The US crypto space is in a mess. Its foreshadowing was already fully visible in March when the prestigious law firm Cooper & Kirk released the paper Operation Choke Point 2.0: Federal Bank regulators come for Crypto.
Has the US market become so hostile that a crypto exodus was necessary? If so, what other jurisdictions are poised to attract innovators, builders and entrepreneurs in the FinTech and crypto space?
First, let’s take a look at the current crypto landscape.
Systemic uncertainty unfolds
Even before Operation Chokepoint 2.0 came into the picture, it was rather telling that the SEC refused to approve even a single Bitcoin ETF traded locally. As market liquidity cornerstones go, that would be it.
Instead, regulators chose to drain liquidity. Crypto-friendly banks were the first to fall — Silvergate and Signature — albeit under suspicious circumstances, which Cooper & Kirk’s attorneys said was indicative of “regulatory overreach against the crypto industry.”
In the meantime, the Securities and Commission Exchange (SEC) is on a rampage in 2023. The watchdog agency filed complaints against Bittrex, Kraken, Gemini and Paxos, with the latest moves against Binance.US and Coinbase.
Charging Coinbase as an unregistered stock exchange seems to have opened the floodgates of legal uncertainty. The SEC approved the exchange’s underlying business model, a condition of going public in April 2021 under ticker COIN. However, as Coinbase expanded its crypto offerings, the SEC considers some of its offerings to be “crypto asset securities”:
At the same time, the SEC failed to provide clarity when previously requested. This appears to be the agency’s gamble to set rules from enforcement, taking advantage of the current legislative void. While Coinbase is taking the SEC to court to clear up securities, the damage is already done.
Robinhood will remove the major cryptocurrencies Cardano (ADA), Solana (SOL), and Polygon (MATIC) on June 27, with more likely to follow according to the SEC’s interpretation. Binance.US stopped all deposits in USDwhile Crypto.com shuts down its institutional exchange.
The legal uncertainty then caused a flood of liquidity, driving the total crypto market cap down $55 billion since Friday. Which crypto-friendly regions are most likely to benefit as FUD cements into the US crypto space?
European Union (EU)
Although the Eurozone has officially entered a recession, it is the first major region to provide a comprehensive legal framework for digital assets. According to Eurostat, this market accounts for about 14% of world trade, next to China and the US as the top three.
The EU Regulations for Market in Crypto-Asset (MiCA) will come into force from June to December 2024. Thanks to this clarity, Ripple CEO Brad Garlinghouse singled out Europe as a “significant beneficiary of the confusion that has existed in the US” in a recent CNBC interview.
Similarly, Paul Grewal, Coinbase’s chief legal officer, sees the US crypto crackdown as an “incredible opportunity” for Ireland and Europe, speaking to the Irish Independent.
Years in the making, MiCA has adopted a balanced, proactive approach to crypto regulation. On the one hand, innovations are encouraged, while financial stability and consumer protection are considered. Here are some of the key MiCA highlights to consider:
- Digital assets exist on a spectrum, from e-money tokens (EMT) and asset reference tokens (ART) to crypto assets and utility tokens.
- Based on their market capitalization, the requirements differ. For example, small cap and utility tokens are exempt from providing a white paper (liability, technology, marketing).
- However, suppose an ART (stablecoin) or EMT crosses certain thresholds, such as a market cap of €5 billion, 10 million holders, or 2.5 million daily transactions with a volume of more than €500 million. In that case, they become “significant” gatekeepers to be regulated under the Digital Markets Act (DMA).
- All crypto companies are licensed as CASPs (crypto asset service providers), with a minimum liquidity threshold of €125,000 for custodians and exchanges and €150,000 for trading platforms.
To maintain their licenses with the European Securities and Markets Authority (ESMA), CASPs must report user transactions. This includes transfers between CASPs and self-custodial wallets if they exceed €1,000. But regardless of transaction size, CASPs must register senders/receivers for hosted wallets under the so-called “Travel Rule”.
While all this tracking isn’t ideal, it’s a big step in legitimizing the industry. At least, unlike the US, where SEC chairman Gary Gensler recently sat blanket-called crypto investors as “peddlers, fraudsters, scammers”.
It is also striking that Switzerland remains a sandbox innovation zone, but also has common ground with the eurozone. That is why there are so many prominent foundations in Switzerland, such as Tezos and Ethereum.
In the EU itself, many crypto companies have already gone global.
Notably, the popular options trading platform Deribit in the Netherlands, LocalBitcoins in Finland, DappRadar in Lithuania, and Ledger, the hardware wallet provider in France.
Hong-Kong
China’s semi-autonomous proxy region, Hong Kong, is back on the crypto menu. While mainland China banned cryptocurrencies so as not to interfere with the digital yuan, Hong Kong was given the green light to trade cryptocurrencies on June 1.
Of course, this means Virtual Asset Service Providers (VASPs) in Hong Kong have to block retailers from mainland China. Any token they list must have high liquidity and must be included two major indexes, and have a year of trading. In addition to these basic requirements, VASPs must segregate assets from clients, set exposure limits, follow cybersecurity standards, and avoid conflicts of interest.
The DeFi space can also thrive under the Securities and Futures Ordinance (Type 7 license), designating their tokens as futures or securities. After the new regime, many exchanges rushed to acquire new HK VASP licenses: CoinEx, Huobi, OKX, Gate.io and BitMEX, just to name a few.
Interestingly, ZA Bank, the subsidiary of China’s state-owned Greenland as HK’s largest digital bank, has also joined Hong Kong’s e-HKD Pilot Program initiative. This shows that China is fully greenlighting Hong Kong’s long-term digital asset adoption.
Hong Kong is also extremely generous in the crypto tax arena. While capital gains tax is null and void for taxpayers, companies fall under the progressive tax regime of up to 17%.
Singapore
Another highly developed city-state, Singapore has been the crypto hub since its inception, boosting crypto adoption for the entire Asia-Pacific region. And for good reason. There is no capital gains tax, making it irrelevant whether one sells or trades cryptocurrencies.
In addition, because the Monetary Authority of Singapore (MAS) classifies them as “intangible property”, cryptocurrencies can be used for payment for goods and services, which is then viewed as bartering. This is also very easy to achieve thanks to Alchemy Pay, from Singapore.
That said, the zero tax regime does not apply to companies. They are subject to a fixed corporate tax rate of 17%. But in addition to Hong Kong, Singapore has a three-year tax exemption for start-up companies, which is especially useful for newer businesses that need help building credit and therefore have limited financing options.
With its financial and social stability, Singapore has served as quite the crypto magnet. For example, California-based OKCoin opened its shop in 2020. Of course, Coinbase and Binance also have offices in Singapore, including Crypto.com.
While Crypto.com is in a rush to shut down its institutional exchange in the US, citing the “current market landscape”, the aptly named exchange had no trouble getting a Major Payment Institution (MPI) license from the MAS.
This means that Crypto.com is no longer subject to thresholds for its Digital Payment Token (DPT) services. Given the SEC’s hostile stance towards these exchanges, it’s safe to say that their fallback position in Singapore is good.
Finally, Singapore has had a friendly approach to integrating machine learning and artificial intelligence technology for several years now. The Ministry of Education has already developed AI-powered learning and education systems for students. From how AI is expected to drive business, from communication to training and more, Singapore has shown a proactive approach to adopting breakthrough technology.
With how AI is expected to integrate with and even help the crypto industry, Singapore could become a hot spot for new crypto projects.
Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five minutes of financefor weekly analysis of the biggest trends in finance and artificial intelligence.