As a region that has long led the way in fintech innovation, Asia’s mature stance on crypto development is unsurprising. Kimberley Long reports on how the region is seeing the sector evolve for banks and crypto companies alike.
Cryptocurrencies have proven divisive since their inception, with fintechs leading the way and banks largely remaining on the sidelines. This division is beginning to mend in Asia, where banks are looking at how they can find a place for crypto assets within the heavily-regulated sector, and fintechs are beginning to develop a track record that makes them more reliable in the eyes of the regulators and investors alike.
Banks are assessing where their place in the ecosystem lies. Alex Manson, head of SC Ventures at Standard Chartered, says: “Banks can bring a lot to the table. We have an industry in the process of maturing and gaining institutional acceptance. Banks are used to bringing robustness and safety, operating in a highly regulated market. It is in our DNA when developing this infrastructure for crypto expansion.”
Bidyut Dumra, executive director and head of innovation at Singapore’s DBS Bank, says the bank went bullish on cryptocurrencies, especially in gaming. “We have been looking at the gamify space, with microcurrencies coming through. This is really interesting, as they have so much penetration with gamers. And it is not limited to cryptocurrencies, with NFTs [non-fungible tokens] and other crypto assets creating a microcosm within gaming. It is mind-blowing how inventive people have become.”
However, Mr Dumra is philosophical about the impact the formal banking sector could have in this space. He says, “When the banks jump into crypto, I wonder if we are making it uncool, if we make it mainstream.”
Consumer protection
While early adopters may not want cryptocurrencies to be brought into the regulatory fold, clearly this is what will be needed for them to become mainstream. However, the regulatory road is not without a few hurdles. Most notably, the People’s Bank of China announced in September 2021 that all “virtual currency-related business activities are illegal financial activities”.
China has previously voiced concerns that cryptocurrencies were being used for various nefarious activities, from money laundering to speculative investments. Harry Hu, senior director at S&P Global Ratings, says: “There are many reasons why there has been a move to ban cryptocurrencies in China, but the main one is consumer protection. Cryptocurrencies are a highly volatile asset class and may not be suitable for an average person to trade in.”
However, Mr Hu adds that the ban may not prevent the more tech-savvy from accessing crypto within China’s borders. “But still, by using a VPN it is possible to gain access. It is more difficult, but can still be done,” he says.
For others, the ban on using crypto in China led them to exploring other opportunities. Yulong Liu, managing director of global partnerships at Babel Finance, says: “The biggest consequences of China banning the use of crypto is yet to come. The main difference we have seen so far is entrepreneurs moving headquarters from China and Hong Kong into places like Singapore, which is more open to accepting crypto. We have also seen places like Dubai and even the Bahamas coming forward as crypto hubs. A major trend is the talent outflow.”
The ban in China has seen potential investors concerned about the legitimacy of crypto in other jurisdictions in the region and beyond. “We are often asked if crypto is recognised by regulators, and the answer is certainly,” Mr Liu explains. “It is widely recognised by Hong Kong’s Securities and Futures Commission, as well as the Monetary Authority of Singapore (MAS). But we recognise there is a gap in regulation parity between the Western world and Asia.”
Mr Liu adds that the company is always striving to meet regulatory compliance across multiple markets. “We see a shift in business focus from north Asia to other regions which used to be underserved,” Mr Liu says. “For Babel Finance, we are entering into emerging markets like Latin America and Turkey. We have seen tremendous adoption of crypto assets in the mass market, and have accordingly moved resources to best serve these markets.”
But clearly regulators’ differing positions on cryptocurrencies is having an impact on how they are perceived. “Cryptocurrencies are more of a store of value than a means of payments at this stage, even in the case of stablecoins,” Mr Hu says. “This, however, could change with the promulgation of new regulations. For example, the UK Treasury plans to legalise stablecoins as a form of payment, while the Japan Financial Services Agency has authorised certain financial institutions to issue stablecoins starting from next year. Private companies, such as Stripe, have already started piloting crypto payments.”
Ravi Menon, managing director of MAS, has been outspoken on creating a positive regulatory environment for crypto to develop. To achieve this, MAS has identified areas to develop.
“We want to grow broader digital asset capabilities,” Mr Menon says. “The digital asset ecosystem comprises an entire range of crypto-related services from trading to custody, brokering, tokenisation, and the blockchain protocol development. All these are parts of the capabilities you need. And we are working very hard to enable a conducive environment for such activities to flourish in Singapore.”
Steps taken so far include clarifying the taxation treatment for crypto activities and providing grants to encourage the development of talent.
Institutional interest
Even with regulators’ thawing attitudes towards cryptocurrencies, a major hurdle to making them mainstream is convincing more cautious investors that the volatile asset can be a trusted store of value.
“There are questions around whether bitcoin is going up or down, or if cryptocurrencies are a Ponzi scheme,” Mr Manson says. “But I think the real question is around whether the asset class is here to stay. Is it relevant to clients? If so, the infrastructure needs to exist. There needs to be collaboration across the ecosystem from the IT providers to exchanges, traders and, obviously, any consumers and users. I expect this to occur as the asset class is simply here to stay.”
Crypto companies are taking advantage of the changing landscape. For example, Babel Finance solidified its place in the sector with a $2bn valuation in May 2022, after raising $80m during Series B funding round, with financing coming from established asset managers to family offices located across Asia. The Hong Kong-based company supports more than 500 companies and high net-worth individuals to provide services including crypto borrowing and lending, as well as portfolio management services.
Mr Liu says: “We are seeing interest from family offices, private companies, hedge funds and banks, so we have grown our asset base to around $5bn. We get serious interest from household names which are trying to explore [this space] further.”
Having greater involvement from the established institutions is the next phase in crypto’s adoption, Mr Manson believes. “Our thesis is that institutional adoption is inevitable. In the early days, the market was focused on retail and the early adopters, but we think it's only a matter of time until institutional adoption gains momentum,” he says.
The banks too are engaging in new developments within the space. “We have just bought a small piece of land in The Sandbox metaverse,” Mr Manson says. “Its use will be driven by our customers. There is hardly a corporate customer now of the bank who isn’t asking themselves: how can the metaverse work for me and how can I get involved? There is an element of understanding what will be relevant to our clients and society as a whole.”
Infrastructure trials
In order to bring crypto to the mainstream, the underlying technology needs to be up to scrtach. For incumbent banks, this may not be simple to achieve. Even with the modern approach to banking, there are still issues to overcome if crypto is to work in the super-fast, seamless way which is promised.
“Cryptocurrencies can be slow to settle and transactions can be quite costly in certain cases,” says Mr Hu. “For example, an Ethereum transaction can cost over $100 per transaction during network congestion. Although some blockchains are expected to be fast, these systems could occasionally crash.”
The reliability of the systems would benefit from a greater number of firms developing innovative and, moreover, trustworthy services. “There’s a lack of infrastructure to build a safe and compliant ecosystem, which I predict would facilitate much wider retail adoption,” Mr Manson says. “Once we can offer exchange-traded funds, exchange-traded products and the things asset managers can do at scale, then it could trigger the second wave of adoption that could look very different to the first wave.”
But within a regulated environment, finding services which are of a high standard both in their technology offerings and internal operations can be a lengthy process. MAS’s Mr Menon is determined to maintain high standards. “We only approve applicants with strong governance structures, fit and proper board and management, and we go through what the track record is. And they need to be familiar with money laundering and terrorist financing risks,” he says.
With a lack of trustworthy infrastructure providers, the established players are looking at how they can bridge the gap themselves. “At SC Ventures, we toyed with the idea that we should be trading the asset class, so we looked for custodians,” Mr Manson says. “We found several start-ups of differing quality, but all without an operational track record. This was not acceptable for an institutional trader like ourselves. In other words, we couldn’t find the standard at which we needed to operate in order to be an active market participant. Instead, we pivoted to creating our own infrastructure and custodian.”
Finding a middle ground to support the established, but cumbersome, banks and the new start-ups could help speed up the consumer adoption process.
DBS’s Mr Dumra says: “Regarding the arrival of the crypto companies, you need friction to start sparks and need sparks to make a fire. There was similar rhetoric when the fintechs came, saying they were going to destroy banks. I think it helps us to become sharper.”
Indeed, there are aspects of the ecosystem led by the crypto companies which the banks could leverage. “Being a start-up, we have the luxury of building the infrastructure from scratch which can cater to a new asset class,” Mr Liu says. “We can operate and trade 24/7, something which the traditional market hasn’t been able to cope with. At the same time, the banks have a long-standing track record, which is robust and brings confidence to investors.”
There is an understanding of the trade-off that is required between choosing to work with a start-up with more flexibility and little track record, and an established bank that has cumbersome technology and less experience using cryptocurrencies. “What we are doing is collaborating with banks and serving traditional investors,” Mr Liu adds. “This turning point will make it more attractive to investors and the market will continue to grow. Greater collaboration will make the asset class more investable and trustworthy.”
Getting more players into the crypto space is another key challenge for wider adoption and improving customer trust.
“Traditionally we think of other operators as competitors, as we’re in a finite environment where there’s an element of a zero-sum game,” Mr Manson says. “Here we have a different situation, where competition is validation. There is an element of us really wanting other players to become participants, get up to scratch and join in. A lot of the value of the ecosystem comes from the ecosystem itself and the ability to plug into different parts. This will be critical to create a more mature, more stable, more effective, and more efficient market we all want for cryptocurrency.”
What remains is for the banks and the crypto companies to find the space where they can work together for the mutual benefit of the market.
Interviews (except for Harry Hu) were conducted during the FT/The Banker Crypto and Digital Assets Summit, April 27-28, 2022.
