2023 Cryptocurrency Market Regulatory Trend Forecast

Written by: Asher Zhang

The cryptocurrency market experienced significant volatility in 2022, during which LUNA collapsed, Three Arrows Capital went bankrupt, and SBF's "crypto empire" suddenly fell apart… A series of crypto events shook governments around the world. The first part of this article reviews important regulatory measures in the crypto market in 2022; the second part organizes the regulatory status and attitudes of major countries towards the crypto market; the third part predicts the regulatory trends for the crypto market in 2023.

Review of Important Regulatory Measures in the Crypto Market in 2022

In 2022, the crypto market faced tremendous turmoil, with the collapse of LUNA, the bankruptcy of Three Arrows Capital, and the sudden downfall of SBF's "crypto empire." Governments around the world also took corresponding measures. This article summarizes the major regulatory policies and measures globally in 2022.

On March 9, U.S. President Biden signed the executive order titled "Ensuring Responsible Development of Digital Assets," marking the first systematic government initiative in the U.S. regarding the development and regulation of "digital assets."

In April, the Singapore Parliament passed the Financial Services and Markets Bill (FSM), requiring digital token issuers and service providers to obtain valid financial licenses and imposing higher anti-money laundering and counter-terrorism financing requirements. The FSM bill references the standards of the Financial Action Task Force (FATF) and expands DPT services to include direct or indirect trading, exchange, transfer, custody of cryptocurrencies, or providing related investment advice. It also broadens the scope of regulatory agencies to cover cryptocurrency service providers established in Singapore but serving outside Singapore.

On June 3, Japan became the first country in the world to create a legal framework for stablecoins. The Parliament passed a bill defining stablecoins as digital currencies, stating that stablecoins must be pegged to the yen or other fiat currencies, ensuring that holders have the right to redeem them at face value.

On June 8, New York legislators in the U.S. released guidelines for stablecoins, indicating that all stablecoins must be fully backed. All stablecoin issuers must have clear redemption policies and backing for stablecoins pegged to the dollar.

On July 15, Russian President Vladimir Putin signed a new law prohibiting the use of digital assets for payments in the country.

On September 16, the White House released its first crypto regulatory framework. The government clearly focused on protecting customers, preventing crime, and potentially launching a CBDC, indicating a desire to leverage the opportunities presented by cryptocurrencies while addressing risks.

On October 10, the European Parliament's committee passed the Markets in Crypto-Assets Regulation (MiCA). On November 10, EU lawmakers voted to pass the Digital Operational Resilience Act, which will impose strict cybersecurity regulations on cryptocurrency providers.

On October 24, the Singapore High Court stated that NFTs can be considered property. Judge Lee Seiu Kin ruled that NFTs meet certain legal requirements to be regarded as property. On October 26, Singapore released a public consultation document on regulatory measures for digital payment token services, planning to further refine regulatory policies for DPT services to reduce risks in DPT transactions and protect investors.

On October 31, the Hong Kong Special Administrative Region government issued a policy declaration on the development of virtual assets in Hong Kong, clarifying the government's policy stance and guidelines for the thriving virtual asset industry and ecosystem in Hong Kong, explicitly stating its embrace of the metaverse and welcoming Web3. On November 1, the Hong Kong Securities and Futures Commission (SFC) released a circular regarding virtual asset futures exchange-traded funds, detailing the requirements for the public offering of approved virtual asset futures ETFs in Hong Kong.

Regulatory Status and Attitudes of Major Countries (Regions) Towards the Crypto Market

From the above summary, it can be seen that the countries significantly impacting the crypto market in 2022 mainly include the U.S., Europe, Japan, Singapore, and Hong Kong, and their regulatory measures have largely influenced the future direction of the global crypto market. This article further organizes the regulatory attitudes of major countries.

United States

U.S. regulatory agencies have evolved from initially including digital assets within their respective jurisdictions to now also regulating operators and issuers derived from digital assets, continuously exploring regulatory pathways. However, the issue lies in the fact that U.S. regulatory agencies have not provided clear definitions for many emerging concepts such as DeFi, DAO, and decentralized smart contracts, leading to panic in the Web3 industry as they fear that further regulatory measures may stifle the development of Web3 technological innovation, especially with OFAC's blanket sanctions against privacy applications like Tornado Cash.

To address these issues, in June 2022, U.S. Republican Senator Cynthia M. Lummis from Wyoming submitted a legislative proposal titled the "Responsible Financial Innovation Act" (under review), which aims to create a more comprehensive regulatory framework for digital assets that integrates with existing laws, pragmatically responding to current issues in digital asset financial regulation, and seeks to balance consumer protection, regulatory transparency, promotion of financial innovation, and market flexibility. The bill provides clearer delineation of the regulatory scope of the SEC and CFTC, definitions of digital assets, and regulations concerning taxation, payment stablecoins, digital asset exchanges, digital asset service providers, self-regulatory associations for digital assets, and financial innovation advisory committees. This bill represents the most comprehensive digital asset regulatory proposal in the U.S. to date, and its regulatory framework and ideas are worth referencing.

Additionally, the White House also released the "First-Ever Comprehensive Framework for Responsible Development of Digital Assets" on September 16, aiming to promote interdepartmental cooperation and provide clearer direction for the regulation of digital assets. At the same time, we see that international financial organizations such as the Financial Stability Board (FSB) and the IMF are preparing to establish regulatory frameworks for digital assets. Although there are currently dozens of bills regarding digital assets pending in the U.S. Congress, the numerous black swan events in the digital asset market in 2022, especially after the collapse of FTX, will inevitably accelerate the U.S.'s determination to further improve financial regulation for Web3, aiming to combat illegal activities while promoting technological innovation and ensuring that the Web3 revolution occurs in the U.S.

Europe

Europe's regulatory measures are mainly reflected in the Markets in Crypto-Assets Regulation (MiCA) passed by the European Parliament's committee on October 10. The main regulatory content of MiCA includes: 1. Regulatory requirements for stablecoin payment tokens and other crypto assets; 2. Regulatory requirements for various crypto asset service providers such as issuers, providers, and trading platforms. MiCA clarifies the scope of applicable regulations, classification of crypto assets, regulatory bodies, and corresponding information reporting systems, business restriction systems, and conduct regulation systems. It establishes a regulatory framework for crypto assets outside existing EU financial legal regulations, categorizing crypto assets into electronic money tokens (EMT), asset-referenced tokens (ART), and other types of crypto assets based on whether they need to anchor the value of other assets.

Thus, the MiCA bill will not only unify the fragmented regulatory policies of EU countries into a cohesive crypto regulatory system but will also influence crypto legislation in countries around the world, accelerating the transition of the global crypto market from a "wild growth" phase to a "legal era." The MiCA legislation is expected to take effect as early as February 2024.

Hong Kong

On October 31, the Hong Kong Special Administrative Region government officially issued a policy declaration on the development of virtual assets in Hong Kong, clarifying the government's policy stance and guidelines for developing a vibrant virtual asset industry and ecosystem in Hong Kong. The government maintains an open attitude towards the ownership of future tokenized assets and the legality of smart contracts to promote their development in Hong Kong. Additionally, the Hong Kong government's "2022 Amendment Bill on Anti-Money Laundering and Counter-Terrorist Financing" (referred to as the amendment bill) is expected to take effect on March 1, 2023. Overall, Hong Kong is establishing a comprehensive and targeted regulatory policy for digital currencies, specifically:

• For security tokens, they will be regulated under the "same business, same risk, same rules" principle by the Securities and Futures Ordinance.

• For virtual assets, Hong Kong will classify them separately through the upcoming "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance" and introduce a new regulatory and licensing system.

• For stablecoins, they will be regulated as virtual assets and may be combined with Hong Kong's existing regulatory framework for stored value payment tools, while also being subject to the Payment Systems and Stored Value Facilities Ordinance.

• Currently, there is no one-size-fits-all regulatory policy for NFTs; some NFTs with securities rights are classified as security tokens for regulation, while some NFTs with governance voting rights will be regulated as virtual assets, and NFTs used for points or gaming purposes will not be subject to the aforementioned regulations.

On December 13, the Hong Kong stock market launched Bitcoin futures ETFs (03066.HK) and Ethereum futures ETFs (03068.HK), which were listed on the 16th, opening the door for Hong Kong stock investors to enter the crypto space. Under the regulation of the Hong Kong Securities and Futures Commission, investors can access Bitcoin and Ethereum-related products through familiar investment methods and forms on the Hong Kong Stock Exchange. The openness of the policy undoubtedly injects confidence into the market.

Singapore

Singapore has a very friendly attitude towards Web3, attracting numerous Web3 companies to establish their headquarters here. From a regulatory perspective, the Monetary Authority of Singapore primarily regulates the banking, securities, insurance, and payment industries, thus categorizing digital currencies into security tokens and payment tokens for separate regulation.

In terms of regulating security tokens, there is already a relatively mature regulatory system for securities, so Singapore applies existing securities regulatory policies through the Securities and Futures Ordinance or the Securities and Futures Act. For non-security token regulation, Singapore tends to formulate entirely new regulatory laws, having established the Payment Services Act (PSA) and the Financial Services and Markets Bill (FSM) to classify most non-security tokens as digital payment tokens (DPT) for regulation.

Regarding stablecoin regulation, on one hand, they are regulated as digital payment tokens or virtual assets; on the other hand, Singapore has taken further measures to regulate stablecoins, intending to add regulatory provisions for stablecoins under the Payment Services Act (PSA). Additionally, regarding central bank digital currency (CBDC), Singapore launched the Ubin project in 2016 for cross-border real-time settlement, which has now entered its fifth phase.

Both Singapore and Hong Kong adopt an inclusive and open attitude towards regulating digital currencies, embracing and encouraging technological innovation while implementing supporting regulatory policies to manage risks and protect investors. From the similar regulatory strategies adopted by Singapore and Hong Kong across different dimensions, we can roughly understand the development direction of digital currency regulation.

Japan

On October 14, the Japanese government announced that the Cabinet had approved a regulatory bill for the crypto asset sector, amending the Act on Prevention of Transfer of Criminal Proceeds to require the sharing of customer information between crypto asset exchanges. Cryptocurrency businesses will be subject to the same level of regulation as financial institutions. In addition to the Act on Prevention of Transfer of Criminal Proceeds, the Japanese government will also collectively revise laws related to money laundering, including the Foreign Exchange Act, the International Terrorism Property Freezing Act, and the Act on Prevention of Transfer of Criminal Proceeds, all involving crypto assets.

Regarding the digital yen, the Bank of Japan (Japan's central bank) has coordinated with three major banks and regional banks to conduct demonstration experiments for the issuance of the "digital yen." Starting in the spring of 2023, it will collaborate with private banks and other institutions to verify whether there are issues with bank account deposits and withdrawals. In the event of a disaster, it will check whether it can operate in an offline environment. This experiment will last for two years, and the Bank of Japan will decide in 2026 whether to issue a CBDC. On December 15, it was reported that Japan's ruling party agreed to relax corporate tax regulations on virtual currencies, exempting companies from paying taxes on unrealized gains from cryptocurrencies they hold after issuance. Currently, profits from holding cryptocurrencies, including unrealized gains, are subject to approximately 30% corporate tax in Japan. Besides this, Japan has not made significant regulatory moves, and given Japan's cautious approach in the crypto field, it is likely observing the dynamics of other countries.

China

Since 2013, China has continuously strengthened its regulatory efforts in the field of virtual currencies. In September 2021, ten departments jointly issued a "comprehensive ban" on virtual currency-related businesses, reaching the peak of regulatory intensity. In March 2022, an article published by the Central Bank's Financial Stability Bureau pointed out that significant achievements had been made in preventing and resolving financial risks since the 19th National Congress. A comprehensive cleanup of financial order has been initiated. The focus has shifted to the normalization of regulatory measures against internet financial irregularities. On September 26, the People's Bank of China stated that it would comprehensively clean up and rectify financial order, continuing to crack down on domestic virtual currency trading and speculation, leading to a significant decline in China's share of global Bitcoin trading volume. Overall, mainland China maintains a high-pressure stance on financial transactions involving crypto assets but has consistently maintained a positive attitude towards blockchain technology.

Outlook on Global Crypto Market Regulatory Trends in 2023

From the regulatory measures and attitudes of major countries discussed above, it is evident that the regulatory processes of major countries vary significantly, and there are considerable differences in their regulatory attitudes towards the crypto market. Overall, the need for global regulation of the crypto market has become very urgent.

Since 2022, over 42 sovereign countries and regions worldwide, excluding mainland China, have implemented 105 regulatory measures and guidelines for the crypto industry. The U.S. has 22 measures, including crypto trading, crypto regulatory guidance, judicial rulings, stablecoins, etc.; the EU has 9 measures, involving regulatory guidance for a series of crypto-related bills, stablecoins, anti-money laundering, etc.; South Korea has produced 8 measures, mainly in judicial rulings, stablecoins, and crypto regulatory guidance.

Considering the inconsistent regulatory pace of various countries, the Financial Stability Board (FSB), which coordinates cross-border financial regulation and formulates and implements global financial standards, will outline steps for regulating the cryptocurrency industry at the beginning of 2023 and quickly issue these measures. In the coming months, the FSB intends to establish a timeline for global regulatory agencies to implement its initial recommendations on global crypto regulation and detail areas where policymakers can benefit more clearly before formulating rules, stating that the goal is to establish a system where crypto service providers offering the same services as banks will adhere to the same standards as banks.

From the current regulatory landscape regarding crypto assets in various countries, the following three trends are expected to emerge:

• Globalization of crypto regulation, with countries exchanging and learning from each other, leading to a gradual unification of regulatory policies, reducing the institutional costs of crypto capital flows across countries and improving capital utilization efficiency.

• Deepening of crypto regulation, as various laws and regulations are promulgated, phenomena such as ambiguous definitions of crypto assets and unclear regulatory responsibilities will be further addressed, resulting in more refined and in-depth development of crypto regulation.

• Expansion of the scope of crypto regulation, with further integration of crypto finance and traditional finance, achieving bidirectional interaction between reality and the virtual world, broadening the areas of user engagement, and making the integration of crypto into real life a significant trend in future financial regulation.

• Despite a tumultuous year for the crypto market, many market participants are not worried about the long-term health of the crypto industry; in the future, the legal framework in 2023 may help restore trust in the industry.