“You only get one chance to make a good first impression.” Also, “blockchain is one of the world’s worst-PR, highest potential innovations”.
Has blockchain used up its one and only chance to make a good first impression?
From 1 January 2017 to 16 December 2017, the world witnessed the meteoric rise of bitcoin, the value of which increased by around 2000%, and so many unqualified investors were attracted that financial big names like JPMorgan CEO Jamie Dimon called bitcoin:
“a fraud worse than tulip bulbs”
Despite the equally sudden burst in 2018, many regulatory bodies are still trying to harness cryptocurrency.
Like most marriages, the potential of a technology begins after the honeymoon period. The time for blockchain to make a lasting and good first impression is actually now.
First Impressions – The Time is Now
The concept of cryptocurrency persisted despite being considered as the world’s worst-PR innovation.
Over the past year, international recognition of virtual assets has slowly gained traction. In March 2020, the French commercial court ruled that bitcoin is akin to currency, and on 1 November 2019, the Court of First Instance in Hong Kong granted a mareva injunction freezing assets in bitcoins in Nico Constantijn Antonius Samara v Stive Jean Paul Dan  HKCFI 2781. Similarly, the UK decision in AA v Persons Unknown  (December) EWHC 3556 recognised cryptocurrency as a form of personal property in law and granted injunctive and other related relief.
It is only now that virtual assets are getting legal recognition, and it is therefore now for virtual assets to make an everlasting impression
The Wild West Era
Fear surrounding virtual assets is the evaporation of investment. When the Bitcoin exchange Mt. Gox went bust (during the first major exchange hack in 2014, which caused the exchange to become insolvent), many traders were left without recourse.
As such, trading virtual assets in the early years was reminiscent of making investments in financial centres in less established jurisdictions. Whist you could make a quick buck, your investment could just as easily evaporate overnight (if not over your lunch break!).
The Race to Regulation (Developed Markets Versus the Third World)
Many jurisdictions attempted to rush to the finish line in rolling out a regulatory regime. The problem is that blockchain remains a nascent technology, and it is difficult to regulate something unknown.
The result is: Third-tier jurisdictions with less stringent or developed regulatory regime, such as Estonia and the newly formed Astana International Financial Centre in Kazakhstan rolled out regulations ahead of more sophisticated jurisdictions such as Hong Kong and London.
Regulators in first-rate financial centres are reputed for giving more consideration when formulating regulations, which are essential to growth of the blockchain industry because they create confidence and bring some semblance of law to the ‘wild west’.
However, having regulations alone is not enough. Hence, a company being listed on the New York Stock Exchange will have significant advantage (reputation and investor attractiveness-wise) over one being listed in an exchange under a jurisdiction with a command economy.
Into 2020: The Hong Kong and United Kingdom Advantage
Everything changed when tier-one financial centres began rolling out regulations. In Hong Kong, the Securities and Futures Commission (SFC) adopted the new regulatory framework for virtual asset trading platforms via an opt-in approach on 6 November 2019. Notable emphasis includes:
- Governance over KYC/AML and market surveillance process;
- Heightened regulatory standards for platform licenses;
- Imposing licensing conditions and limiting services to sophisticated professional investors with sufficient knowledge;
- Stringent criteria for mandatory reserve/lockup capital/buffer requirements; and
- Most importantly: Segregation of custodian funds in segregated accounts – for better safekeeping of investors’ virtual assets.
This was Asia’s first regulatory framework for virtual assets platform offered by a Tier 1 Financial Centre.
In the UK, regulation of crypto-assets has been split into regulated tokens (also known as security tokens or e-money tokens), which are regulated under separate provisions, and unregulated (or exchange) tokens, which include cryptocurrency. The latter are now regulated under the AML provisions, which came into force in the UK on 10th January 2020. Since then, the UK Financial Conduct Authority (FCA) became supervisor for five specific crypto-asset activities:
- Exchange of fiat currency for crypto-assets;
- Exchange of crypto-assets for different crypto-assets;
- Custodian wallet providers
- Initial coin offerings
- Crypto ATMs
Entities carrying on such business must now be registered with the FCA which must be satisfied that they carry out, amongst other things, proper risk assessments and record keeping - and, as importantly, that their key personnel are “fit and proper.”
Such regulation seeks to provide confidence without placing unnecessary shackles so as to preserve the innovative nature of cryptocurrency.
Competition from Lower-tiered Jurisdictions such as AIFC? Not Really
Investors seek confidence when engaging in all sorts of trading activities. In Hong Kong, the regulatory framework ensures that traders trading with licenced exchanges will be protected. Furthermore, uniform standards in safeguarding the security of such exchanges not only improve the reputation of the licenced exchanges but also guide their sound development.
A jurisdiction will not be able to offer stability, confidence and robustness simply by copying or importing laws from other developed jurisdictions. The advantage shared by both Hong Kong and the United Kingdom is that they have long established regulatory bodies. Their robustness is moulded through countless years of developments that very few other jurisdictions can match or offer.
The Importance of Locality
- There is only one chance at making a first impression: Choose your first jurisdiction carefully and don’t rush to the finish.
- There is an advantage in starting off in a tough, highly regulated jurisdiction: Quality and stability will automatically be imbued with your exchange, as will be consumer confidence.
This article was authored by Andrew Wheeler QC of 7BR Chambers.
This article was first authored in Hong Kong Lawyer.