The world’s biggest crypto market remains East Asia, but regulators in the West appear to be finally warming to digital assets
The word of 2020, and one we have heard an unprecedented number of times this year.
It’s also a word that adequately captures what the crypto markets have experienced these past ten months.
Since Bitcoin was thrust onto the world a little over a decade ago, financial markets as we know them have transformed drastically. But 2020 has been the year of unprecedented growth for the asset class.
Digging deeper beneath headlines of preposterous ‘pump and dump’ meme tokens, the digital asset sector has made great strides towards maturity, largely due to a surge in product offerings catering to sophisticated and institutional investors.
Recent moves from some of the world’s largest financial powerhouses such as Mastercard, JP Morgan and Goldman Sachs, signal that traditional institutions’ love affair with cryptoassets is set to continue to blossom.
The sector has also seen increased engagement from governments. As it stands, there are very few central banks or governments not looking into issuing their own central bank digital currencies (CBDCs). Christine Lagarde, the Head of the European Central Bank (ECB), continues to advocate for a ‘digital euro’, positioning the change as an essential one to acclimate to a new digital world.
With exciting crypto announcements from corporates and governments coming thick and fast, many are wondering which region is leading innovation in the cryptoasset space: the East or the West?
A notable difference between Asia and the West in 2020 is government proactiveness in understanding digital assets and implementing DLT-based initiatives.
Since President Xi endorsed blockchain development in China back in October last year, the country has made breakneck progress in incorporating blockchain into its existing financial system.
There are rumoured to be approximately 35,000 blockchain companies in China, and the sector now serves as a critical pillar of the country’s post-COVID recovery. The country’s ambition to become a global leader in blockchain has also resulted in its possession of most of the blockchain patents in the world.
In addition to its forthcoming digital currency, which appears to be near completion and is expected to be one of the seminal events that will define 2020 (alongside the current pandemic), China’s also saw the launch of the ambitious Blockchain-based Service Network (BSN) initiative back in April.
Backed by Beijing and giant state-owned companies like China UnionPay, China Mobile and China Merchants Bank, BSN strives to provide a simple and cost-efficient way for enterprises to use blockchain technology and build decentralised apps (dApps) in all kinds of application scenarios – not only for China but globally. In its short time of existence, the BSN has already cemented a presence in dozens of countries, including Japan and Australia.
As Sam Olsen, a commentator on Chinese-Western relations, recently stated: “The world is hungry for more connectivity, and China is satisfying that demand.”
Though China may be spearheading the blockchain revolution right now, other Asian countries including South Korea, Japan and Singapore have been progressive and welcoming of cryptocurrency and the regulation of the space for a number of years.
Singapore in particular has been chosen by many crypto companies as an operational base, due to the city-state’s wholehearted embrace of innovation. The sector’s growth has been nurtured by a number of crypto-friendly initiatives from the Monetary Authority of Singapore (MAS), the nation’s central bank. The Payment Services Act, enacted back in January, was introduced to serve as the new regulatory framework for cryptocurrency payments and foster confidence in digital payments.
Japan, a country which has seen two of the biggest crypto hacks in history (Coincheck and Mt. Gox), has made a name for itself as a world leading digital asset hub after handing out 23 licenses to crypto exchanges since 2017. Back in May, new cryptoasset regulations came into effect protecting digital asset investors involved in exchanges, as well as custodians and their assets.
In Europe, Switzerland continues to roll out the red carpet for crypto and blockchain businesses. The Alpine country recently cemented its status as the region’s leading crypto and blockchain hub by passing a full set of laws that provide a clear, legal framework for blockchain-based facilities and securities.
Though countries in the West are generally more hesitant in their approach to regulating digital assets, more and more jurisdictions are following Switzerland’s lead in creating a regulatory framework that enables crypto to thrive.
In the EU, a leaked draft of a new set of rules for the crypto industry from the European Commission known as the ‘Markets in Crypto-Assets’ (MiCA) was shared across the internet.
Meanwhile in the US, a shift in how regulators view cryptocurrencies appears to be underway following a slew of recent announcements by US officials. This summer, the US Office of the Comptroller of the Currency gave the green-light for all nationally chartered banks in the US to provide crypto custody services. The move represents a huge leap towards the mainstream adoption of digital assets.
Back in August, the Federal Reserve Governor, Lael Brainard, made global headlines after announcing that the US Federal Reserve would be working with MIT to determine how America’s Central Bank might one day be deploying a ‘digital dollar’, And just last month, Congress saw two new bills to streamline digital assets and crypto exchange regulation.
Despite this significant and propitious shift in regulatory approach, when it comes to crypto adoption and regulation, most market watchers overwhelmingly agree that Asian countries are poised to hold an upper hand over the West.
From the number of crypto exchanges to the number of mining pools, Asia greatly outperforms its Western counterparts. Around two-thirds of the world’s hashrate behind Bitcoin stems from Asian companies, more specifically China. The low cost of electricity in Asia compared to other regions is a key driving factors of the region’s dominance in cryptocurrency mining.
And when it comes to crypto activity, an in-depth study published last month by Chainalysis crowned East Asia as the world’s largest cryptoasset market.
Crypto addresses stemming from this region accounted for 31% of all the digital currency transactions in the twelve months – 77% more than Western Europe.
Michelle Lai, Senior Strategic Advisor for APAC at Copper, commented: “Crypto made remarkable progress in 2020 thanks to 3 major factors: continued momentum from institutional players, fears related to seemingly limitless COVID-driven QE, and a DeFi revolution that grabbed headlines in all major business publications.”
“Crypto started shifting from the fringes of financial markets towards a more long-lasting place in the alternatives portfolio. This shift is a recurrent theme in the financial markets. In 1975 the legendary John Bogle established the first public index mutual fund with just $11mn in assets; the fund was referred to derisively as “Bogle’s folly.” By the time he passed away in 2019, the fund, now called the Vanguard 500 index Fund, held more than $400 bn in assets. In 1946 the first two venture capital firms were founded, and an asset class which had primarily been the domain of families like the Vanderbilts and the Rockefellers. Today venture capital is a mainstay in the alternatives portfolio, and globally accounts for about $1 trillion in AUM. Even individuals can be LPs in VC funds.”
“Regulators in different countries acknowledge the early rumblings of a new asset class to different extents, leading to different policy stances. But as crypto gains wider acceptance and regulators realize that they risk losing their head start in a powerful new asset class, a restructuring of the regulatory landscape has begun in the US and across the EU.”