In 2020, Reuters reported that the Asia Pacific region overtook the US for fines issued for AML regulatory breaches, a total of $5.1 billion and a seven-fold increase from 2019. At the same time, some Asian countries remain the fastest-growing markets for consumer crypto adoption. According to a Mesarri report, by the end of 2019, six of the top ten largest crypto firms in the world were located in Asia and in early 2021, 42% of market capitalization for token projects were headquartered in Asia from a list of top 20 companies. Given that regulations in Asian countries can vary widely, we have provided an overview of countries that have introduced regulations for crypto, including South Korea, Singapore, Hong Kong, The Philippines, Thailand, and Japan.
Are ALL Crypto Companies Affected?
While the global AML/CFT watchdog, the Financial Actions Task Force (FATF), has defined Virtual Asset Service Providers (VASPs) and laid out recommendations for handling them, regulations are not uniform between countries. At its core, the guidance of FATF serves as a critical step to clarify and define global regulation in the crypto industry and for the handling of virtual assets.
VASPs are defined as businesses that transfer or exchange between virtual assets and other virtual assets or fiat currencies. Services could be safekeeping, administering, or instruments enabling control over virtual assets. Finally, they can be participating in and providing financial services related to an issuer’s offer and/or sale of a virtual asset (in other words offering token sales or ICOs). It also means that platforms that create platforms with their own tokens as virtual currencies, such as for eSports, or creating non-fungible tokens (NFTs) will be counted as VASPs.
While countries in Asia have been adopting these definitions and regulations at differing paces, they may have a tight timeline to become compliant once laws are introduced. Companies may also be used as industry examples for how regulations are interpreted when licensing and legal battles come into play, such as country regulators cracking down on Binance.
In the Asia Pacific, governments may be legitimizing the crypto industry by introducing regulations that are more in line with the traditional financial sector, such as South Korea. They could be banning cryptocurrencies altogether, such as China. They could may also be targeting only certain parts of the industry or acknowledging specific cryptocurrencies, such as bitcoin. Below, we have outlined some notable developments in key markets.
In March 2021, the amendment to the Act on the Reporting and Use of Specific Financial Transaction Information came into effect for VASPs operating in South Korea. The new regulation covers activities for a number of VASPs, and directly affects businesses that operate cryptocurrency exchanges, cryptocurrency wallet providers and ICOs. Crytpo service providers must update their AML compliance program and register with the Korean financial regulators before they start their activity.
VASPs will have to register an authorized company bank account and provide customers with their own real-name accounts with the same bank; establish expanded AML/KYC procedures that includes customer due diligence and reporting suspicious transactions; acquire ISMS certificate at the Korea Internet & Security Agency (KISA) and submit details to the financial intelligence unit.
According to a study in 2019, South Korea has the highest number of crypto investors. South Korea also has a high number of consumers using blockchain technology on a daily basis through the Chai payments app, which uses Terra’s blockchain to settle transactions. In addition, the country’s most popular messaging app Kakao, has a native token and wallet. The new regulations will likely not dampen appetite for crypto in the country and major exchanges such as Bithumb, Coinone and Korbit have reportedly implemented them.
The country has legalized, cryptocurrency exchanges and trading, though cryptocurrencies are not considered legal tender. Singapore’s tax authority treat bitcoins as “goods”, which means it is subject to Goods and Services Tax as opposed to income tax. The Monetary Authority of Singapore (MAS) has not yet sought to regulate virtual currencies, but it has said it will regulate digital payments tokens (DPT) if those tokens were classified as “securities”, such as for ICOs.
Crypto exchanges and other crypto businesses came under the MAS authority as of January 2020 with the Payment Services Act (PS Act), requiring them to obtain a MAS operating license. The PS Act is aligned with many of the FATF’s recent recommendations related to VASPs. In July 2020, MAS proposed new financial sector regulations seeking to introduce stronger AML/CFT standards for cryptocurrency service providers and higher requirements for technology risk management in financial institutions.
Singapore has has received over 480 crypto license applications for crypto services under the new PS Act. However, Singapore companies such as Binance Asia Services, Gemini, and Coinbase Singapore have not yet received a crypto license.
Hong Kong is the headquarters for a number of cryptocurrency exchanges, including some of the world’s largest, such as FTX.
Currently, exchanges can apply to be licensed by the Securities and Futures Commission, but are not yet obliged to. At the same time, the Hong Kong’s Financial Services and the Treasury Bureau (FSTB) has a public stance that virtual asset exchanges should be licensed to operate in the city. Cryptocurrency exchanges operating in Hong Kong will likely have to be licenced by the city’s markets regulator and will only be allowed to provide services to professional investors.
In addition to this, by May 2021, Hong Kong’s authorities restricted crypto investment to professional investors, defined as individuals with a portfolio of HKD 8 million (USD 1.03 million) to count as a professional investor.
At the same time, Hong Kong Monetary Authority recently issued a Guide to RegTech adoption, signaling that the city is encouraging identity verification and other digital solutions to facilitate regulatory compliance for digital-native services.
Companies should lookout for new legislative changes in line with FSTB proposals in the coming year.
The Philippines is reportedly the third fastest growing markets for cryptocurrency adoption since the pandemic and the country is now on a par with Vietnam and Nigeria. The Bangko Sentral ng Pilipinas (BSP) in March showed that gaming rewards, BTC, ATM networks and rural banking integration indicate an upsurge that makes crypto growth in the Philippines the world’s third-fastest growing sector.
By December 2020, the Bangko Sentral ng Pilipinas (BSP) had opened up channels with 17 virtual currency exchanges that are industry compliant. By January 2021, it also introduced regulations for VASPs that were largely in line with FATF recommendations. At the same time, a new law was passed to strengthen the Anti-Money Laundering Act of 2001 that expanded the powers of the Anti-Money Laundering Council.
The Philippine Stock Exchange has already stated that it will allow crypto trading after approval from regulators. VASPs can expect updates in the coming years that will clarify the opportunities to offer services in the country.
Thailand has had shifting regulations for the crypto industry, but remains one of the more sophisticated markets in the Asia Pacific region. In 2013, it had initially banned bitcoin, but has since taken on a regulation-led approach.
New listings require regulator approval and only whitelisted tokens can be offered to clients. Cryptocurrencies such as BTC and ETH are also differentiated from digital tokens, which refer to the right to participate in an investment, or to acquire goods and services under an agreement between the issuer and the holder. Thailand has since licensed 13 crypto service providers that are broken down into three categories: exchanges, brokers, and dealers.
In May 2018, the SEC introduced imposed a 7% VAT for crypto traders, on top of the 15% withholding tax on capital gains on investments. The Thai SEC regulates ICOs and in June 2021, the Thai SEC passed Rules, Conditions, and Procedures for Undertaking Digital Asset Businesses law that bans NFTs, meme coins, and exchange tokens.
Licensing regulations caused Thailand’s first and largest crypto exchange, BX, to cease operations. The Thai SEC has also recently filed a complaint against Binance alleging that it is operating without a license. However, the Thai SEC continues to revise its regulation based on industry and market feedback. Companies can monitor the Thai market to see if new opportunities for business open in the near future.
How crypto companies can approach Asian markets
Companies should remain aware of the changing Asian government positions on crypto services. Some may be more friendly to virtual assets, while having more stringent regulations on cryptocurrencies specifically. While it may be enticinging to choose a country with minimal crypto licensing requirements, complying with FATF guidelines for VASPs can help companies begin with the high standard that future compliance requirements may hold. Should companies need to be registered with authorities to operate in the future, they can already do so with the right compliance program in place. In addition, companies can also use this grace period for less regulated markets to design KYC programs to build trust with consumers as part of a growth strategy.
Strengthen customer relationships with KYC
Using identity verification to meet compliance requirements can be a strategic driver for business growth by building customer relationships based on trust and safety. Below, we outline three areas where crypto companies can win customers over for identity verification.
- Acknowledge privacy and safety concerns for customers. Because blockchain, crypto, and online identity verification technologies are relatively new, educating end users about how they work will help convert customers. Explain why KYC checks may be required for transactions, such as to meet the FATF Travel Rule, and how performing identity verification during user onboarding can help secure an account. Put this information front and center on your website, include FAQs, and add guidance through an identity verification flow.
- Give verified users benefits. Show users how verifying their identity can help them secure their account from account takeovers or identity theft. Also, give them a convenient way to apply for additional services by reusing their documents. Show them how quickly they can reconfirm their identity to authorize a transaction.
- Choosing the right identity verification solution for your industry needs. Rather than invest in both security and compliance from scratch, choose a trusted provider that integrates into your tech stack. This helps you verify your users’ identities, without needing to worry about data breaches. This allows you to focus on orchestrating verification flows that meet your needs, whether it is for user onboarding, transaction authorization, or something else.
As countries in the Asia Pacific continue to respond to consumer demand for crypto and virtual asset services, companies that meet global requirements now will maintain a competitive advantage for the coming years.
Check out Passbase for free if you’re looking for a reliable, robust, and secure ID verification solution.
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