even though the requirement is that the issue of stablecoin or the service provider should keep the collateral, fiat collateral by Japanese custodians. And then
00:08:42
Speaker
Further to that, the Japanese government has some special committee regarding weapons-free adoption. They have some plans to legalize towers into Japanese legal systems. Yeah. Great. And, Manmi, what's going on in your world?
India vs. Singapore: Navigating Crypto Regulations?
00:09:03
Speaker
Okay, so I guess in contrast to Ursula's white and colorful attire, me being an odd black,
00:09:09
Speaker
maybe indicate something I'm not sure but two jurisdictions that are important to me are India where I'm from and Singapore where I'm based and
00:09:20
Speaker
I guess the all-black sort of represents the India position on this. So India has an outlawed crypto or doesn't have any clear regulations around it. However, there's no status to it yet. The central bank, governor, the minister of finance have been very, very negative on the entire industry, but regulations haven't come out.
00:09:42
Speaker
So you can still trade, you can buy and sell, but all the local exchanges, the way they make it sort of more difficult and onerous for retail participants to participate is that there's an actual transaction, a tax on every transaction.
00:09:58
Speaker
So that just makes it really difficult and more expensive for any participant in retail or institution, especially in retail, to really participate in crypto legitimately and so on. So that's sort of, India's trying to figure out exactly what rule and law to put in place. And until then, be wary.
00:10:18
Speaker
Singapore started off a lot more, I think, open to blockchain. And I think when we look at regulations, maybe there are like sort of three buckets to kind of look at it in. One is the regulations and rules around the existence of exchanges, domestic exchanges, right? The ability for retail to actually participate in purchase and sell of tokens. The second one is
00:10:47
Speaker
for businesses, startups, and whatever to have the right regulatory framework for them to set up a business that leverages blockchain, may have tokens, may not have tokens or whatever, but then it has a play towards the consumer, towards the retail segment, which for regulators is a large part of what they're all worried about. And the third part is towards business segments, like B2B versus B2C kind of play.
00:11:10
Speaker
So in that, I think from an exchange perspective, Singapore has been fairly open in line for licensed exchanges, very few, but you have that and you have the ability to participate offshore as well. So retail has access on and off-ramps for crypto. In terms of startups setting up their business in Singapore, being able to
00:11:36
Speaker
issue tokens and have investors coming in from other parts of the world. That's quite easy. Some of the foundations, for example, for blockchain companies and all are based out of Singapore, and that's been fairly easy. There's a standard set of templates, rules and regulations around it, so you have predictability. You know what you can and what you can't do.
00:11:57
Speaker
On the B2B side, it's been a mixed bag, I think, with Singapore right now. The local regulator, it's an all-in-one regulator called Monetary Authority of Singapore. You know them very well, obviously. And they are in the midst now of consultations with industry to sort of figure out what is the best regulatory framework. But what's more important, I think, in contrast with what you see in the US and possibly even in Europe,
00:12:26
Speaker
is that, you know, if you understand Singapore and Singapore, Inc., if you want to call it, you know, there's this one master regulator, then they have these sort of sovereign wealth funds that are big investors. And these are large investors in both early stage ventures and late stage ventures and so on.
00:12:41
Speaker
So they actually invest in blockchain companies. So one of the biggest, I think, famous stories now out of Singapore in the recent past was that Temasek, one of the wealth funds out of Singapore, actually was an investor in FTX and lost a lot of money in that thing.
00:12:58
Speaker
To me, the large part here is that as an institution, it's a jurisdiction that has gone, experimented, made investments, opened up its doors, allowed participation across multiple segments, and it's now understanding how that is playing out and then trying to figure out what are the best rules that allow for innovation, allow for participation, but in turn protect the domestic environment, the domestic ecosystem. But using Singapore as a base for servicing the rest of the world,
00:13:28
Speaker
No problem.
00:13:31
Speaker
Great. And Joey, talk a little bit about some of your UN work and what's going
Challenges of Implementing Global Crypto Regulations
00:13:36
Speaker
on. I think it's an amazing world that we live in, right? And actually, we've heard our colleagues before talk about Mika, et cetera. None of the top 25 platforms in this world operate within the EU. And obviously, I'm a big supporter of regulatory certainty and clarity, and that's all super fantastic. But the reality is frameworks like the payments act in Singapore came into effect in 2018.
00:14:00
Speaker
In Gibraltar, it was like 2017. There are lots of frameworks around the world that have developed over time, and that has a huge amount of value and a huge amount of actual activity that's being conducted in the world. It's a digital, online, global, cross-border basis.
00:14:17
Speaker
infrastructure. So your domicile or your base is obviously key and core, but it's not like it was in the olden days. In the olden days, if you weren't a hedge fund registered in, managed from New York or London, it's a bit questionable. If you're a private bank, you're not in Switzerland. It's also slightly odd. But in this world, that's not the case. And I think lots of jurisdictions have raised that. And there's been loads of issues, by the way. We mentioned FTX.
00:14:43
Speaker
That's another problem. Mikar is wonderful on one side of things. How many of the regulatory authorities within Europe have the competence and understanding to properly monitor and supervise this industry? I'm not really sure. Remember that in the Bahamas, there was law and regulation around client segregation of assets.
00:15:06
Speaker
got corporate governance. It was all legislation. Did the authorities have the capability to actively monitor that and implement it? Not really sure that they did. And the EU to an extent is slightly in that world. I'm not going to go on a sort of EU bashing
00:15:21
Speaker
Exercise running but there are lots of questions around that and we talked about all these new frontiers decentralized finance as a concept is like super interesting and wonderful in the Philippines they've already developed a framework to try to bring that within some form of perimeter.
00:15:37
Speaker
In the EU, it's not really clear. Some people say it'll form part of Mika 2.0. Some people say, well, actually, if you look at the text and you, unless you really clearly define what an exchange is or what the reception or transmission of an order is, I can tell you there are going to be European authorities
00:15:56
Speaker
that form of view that decentralized finance falls within scope. And you have the FATF, and they're talking about this concept of influence and control, how many of the authorities are going to take that. There's going to be lots of different interpretations around the EU as well. And it's wider than Mika. So the data acts that people maybe don't talk that much about, Article 30 yet, but that has a requirement for the interruption and termination of smart contracts.
00:16:26
Speaker
as a requirement for the smart contract. What is the implication of that, the data act? And people talk a lot about interactions with unhosted wallets or interaction with DeFi related platforms. So have they understood the implications of the TFR, the Transfer Funds Regulations?
00:16:43
Speaker
sometimes they haven't. Lots of other countries, I'm not, by the way, interested in everyone's thoughts. Sometimes you hear Mika is going to be the GDPR of regulation, and the whole world is going to copy it. But the whole world has done a lot of things that the world is not sort of waiting for one benchmark, and then they're going to spend another five years revising the legislation. They're very developed.
00:17:05
Speaker
And it's another silly example, but I was with the big car platform in Thailand they control 90% of the volume in Thailand or something Talk to them about banking correspondent issues and they look at you like an alien Because they don't understand it the the entire central bank down to all banks are fully Supportive in the Hong Kong there were statements the other day again about supporting the industry So that's that's already happening in Asia and that's where a lot of the big platforms are so
00:17:35
Speaker
In the EU, in the US, it's just a different world. And I expect the question of regulatory arbitrage to become more and more active. Even within the EU, it'll become more and more active. And EU versus rest of the world will also become more and more active. So I think it's important to understand what's happening in the world, I think.
00:17:58
Speaker
Thank you all. Those were really great comments. It's hard for me to see a common theme across all of this, though. And I wonder if you all are seeing a common theme. Everybody talks about anti-money laundering. We had a panel about that. It's pretty clear that a bunch of jurisdictions are doing things in that direction. Are we seeing any other common thread across multiple jurisdictions right now?
00:18:28
Speaker
I'll jump in. Just super high level, I would say if there was a common theme, it would be away from the 2019 FATIF recommendations around registration and AML to the scope of actual prudential supervision of actual regulation. That is a definite common theme. The FTX blowups and other things like that have raised a lot of triggers with a lot of
00:18:54
Speaker
And then the other theme or the difference that I see anyway is some authorities are really open to discussions around, I don't know, zero knowledge proof based on chain compliance or the concept of embedded supervision for a decentralized
00:19:13
Speaker
platform. Some of them are really open, some of them are really, really closed. So I am not going to convince the SEC to reform a view on how to approach DeFi risk. But I can have that conversation with lots of, and I think that's a bit of a trend as well, that the adaptability of some versus the sort of stringent position of others and the move away from AML running KYC checks is not going to be being regulated as a VASP is going to be a lot more than that, I think, moving forward.
00:19:42
Speaker
Don't know what you guys think, but I was just going to say from a policy level, you see some very strong themes. If you're a jurisdiction that has capital controls, you're very concerned about crypto. And so like mainland China completely shut it down.
00:19:57
Speaker
markets like, I would say, Korea, Vietnam, where they've got restricted currencies equally have taken a more restrictive, restrained approach. But then you've got that whole category of jurisdictions that really see a competitive opportunity. They'd like to see the craziness going on in the US and the EU taking its time, and they see that business really responds well to a well-run regulatory environment. I mean, if they can make the ecosystem work so that nudge into banks, that's a really strong thing.
00:20:26
Speaker
Hong Kong is desperate to get business back to Hong Kong. And so that means that it's got a really strong policy objective. Singapore as well must retain its status as an international financial center, otherwise it loses its reason for being. So that's the thing. The other key theme I see is experimentation at a government and incumbent level. We see this in Australia with really strong partnerships around experimentation of retail CBDCs.
00:20:53
Speaker
but working with FinTechs and crypto providers along those lines. And then in Hong Kong, you see the Hong Kong government launched a digital bond with your Goldman Sachs platform and HSBC. So that level of experimentation and learning is quite relentless and I see is a strong theme in Asia.
00:21:12
Speaker
I think the other thing, by the way, is around sort of general solicitation rules as a concept. So there's a lot more examples. So if you look at NICAR, like as an example, Article 61, it actually defines when you're triggering a licensing requirement in the EU and when you're not. And there are lots of platforms looking for a hub. And they'll be focusing more on that or not triggering those requirements. So that and that across the world is becoming a much more
00:21:40
Speaker
outside of the U.S., a touchpoint to the U.S. is separate. But the rest of the world, that's another sort of... I think picking up from your point, like one common theme you see, especially across Asia, and I mean, I'm talking about Asia as per a U.N.'s definition, right? So we're talking all the way from the Middle East and, you know, all the way eastwards. So across Asia,
00:22:03
Speaker
The adoption of fintech and the proliferation of fintech solutions amongst individuals, amongst the general populace, is very, very strong, has been there for a long time. So, you know, QR payments and all this kind of stuff, it's like, it's commonplace, right? So, regulators out there are
00:22:22
Speaker
arguably slightly more in tune and understanding of both the benefits, the risks and the opportunities that come out of all these plays and our particular blockchain industry. So they try to engage more, they try to understand more. You have genuine open door policies with a lot of the regulators, even in India, you can go meet the regulator, they'll tell you no or something, but you'll get a clear
00:22:47
Speaker
Answer one way or the other right in singapore open door hong kong and imagine it's the same thing and and then and then southeast Asia and and and the GCC right you go to the ue you can sit down and meet with the regulators and and and have a chat with them about what you're trying to do and how it works for them doesn't work for them what you need to fix what you don't all of that stuff just makes it so much more
00:23:09
Speaker
practical and predictable and easy for businesses to consider figuring out which is the best location for them to set up a hub, a business, and so on and so forth. John Beck, anything you'd like to add? Let me just add up one thing.
00:23:28
Speaker
The appropriateness between the real risk and the proper measure is very important. Otherwise, most of the pension institutions or banks or other investors are restricted from their investment or business activities. In that sense, I think sharing some information on the wallet address in the problem should be
00:23:56
Speaker
disclosed to the public or to some competent authorities so many judicial can share those information and utilize to protect some mind laundering and other type of financing. I think we need to adapt to that thing more than now.
00:24:16
Speaker
So outside the door, we have our Tree of Web 3 Wisdom and the fifth branch of the tree is Think Global. And we really encourage all global regulators to be collaborating and talking with each other.
Is International Regulatory Collaboration Achievable?
00:24:30
Speaker
Are you all seeing that happening? Is there good communication between regulators in different jurisdictions?
00:24:38
Speaker
I would say, generally speaking, beyond that, within some regulatory authority, there isn't really good cross-communication within the authorities, within some jurisdictions. There's some discussions around whether this falls within the scope of... Well, I mean, in the US, it's obviously the CITC and the SEC, et cetera, but that happens...
00:25:05
Speaker
Yeah, sonora too. But that happens in lots of lots of jurisdictions. And we haven't talked, by the way, about Latin America or South America. That's an entirely entirely different universe. They have a real attraction to the industry for lots and lots of other specific reasons. You can't talk about the concern of Bitcoin volatility if you live in Argentina. It's a very different sort of concept that there is a lack of
00:25:32
Speaker
clarity there as well. And I think recently the IMF announced that the $45 billion funding into Argentina would be restricted on the basis that they started to close contact with crypto-related platforms. There was some lumeo that introduced a sort of trading element to Bank of Galicia in Argentina. And that was by the central bank cut off within 24 hours because they're trying to restrict those controls and everything.
00:26:01
Speaker
That's very general, but as a general point, you guys might have a different view, but I would say cross-jurisdictional or standard-setting exercises are not happening anywhere near enough. I don't know. Regarding the security token offering, the Korean government is keen on what's going on with American regulation. So in that sense,
00:26:27
Speaker
And officially, they contacted the SEC. What is the proper regulation on security tokens? But the problem is that both countries have different legal systems, basically. So America has got a negative regulation system, but Korea has got a political regulation system.
00:26:48
Speaker
So it's not easy to have benchmark SEDs, right? That actually isn't even a benchmark, not on the standard regulation, but on what a virtual asset is. There are so many different definitions that are sort of being... You know what, I feel like that's over. You know, that came up in the last session and is almost overblown. I did like the Dubai approach, which was just,
00:27:11
Speaker
You know, if it's a digital representation, it's the end. And there are some exceptions, but let's not play around whether it's a cryptographically secured blah, blah, blah, because someone will figure out a way to get around it. But I mean, in terms of cooperation, I see it a lot if you've got regulators that are part of other forum. So like Securities and Futures Commission is part of IOSCO. They talk. Then also the other side to it is through the bilateral MOUs that exist between those regulators.
00:27:37
Speaker
And they will have an increasingly important role to play for global exchanges because one of the biggest pain points for those exchanges is having to divide up their order books and having to comply with home market regulators as if they were distinct legal entities. So I think that will grow. But at the moment, most regulators are piggybacking, sort of checking things out.
00:27:59
Speaker
and then also think that whatever they're doing is probably the highest standard. Yeah, they like I asked go developed the recommendations around market integrity is a standard for crypto asset trading platforms four years ago, three, four years ago, and no regulatory authority has really done it yet. Good for you. So it's probably the difference between
00:28:23
Speaker
Do they speak and do they come up with some common policy? Do they speak? Yeah. Any couple of nations, any nations that have significant capital flows between them and trade flows between them, the regulators speak to each other. Now, whether they agree on stuff and they come up with any common policy, that's a secondary issue. You speak to anybody in Southeast Asia. All the regulators I've had the chance to speak with, everybody speaks to MAS in Singapore.
00:28:48
Speaker
Right and India speaking with all the guys in their sphere of influence if you want to put it so. The question was more do they engage together right on that since I would say yes but whether. It's meaningful as an outcome for us I'm not so sure. Great well this has been a terrific panel really appreciate everybody's contributions and let's give a big round of applause.
00:29:14
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more Hootful and hype-free resources, visit www.owlexplanets.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time!