Cryptocurrency Regulations in ASEAN, East Asia, & America: To Regulate or Not To Regulate.

• Author: Sonksen, Clark
• Position: Association of Southeast Asian Nations

INTRODUCTION

This note compares the current landscape of cryptocurrency regulations in Southeast Asia (ASEAN member states: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam), (1) East Asian nations excluding China (Japan, South Korea, North Korea, Hong Kong, and Taiwan), and the United States.

The terms cryptocurrency, blockchain, and Bitcoin are all heavily associated with one another, but each refer to distinct things. Part one provides a background on these terms, as well as the recent history of cryptocurrency adoption throughout the world.

The main body of this note will categorize these nations into groups based on the type and level of regulations implemented (i.e. a proactive stance implementing regulation and favoring usage of cryptocurrencies, a reactive stance with restrictive regulation, a hesitant stance with slowness to enact any regulation at all, a restrictive stance with a complete ban on usage, etc.). This note also addresses a key question that every nation now faces due to the increased global usage of cryptocurrencies: Should countries regulate their cryptocurrency markets? And if so, how and to what extent should they do so? Finally, Part III argues that the type of regulatory scheme which Japan, Hong Kong, Singapore, and Thailand have utilized (a proactive liberal approach) is the best method.

PART 1 A: BACKGROUND & DEFINITIONS (BITCOIN, BLOCKCHAIN, & CRYPTOCURRENCY)

The simplest definition for cryptocurrency is: "A... digital or virtual currency that uses cryptography for security.... Many cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers. A defined feature of a cryptocurrency... is its organic nature; it is not issued by any central authority, rendering it theoretically immune to governmental interference or manipulation." (2) Blockchain technology:

[R]efers to the system's protocol, a common phrase in software terminology that describes a fundamental set of programming instructions that allow computers to communicate with each other. Bitcoin's protocol is run over a network of computers that belong to the many people around the world that are charged with maintaining its core blockchain ledger and monetary system. It provides those computers with the operating instructions and information they need to keep track of and verify transactions among people operating within the bitcoin economy. The system employs encryption, which lets users key in special passwords to send digital money directly to each other without revealing those passwords to any person or institution. Just as important, it lays out the steps that computers in the network must perform to reach a consensus on the validity of each transaction. Once that consensus has been reached, a payee knows that the payer has sufficient funds--that the payer isn't sending counterfeit digital money. (3) Put more simply, cryptocurrency is an asset existing in virtual rather than physical form and blockchain is the technology making that happen.

Of these digital currencies, Bitcoin is generally considered the first completely decentralized currency (4) and is far and away the most widely used cryptocurrency. (5) Broken down to its simplest form, Bitcoin is made up of "the digital units of value that are used by people in exchange for goods and services or other currencies, and whose price tends to swing wildly against traditional government issued currencies." (6) Because of this, many laws and regulations fashioned by governmental institutions in order to regulate cryptocurrencies often refer to these currencies as bitcoin(s), utilized as a catch-all term to refer to cryptocurrencies more broadly.

A summation of the three concepts and how they relate to one another is as follows:

[T]he simple genius of this technology is that it cuts away the middleman yet maintains an infrastructure that allows strangers to deal with one another... At their core, cryptocurrencies are built around the principle of a universal, inviolable ledger, one that is made fully public and is constantly being verified by these high-powered computers, each essentially acting independently of the other... The network-based ledger--which in the case of most cryptocurrencies is called a blockchain--works as a stand-in for the middlemen since it can just as effectively tell us whether the counterparty to a transaction is good for his or her money. (7) One final important term to note and define is the Initial Coin Offering (ICO). An ICO is "a fundraising mechanism in which new projects sell their underlying crypto tokens" in exchange for other cryptocurrencies (such as Bitcoin) or fiat currencies (such as US dollars). (8) It is similar to an IPO (Initial Public Offering) where investors purchase shares of a company (usually listed on a stock exchange), but differs in that investors merely own some amount of the newly launched cryptocurrency rather than ownership stake in a company. (9) Additionally, the US Securities & Exchange Commission (SEC) has closely regulated IPOs since the 1930s, (10) while ICOs have thus far had few restrictions placed on them, presenting much greater risks to potential investors. (11)

Benefits of virtual currencies include the anonymity of transactions, cutting out rent seeking financial middlemen, and universal recognition of the currencies. (12) Drawbacks range from potential theft, lack of guidance in regards to tax and regulatory implications, and extreme volatility. (13) One particularly notable drawback evidenced in recent years has been the vulnerability of cryptocurrency exchanges to theft as investors risk having their cryptocurrencies stolen directly from an exchange. (14)

Exchanges are cryptocurrency platforms that allow investors and consumers to "buy, sell, and trade cryptocurrencies through fiat currency" such as US dollars or other cryptocurrencies. (15) These numerous and varied exchanges provide a vital function by acting as a marketplace for cryptocurrencies, but create the "additional risk" of having one's cryptocurrency stolen on an exchange. (16)

As governments around the world increase their knowledge and subsequent regulation of cryptocurrencies these regulations tend to refer less to Bitcoin specifically and to cryptocurrencies generally. These regulations have rapidly increased in recent years, as nations scramble to regulate cryptocurrencies as their usage explodes globally, (17) especially in the ASEAN states. (18)

If well designed, these could bolster cryptocurrencies by making people feel better protected from their more dangerous elements. But the bureaucrats may go too far with regulation and end up quashing innovative start-ups' ability to make full use of this technology's potential to empower individuals, break down monopolies, and reduce cost, waste, and corruption. (19) Striking a balance between these inherent tensions in cryptocurrency regulations is a key challenge governments face when addressing these currencies.

Part 1B: Legality of Cryptocurrency by Country

The following is an overview on current legality and potential limits on uses of cryptocurrencies in various countries, focused on ASEAN member states, East Asian nations, and the United States specifically.

USA (Legal)

The United States Treasury treats Bitcoin and other cryptocurrencies as a "convertible virtual currency." (20) There is still much uncertainty around cryptocurrency regulation in the US as various government agencies treat it differently. "One example is the confusion around whether a particular token or coin constitutes a security (subject to SEC regulation), a commodity (subject to CFTC regulation), or a payment (subject to money transmitter requirements under FinCEN and state regulation)." (21) The confusion over whether cryptocurrencies should be treated as either securities, commodities, payments, or some combination of the three, is in part due to its versatility. (22) This confusion (23) creates a headache for US regulators as this question is integral in determining which agency (the SEC, CFTC, or FinCEN) should have primary authority over shaping regulations. (24)

Adding further complexity is the fact that there also exist differing state regulations on cryptocurrencies, which can potentially extend beyond federal regulation. (25) This growing and perplexing patchwork of both federal and state regulations can lead to greater confusion than might exist if only one regulatory body governed. This has understandably led to "concerns from market participants over complying with the patchwork of regulation" as parties struggle to understand what is or isn't allowed, and then comply with those laws. (26)

ASEAN Member States

Singapore (Legal)

The Monetary Authority of Singapore (the central bank and chief financial regulatory authority) treats Bitcoin as legal and takes a hands-off approach. (27) Interestingly, the Singaporean government first announced this stance in 2013, ahead of many of its ASEAN peers which didn't begin to address the issue until 2016 or later. Earlier this year in 2019 the Singaporean Parliament passed the Payment Services Act which regulates Bitcoin and other cryptocurrencies as "digital payment tokens." (28) This noninterventionist approach has led Singapore to become a hotspot for cryptocurrency exchanges (29) and startup companies based around innovations in the blockchain space. (30)

This liberal approach to regulation, "coupled with the country's high level of indigenous talent, entrepreneurial spirit, and fintech development," (31) has led the Singaporean government agency Infocomm Media Development Authority (IMDA) to estimate that the blockchain market in Singapore has "the potential to achieve a market spending between US $201 million to US $272 million" by 2022 and upwards of US $2 billion by 2030. (32)

Brunei (Legal for trading/holding, not...