Regulating Initial Coin Offerings and Cryptocurrency Exchanges across Asia


Paul Tierno

Asian regulators have clarified their stances on initial coin offerings (ICOs) and cryptocurrency exchanges this past year as public interest in both has skyrocketed. Some of the same qualities that attract investors to cryptocurrencies, such as decentralization, anonymity, and immutability, also make them highly susceptible to money laundering and fraud. Regulators have recently acted to protect investors and limit fallout to financial systems in steps ranging from banning ICOs and cryptocurrency exchanges to implementing licensing requirements ensuring that new currencies and products face the same scrutiny as existing ones.

Emerging cryptocurrencies and corporate entities have issued numerous ICOs over the past year, capitalizing on the growing popularity of digital currencies. As of early February 2018, the combined market capitalization of the three largest cryptocurrencies was approximately $219 billion, up from $18 billion a year earlier. Cryptocurrency trading is particularly popular in Asia. For the three years prior to 2017, the Chinese yuan dwarfed all other currencies involved in bitcoin1 transactions. Since Chinese regulators implemented a series of restrictions on cryptocurrency, the Japanese yen took over as the major currency pair in bitcoin trades on exchanges.

In theory, ICOs function much like initial public offerings from traditional companies: entities issue digital coins—also known as tokens—to investors in exchange for financing of some corporate enterprise or digital currency launch. These coins may be exchanged for some service to be provided by the new enterprise, or may simply take on the value of a digital currency launched with the proceeds. Digital currencies and tokens from ICOs alike may trade on the secondary market on exchanges.

ICOs have attracted regulatory scrutiny as offerings increased more than tenfold, to an estimated $3.5 billion in 2017, up from little more than $250 million the year before, with the dramatic rise of virtual currencies, and as the lack of compliance with securities regulation and prospect for fraud became apparent. The confluence of ICO proliferation and the increased volatility of cryptocurrencies in Asia prompted many regulators in the region’s largest economies to issue rules governing ICOs and cryptocurrency exchanges. Unsurprisingly, regulatory actions like outright bans limit the demand for ICOs and cryptocurrencies. This may spook immature markets, in turn leading to greater volatility and creating a feedback loop of incidents that attract further scrutiny.

Regulators often cite the need to protect the public from volatile and unregulated investment schemes when issuing regulations. A recent study by Ernst & Young reported that nearly 10 percent (or $400 million) of funds raised by ICOs over the past two years have been hacked. Recently, hackers stole more than $400 million of XEM, a cryptocurrency, from one of the largest exchanges in Japan. Governments are also weary that the anonymous nature of ICOs and cryptocurrencies lend themselves to money laundering and potential terrorist financing.

Regulatory Actions Toward ICOs and Cryptocurrencies

Asian regulatory actions toward ICOs and cryptocurrencies fall into three main camps: countries that ban ICOs and exchanges (China); those that outlaw ICOs but permit exchanges and virtual currency trading (South Korea and Indonesia); and others that regulate ICOs as securities (Japan, Singapore, Hong Kong, Taiwan, Malaysia, and the Philippines). Below is a limited survey of the current treatment of ICOs and cryptocurrency exchanges by various Asian regulators.

Jurisdictions Prohibiting ICOs and Cryptocurrency Exchanges


For much of its brief history, bitcoin trading with fiat currencies had been dominated by the Chinese renminbi (RMB). At its height, the RMB was involved in more than 95 percent of bitcoin trades. That changed in January 2017 when China implemented a transaction tax and prohibited margin lending. RMB related bitcoin transactions conducted on exchanges fell almost overnight from greater than 80 percent to 15 percent, as trading migrated to over the counter (OTC) transactions, where they trade at a premium. Since then, Chinese regulators have banned ICOs and the trading of cryptocurrencies or operation of exchanges, according to a September 2017 memo by seven coordinated agencies, including the Peoples Bank of China (PBoC). The agencies also prohibited financial institutions and non-bank payment agencies from engaging in business related to cryptocurrencies, including issuances, account opening, trading, clearing or settling. What little Chinese trading of cryptocurrencies remained on exchanges after the tax and ban on margin lending had all but evaporated and moved offshore. Determined to stamp out activity fully, the PBoC recently outlawed participation in offshore ICOs or virtual currency exchanges as well. China still accounts for nearly 80 percent of global bitcoin mining, but this may also soon disappear as Chinese authorities decided to shut down cryptocurrencies mining operations in January 2018.

Jurisdictions Banning ICOs but Permitting Cryptocurrency Exchanges


In September 2017, Korea also banned ICOs, noting the movement of funds into a “nonproductive speculative direction.” In doing so, the Financial Services Commission (FSC) cited China’s earlier action and referred to the prevalence of fraudulent activity. Despite the blanket ban, cryptocurrency exchanges remain open and legal, and won-bitcoin transactions are the fourth largest among major fiat currencies by volume. At the same time, Korean regulators have taken additional steps, noting concern that “cryptocurrencies are highly likely to be used as a means to money launder.” Money laundering is particularly sensitive in South Korea, where exchanges are frequent targets of North Korean hackers that seek the anonymity of cryptocurrencies to bypass sanctions and obtain hard currency.

The FSC recently announced an action between the Financial Supervisory Services and the Korea Financial Intelligence Unit to inspect six commercial banks that provide trading accounts to cryptocurrency exchanges. The inspection aims to determine whether banks comply with Anti-Money Laundering and Know Your Customer regulations in serving cryptocurrency exchanges. Korean regulators have also outlawed anonymous cryptocurrency accounts, requiring that clients of cryptocurrency exchanges maintain “real name” bank accounts at the same bank holding the trading account of the exchange. Additionally, the FSC recently announced it will levy a 24.2 percent tax on cryptocurrency exchanges that earn more than $18.8 million in revenue.

These regulatory actions and earlier rumors of a potential ban sent shockwaves through global cryptocurrency markets. XRP, another popular cryptocurrency created by fintech firm Ripple, fell after some cryptocurrency trackers, which report the prices of cryptocurrencies, removed the prices reported by Korean exchanges from the aggregate price based on the various regulatory actions. XRP had traded at a premium in Korea due to a variety of restrictions that limit cross-border cryptocurrency transactions, and the elimination of the higher Korea price caused aggregates to plunge roughly 25 percent.


Bank Indonesia (BI), Indonesia’s central bank, has stated that cryptocurrencies are not “recognized as legitimate instruments of payment, therefore not allowed to be used for payment in Indonesia.” The notice builds on a 2015 BI regulation (referenced in an earlier post) requiring that all payment transactions in Indonesia be conducted in Indonesian rupiah. In the same press release, BI warns the public of the risks involved in trading virtual currencies. While the notice prohibits all payment operators and fintech companies from processing any virtual currency transactions, trading of virtual currencies is legal and exchanges are open.

Jurisdictions Permitting ICOs and Regulating Cryptocurrencies like Securities


The share of exchange-based bitcoin transactions involving the Japanese yen increased from 10 percent to more than 56 percent in the days after China implemented its transaction tax. Japan’s role as an Asian hub for cryptocurrency enthusiasts has expanded—notwithstanding the 2014 hack and collapse of a large bitcoin exchange in Tokyo—in part due to Japan’s openness to digital currencies in contrast to its neighbors. The operation of virtual currency exchanges and ICOs remain legal in Japan.

Based on a change to the Payment Services Act in April 2017, virtual currency exchanges must register with the Financial Services Agency (FSA). Since the law was promulgated, at least 11 businesses have registered as such. Then in October 2017, the FSA expanded its rules regarding ICOs and cryptocurrencies tailoring required action to the nature of the ICO. If the ICO issued a digital currency, its issuer must register as a virtual currency exchange with local finance bureau. In addition, ICOs conducted as part of an investment scheme are governed by securities law.

Singapore, Hong Kong, Malaysia, Taiwan, and the Philippines

ICOs remain legal in Singapore, Hong Kong, Taiwan, Malaysia, and the Philippines where, as in Japan, coins structured like securities are subject to securities regulation. In Singapore, Hong Kong, and the Philippines, coins resembling securities are subject to regulation by local authorities. Exchanges that facilitate secondary trading must also be registered.

Taiwan determines whether ICOs must be registered as a security on a case by case basis, while Malaysia’s central bank warned companies contemplating ICOs that such activities may trigger regulatory scrutiny and oversight.

ICOs are unregulated in Thailand, pending ongoing discussions of a regulatory framework.

Evolving Regulation

Regulation of ICOs and virtual currency exchanges has been almost as frenetic as markets for the products themselves. The same technologies underpinning cryptocurrencies, fundraising, and payments that expand financial inclusion may also promote anonymity and eschew centralized authority. As such, they exacerbate traditional concerns of regulators, issues like money laundering, fraud, and deceptive investment schemes. Fragmented systems may continue to invite regulatory arbitrage, while unregulated and dubious investments will magnify the opportunity for significant financial gain (and loss). With traditional institutions—and even some governments—considering adoption of these technologies, regulation must continue adapting to meet growing and evolving threats.

1. For the purposes of this blog post, bitcoin (the largest virtual currency) is used as a proxy for all digital currencies. However, RMB and other foreign currency volume as a percentage of total trades of other virtual currencies such as Ethereum and XRP vary. Volume refers to exchange-based transactions. However, in China much has migrated to OTC markets.

The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

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