Babel Finance: Current Status and Outlook of Crypto Asset Management in Asia

The Asian crypto-financial market has been developing in the contradiction between strong government regulation and private self-growth. China began to crack down on crypto mining and trading in 2021, and "CHOYNA" gradually disappeared in the crypto community. Asia, which accounted for 43% of global crypto trading volume last year, has slipped to 35% this year. At the same time, a wave of investment by crypto institutions has emerged in Europe and the United States, and they have begun to dominate the crypto market. Despite this, participants in the crypto asset market in Asia are still innovating and changing, and new trends and orders are forming in the Asian market. Here, we sort out the overall development of crypto asset investment in Asia since 2021, focusing on the differences in development among countries, the focus of interest of Asian investors, and analyzing the challenges facing the Asian crypto asset industry, hoping to provide investors with meaningful reference for their investments in the new year.

Key Takeaways

• At present, Asia is forming a basic pattern of strong regulation in East Asia and South Asia, soft regulation in Southeast Asia, mining in Central Asia, and lagging behind in West Asia.

• Thanks to their strategic geographical locations, Singapore and Hong Kong are becoming Asia's crypto hubs.

• The main obstacles to the development of crypto asset management in Asia are the vague regulatory system and the lack of infrastructure. Although there are great differences between countries/regions, this obstacle is gradually being eliminated.

• Asian investors' interest in cryptocurrencies continues to rise. Institutional users prefer to allocate mainstream coins or related tracking assets. Ordinary users are becoming differentiated. Southeast Asia may lead the GameFi market.

• Many reports believe that Asia has huge potential for crypto asset management and its growth rate will rank first in the world.  

Table of contents

Market Overview

Asset management: venture capital and hedge funds dominate

Investment Group: Institutional acceptance increases, retail investors flock to GameFi

Compliance and supervision: Singapore and Hong Kong are currently leading in Asia

1. Market Overview

In 2017, Asian investors became the main force driving the rise in Bitcoin prices. However, in the bull market of 2020-2021, Asian investors performed slightly bleakly, lagging far behind their European and American counterparts in terms of the number and scale of participants, as well as the estimated average returns. However, with the clear regional regulatory framework and the rise of NFTs and GameFi, Asia's new crypto-financial landscape is being rebuilt. The Asian market, which accounts for 60% of the world's population, has initially formed a basic pattern of strong regulation in East Asia and South Asia, soft regulation in Southeast Asia, lagging in West Asia, and mining in Central Asia.

1. Regional pattern

East Asia and South Asia : In 2021, East Asian countries represented by China and South Korea continued to regulate the cryptocurrency industry, while Indian regulation was wavering many times. Chinese miners, who once accounted for more than 60% of the global Bitcoin computing power, have gone overseas. For a long time to come, East Asia will be the region with the strictest regulation of the crypto industry. Of course, Hong Kong and Japan are exceptions, which we will discuss in detail later.

Despite this, East Asia still firmly holds the largest share of the Asian crypto financial market, while South Asia and Southeast Asia have huge potential for scale growth.

Southeast Asia : Southeast Asia has great differences in the region, but the popularity of cryptocurrencies is growing the fastest. The Philippines' computing power has always been at the forefront, Singapore's crypto financial industry is developing rapidly, and the GameFi craze in 2021 has also boosted the region's enthusiasm for crypto investment.

Central Asia : Central Asian countries represented by Kazakhstan have abundant and cheap natural gas resources and have taken over part of China's computing power. The computing power of Central Asia and Russia's Far East is second only to the United States.

West Asia : Except for Iran, which has a place in the mining field, the development of the encryption industry in West Asia is almost stagnant, and there are no highlights worthy of much attention at present.

2. Industry structure

Asian crypto companies/projects are in a priority position in areas with significant short-term profits, such as mining machine manufacturing and exchanges, but there is a clear gap compared to Europe and the United States in terms of infrastructure (such as public chains) and asset management. An obvious case in point is that the DeFi, NFT, and public chain competition booms are all led by American companies, while the popular Pay to Earn model GameFi in 2021 was the first to prevail in Southeast Asian countries.

Major participants in Asian crypto finance Figure 1 Source: Babel Finance compiled from public information

When it comes to crypto asset investment and management, different cultures and regulatory differences limit the expansion of borderless crypto technology and products, which imposes many constraints on crypto asset management in registration, issuance, investment, etc. Despite this, the popularity of cryptocurrencies in Asia is still rising rapidly and ranks first, and the crypto asset industry has potential for breakthroughs, which we will discuss in detail below.

Global Cryptocurrency Acceptance Index Distribution Figure 2 Source: Chainalaysis

2. Asset management: venture capital and hedge funds dominate

1. Crypto funds in Asia are growing fastest, concentrated in Hong Kong and Singapore

According to a report from MarketsandMarkets™, the global crypto asset management scale will have a compound annual growth rate (CAGR) of 21.5% from 2021 to 2026. North America will still have the largest market share, but Asia Pacific will grow the fastest.

Research And Markets is more optimistic, and its research report points out that the global blockchain technology market will grow at a compound annual growth rate of 82.4% from 2021 to 2028, and is expected to reach US$394.6 billion by 2028. The report also mentioned that the increasing adoption of blockchain technology in emerging economies such as China and India will create growth opportunities for market players in the Asia-Pacific region during the forecast period.

Comparison of regional growth rates of global digital asset management scale Figure 3 Source: MarketsandMarkets™

As we mentioned in the introduction, Asia has the world's largest emerging economy, a traditional habit of high savings rate and a stable financial technology development background. It has a very large room for growth in the crypto market. Singapore and Hong Kong, China have gradually become the crypto centers of Asia.

At the same time, we compared the data of PwC in 2019 and Crypto Fund Research in 2021 and found that the number and size of crypto funds in Asia have not fluctuated significantly, and are still concentrated in Singapore and Hong Kong, China. As shown in the figure below, as of Q3 2021, there are 125 crypto funds in China (including Hong Kong) and Singapore, accounting for 15% of the total statistical samples.

Distribution of crypto funds by country Figure 4 Source: Crypto Fund Research

2. Crypto Funds: Mainly Venture Capital and Hedge Funds

Crypto investment funds in Asia are mainly venture capital funds (VC) and hedge funds, with a small number of investment trusts and private equity funds (PE). There are even fewer over-the-counter forward/swap products and bond funds. Exchange-traded funds (ETFs), exchange-traded notes (ETNs), exchange-traded managed funds (ETMFs), exchange-listed structured products (SPs), exchange-traded instruments (ETVs), and exchange-traded commodities (ETCs) that are gradually emerging in Europe and the United States are even rarer.

In general, there are not many native crypto funds in Asia. It is common for traditional funds to participate in crypto venture capital, and institutions that are deeply involved in crypto investment often implement equity investment and token investment in parallel.

1) Venture Capital Funds

To elaborate, Asia has the largest number and scale of crypto venture capital funds, mainly because under the current legal and regulatory framework, the terms for protecting equity investments are clearer and more complete. At the same time, financial technology in East Asia and Southeast Asia is developing rapidly, and the geographical conditions are unique.

Asian crypto-equity investment institutions are mainly concentrated in East Asia and Southeast Asia, with more than half of them established in the form of funds. According to our incomplete statistics, as of November 2021, there were approximately 542 institutions involved in crypto-equity investment in Asia, distributed in China (223, including Hong Kong, Macao and Taiwan), Singapore (117), India (48), Japan (36), Vietnam (36), etc.

In order to minimize friction with regulators, such funds mostly adopt closed-end management and joint investment methods. For example, Sino Global has been using its own capital to invest in more than 20 crypto startups, and only last year did it publicly issue a $200 million fund with the support of FTX.

The more well-known ones include Fidelity Asia Ventures (FAV), S. Capital, Fenbushi Capital, Node Capital, Spartan Group, Alameda Research, etc.

14 blockchain projects invested by Sequoia China Table 1 Source: Science and Technology Innovation Board Daily

Venture capital funds generally invest in crypto projects by holding equity for a long time, and receive a small amount of tokens with lock-up periods. According to our observations, many venture capital funds have investments from other large institutions, and these venture capital funds often jointly invest in projects. Such investment background and cooperation methods help venture capital funds gain strong information collection and identification capabilities, and increase their voice in the projects they invest in. At the same time, they can also help crypto projects in community governance, marketing promotion, early liquidity supply and business development.

2) Hedge Funds

The structure of crypto hedge funds is very similar to traditional hedge funds. They mainly use leveraged trading strategies such as quantitative trading, arbitrage, long and short positions to create alpha or returns above the market for high net worth individuals and institutional clients.

Given the limited support channels for capital entry and the uncertain regulatory environment in the region, Asian crypto hedge funds are operating cautiously. After China introduced a series of crackdown policies, the United States took over the spot pricing power of cryptocurrencies, but Asian funds still occupy an important position in the derivatives market because exchanges with Chinese backgrounds generally provide high-leverage contract products.

Similarly, Asian crypto hedge funds are mainly concentrated in East Asia and Southeast Asia, second only to North America and Europe in terms of number and size. We combined the data from Crypto Fund Research and Dove Metrics and found that Asian crypto hedge funds are mainly distributed in China, Singapore, Vietnam and other places. The Middle East also has 2.5% of the world's crypto funds, which may be attributed to 3iQ's ETP product QBTC listed on Nasdaq Dubai.

2021Q3 Global Crypto Hedge Fund Market Changes Figure 5 Source: Dove Metrics

Registration and issuance : Due to vague regulatory requirements and a sensitive regulatory environment, the registration and issuance of Asian crypto hedge funds is more conservative than equity funds. Most of them are in an unregulated closed state, and there are only a small number of registered funds for qualified investors. For example, Huobi-Asset has obtained a Category 9 (asset management) license from the Hong Kong Securities and Futures Commission (SFC). It has issued four compliant funds, including Bitcoin Tracker Fund, Ethereum Tracker Fund, Active multi-strategy virtual asset Fund, and Multi-Asset Fund.

Some publicly issued Bitcoin funds registered in Asia Table 2 Source: Babel Finance compiled from public information

In addition to specialized crypto-themed funds, other traditional funds (Non-crypto focused funds) may also participate in cryptocurrency investment, but there are currently no public cases.

Subscription and redemption : Registered crypto hedge funds generally require qualified investors to pass anti-money laundering (AML) and know your customer (KYC) before they can subscribe. Different funds of different sizes have different rules for redemption.

Fees: According to PwC's 2021Q3 digital currency hedge fund report, the median fees charged by crypto hedge funds are 2% management fees and 20% performance fees, which are consistent with the data in the 2019 report, but the average performance fee increased from 21.1% to 22.5%, which means that the high returns brought by the bull market have enabled fund managers to receive higher compensation rewards.

This charging rule is generally applicable to the situation in Asia. For example, BBshares in Hong Kong and Kryptos Alpha in Singapore adopt the traditional 2/20 charging principle. BGBF-1, the first compliant Bitcoin fund in Southeast Asia, charges an annual management fee of 1.5%. Most decentralized small funds have waived subscription fees and directly agreed on the profit sharing ratio.

Investment targets : In our research, we found that the investment targets of local crypto hedge funds are similar to those in Europe and the United States. The main investment directions are:

• Mainly cryptocurrency spot (passive management), BTC and ETH have the highest adoption rate, and there are also some BNB, LINK, LTC, DOT, AAVE, etc.;

• Cryptocurrency derivatives and their combinations, including arbitrage, hedging, high-frequency trading, etc. of options, swaps and CFDs. For example, Babel Finance once launched a hedging "shark fin" option contract structured product for miners;

• Staking and Lending/Borrowing product investments include self-operated mortgages, zero-interest loans, overnight lending loans, spot leverage or margin products, etc. For example, the investment direction of Fintonia Secured Yield Fund, a registered fund released by Singapore's Fintonia Group, is to lend stablecoins to lenders, who in turn obtain collateral in the form of Bitcoin.

In addition, there are a small number of funds investing in cloud computing power, securitized products and other areas.

• Invest in cloud computing power or mining machine support business for miners. Cloud computing power is to securitize and package mining computing power based on the POW mechanism, and split it into products that will use the mined cryptocurrency as the distribution income in the future;

• For example, in August 2017, Japanese financial information company Fisco issued the country’s first Bitcoin-backed bond.

Investment strategy: In terms of investment strategy, unlike the long-term holding plan of North American compliant funds, Asian crypto funds are in a specific environment without strict position limit declaration, financial audit, tax payment, etc., so they tend to adopt short-term transactions on a wider range of assets, including buying, market making, arbitrage, hedging and other strategies and their combinations, thus forming two types of products: net value and fixed income.

The four most common strategies of crypto hedge funds Figure 6 Source: PwC

3. Investment Group: Institutional acceptance increases, retail investors flock to GameFi

1. Investors’ interest has doubled and they are entering the market one after another

Cryptocurrency has become popular in 2020, and Asian investors have shown a surge in interest. One obvious fact is that despite the many compliance obstacles, Asian investors are still actively participating in crypto activities.

In fact, the popularity of cryptocurrency in Asia is not that lagging behind. According to the visit data of bitcointalk.org, Chinese holders account for 1.5%, and Japan, Thailand, Indonesia and other countries account for about 1%, second only to English-speaking developed countries.

According to research data from Fidelity, Chainalysis, and the financial comparison website Finder, the cryptocurrency collection rate in Asia, especially in ASEAN countries, is higher than in Europe and the United States. The acceptance of cryptocurrencies by ordinary users in Vietnam, India, the Philippines, Indonesia, Hong Kong, China, Malaysia and other places are all at the forefront. The main driving factor is neither seeking safe havens due to social unrest like in Latin America and Africa, nor using it to fight inflation or as a means of tax exemption like in Europe and the United States. It is more driven by the convenience of crypto transactions and the FOMO sentiment of pursuing bull market profits.

As early as 2019, the Organization for Economic Cooperation and Development (OECD) conducted a report titled "Cryptoassets in Asia — Consumer attitudes, behaviours and experiences" on three Southeast Asian countries: Malaysia, the Philippines and Vietnam. Among the respondents, more than 68% of them invested more than 5% in crypto assets.

Proportion of assets invested in cryptocurrencies by people in sampled countries Figure 7 Source: OECD

Some more intuitive figures show that the pace at which Asian investors are allocating cryptocurrencies is accelerating.

• According to Indonesian exchange Bappebti, there are currently 4.45 million cryptocurrency investors in the country. An estimate from the Indonesian Ministry of Trade is more optimistic, predicting that there will be about 6.6 million cryptocurrency investors in the country by June 2021.

• The "Virtual Currency App Market Analysis" research report released by IGA Works in April 2021 shows that the number of users who have downloaded virtual currency apps in South Korea has reached 3 million, of which 60% are new crypto investors. They are investing in Bitcoin and "the top ten altcoins by market value", with specific amounts below US$100.

• According to data from JPBitcoin, 11 local crypto exchanges in Japan have a 24-hour trading volume of nearly 6,000 BTC, of ​​which Japanese yen accounts for 13.67%. Due to the entry of Mrs. Watanabe, who is good at financial management, and the strong anime culture, NFT in Japan has developed rapidly. BitBank's online survey shows that 26% of Japanese crypto investors already own NFT.

• In 2021, GameFi took the lead in Southeast Asia, and the number of crypto users surged. Most notably, the top-ranked Ethereum game Axie Infinity was developed by a Vietnamese team, sparking a nationwide craze in the Philippines, Indonesia, and Vietnam.

• The 2021 ASEAN Fintech Report released by UOB, PwC Singapore and Singapore Fintech Association (SFA) Crypto shows that in the first nine months of 2021, the region's cryptocurrency sector surpassed alternative lending (such as P2P lending platforms) from the top three for the first time in six years.

It is also worth mentioning that there are significant regional differences among Asian investors. In developed countries/regions in Asia, investors are often dominated by high-net-worth individuals or institutions, while in developing countries/regions, ordinary users account for a larger proportion. This seems to be easier to understand. Singapore and Hong Kong, China, where the Asian crypto markets are the most prosperous, are typical representatives. They have small hinterlands, small population bases, and have entered a deeply aging society, so crypto investors are mainly overseas and local institutions established here, rather than local residents.

2. Institutional users: mainly high net worth individuals and family offices

Compared with Europe and the United States, Asia's compliant investment channels have always been scarce, which has led to the fact that institutional investors are still mainly high-net-worth individuals and family offices, and they are concentrated in the more easily operable equity investment field. However, this situation is changing, and many traditional private equity funds, listed companies and even sovereign wealth funds in Asia are beginning to deploy in the crypto field.

1) High Net Worth Individuals

High net worth individuals can be identified as qualified investors or professional investors. The threshold defined by Hong Kong is HK$8 million (approximately US$1.02 million), while Singapore is slightly higher at S$2 million (approximately US$1.46 million).

High net worth individuals are the most common type of investor in crypto hedge funds. Asia’s high net worth users are mainly early miners, and there are also many Hodlers who seek to hedge against inflation or are optimistic about the prospects of crypto.

• According to the "2021 Korean Rich Report" released by the KB Financial Group Management Institute, 33.8% of the rich people surveyed in South Korea have invested in cryptocurrencies, and the proportion of "active investment" has increased by 5.2% month-on-month.

• DBS Bank (DBS) disclosed in its first quarter 2021 earnings call that the DBS Digital Exchange (DDEX) serves 120 clients and holds assets worth S$80 million (approximately US$60 million).

• Singapore-based crypto hedge fund Kryptos Alpha has revealed that all of its funding came from high net worth individuals.

2) Family Office

In addition to directly investing in crypto assets, some high-net-worth individuals will set up their own family funds to invest in crypto assets, and the proportion of crypto assets in the investment portfolio is generally less than 3%.

American family offices have played an important role in allocating Bitcoin. Well-known family offices such as the Soros Family Office, Rockefeller Investment Company, and Winklevoss Capital have all included Bitcoin in their investment portfolios.

Unlike American family offices that directly purchase Bitcoin, Asian family offices are relatively scarce in this area. We have not yet seen any cases of directly buying crypto assets, but we can still see them in the blockchain investment field in some equity investment cases.

Animoca Brands is a blockchain game and NFT developer headquartered in Hong Kong. According to incomplete statistics, the company has invested in more than 100 blockchain projects in the past three years. Sky Mavis (Axie Infinity), which became popular in 2021, is in its investment sequence. The investor behind the company is Blue Pool Capital, the family wealth management fund of Jack Ma and Joseph Tsai.

3) Listed companies

The most well-known case is that Meitu, a Hong Kong-listed company, purchased $100 million worth of Bitcoin in three installments in 2021. Meitu's configuration of cryptocurrencies provides a reference model for other listed companies. Its method of buying Bitcoin as a balance sheet and complying with the accounting and legal standards disclosed by listed companies has been proven to be worthy of reference.

In fact, Asian companies may have bought crypto assets in different forms, but such data is not available, as Binance founder Changpeng Zhao (CZ) said on Twitter, "I know many asian companies own #Bitcoin฿ already. They are just not very public about it."

4) Commercial Banks

Although commercial banks in Asia have not included crypto assets in their bank reserves, they have begun to invest in the crypto field and are even directly involved in the custody of crypto assets and the exchange of stablecoins.

In November 2021, Siam Commercial Bank, one of Thailand's largest banks, acquired a 51% stake in the cryptocurrency exchange Bitkub for over US$500 million.

Korea's Kookmin Bank (KB), Japan's Nomura Securities, Singapore's DBS Bank (DBS), and Sygnum Singapore headquarters have all opened crypto asset custody services.

5) Sovereign Wealth Funds

The sources of funds for sovereign wealth funds are national fiscal surpluses, foreign exchange reserves, natural resource export surpluses, etc., and they are generally managed by specialized government investment institutions. This requires sovereign wealth funds to have a very conservative investment style and mainly make long-term investments.

Currently, except for El Salvador, government investment funds in other countries in the world have not directly invested in Bitcoin. For example, the well-known Norwegian Government Pension Fund also indirectly holds Bitcoin through investing in MicroStrategy. However, Asian sovereign funds or government shareholding institutions have also gradually deployed in the encryption field.

• Cyberport is affiliated to the Hong Kong Cyberport Management Company Limited, which is wholly owned by the Hong Kong Special Administrative Region Government. It is the largest financial technology center and innovative digital community in Hong Kong. It has successively invested in crypto custodian Hex Trust, crypto payment provider Bitspark, etc.

• Abu Dhabi's Mubadala Investment Capital, the world's 13th largest sovereign wealth fund, invested in crypto asset exchange MidChains in 2019.

• South Korea’s sovereign wealth fund has also been involved in crypto investments. South Korea’s National Pension Service (NPS) invested $2.44 million in four companies operating cryptocurrency exchanges in South Korea in January 2020.

Although all of the above-mentioned Asian sovereign wealth funds have adopted equity investment to participate in the crypto business, participation in token investment is also about to happen. According to reports, the Korea Teachers’ Credit Union (KTCU), a South Korean pension fund with an asset size of $40 billion, plans to start investing in a Bitcoin ETF in 2022.

3. Retail investors: The rise of Southeast Asian gaming guilds

Except for Singapore and Hong Kong, China, Southeast Asia has a much higher penetration rate and usage of the new crypto market than other regions. We have combined research reports from Finder, Messari, Chainalysis, DappRadar, Statista, etc. and found that users in emerging Asian economies such as Malaysia, the Philippines, Vietnam, and Indonesia have a higher penetration rate in the Metaverse than the first place. The high level of participation and enthusiasm of Generation Z has undoubtedly boosted the Metaverse narrative of Pay to Earn, significantly increasing Asia's influence.

• Coins.ph, the largest crypto payment platform in the Philippines, had 5 million users at the beginning of 2019 and has reached 10 million users by 2021;

• Indodx, Indonesia’s largest exchange, had nearly 2 million members in June 2020, with a monthly trading volume of $200 million, and 4.7 million members by November 2021;

• Bitkub, the largest exchange in Thailand, once revealed that after the price of Bitcoin exceeded $40,000, more than 4,000 new accounts were added every day. As of early July 2021, its number of active customers reached 1 million;

• A survey on Singapore's crypto users jointly released by cryptocurrency exchange Gemini and Seedly showed that 66% of respondents had invested in and held cryptocurrencies, of which 80% of cryptocurrency holders were still under 35 years old, and half of them were in the 25-34 age group.

If the crypto adoption rate in Asia continues to increase and local investors are following the US-driven crypto bull market, then the explosion of the Metaverse in the second half of 2021 directly enabled digital game natives in Southeast Asia to overtake others with the help of Play to Earn's GameFi.

In July 2021, Axie Infinity, a fighting game developed by a Vietnamese team, became popular in Southeast Asia after its launch. It seems to be no different from ordinary pet fighting games, but its creativity lies in the use of NFT to make each elf in the game unique, and these elves themselves need to be purchased with ETH. Although similar games have appeared before, the technical application of this game is more mature and the game system is more complete. Especially under the promotion of the local game guild in the Philippines (Yield Guild Games, YGG), this game has taken shape as a metaverse, just like DeFi instantly ignited the enthusiasm of global players due to liquidity mining.

According to data, Axie Infinity has approximately 2.5 million active online players every day. These players generated more than US$2 billion in trading volume in November, accounting for more than 80% of the total NFT game market. Its token AXS has also soared, with an increase of more than 1,700% in the past four months.

If the soil for the explosion of P2E blockchain games in Asia is the local emerging economies, high-density population and booming application of financial technology, then gaming guilds are the direct drivers of this wave of enthusiasm.

A gaming guild is a guild organization composed of senior gamers. By formulating various rules, the players can interact and collaborate efficiently and have fun playing. For example, many gaming guilds in Southeast Asia, such as YYG, Crypto Gaming United, and Gaming Guild, most of their members are from low-income groups in countries such as the Philippines, India, and Indonesia. Their large scale of personnel, when encountering P2E blockchain games, naturally has the conditions for detonation, comparable to the retail organizations on the WSB section of Reddit in the United States.

According to data from the public opinion monitoring website Meltwater in November 2021, seven of the top 10 countries driving P2E traffic trends are from Asia, three of which are emerging economies in Southeast Asia (Indonesia, the Philippines, and Vietnam).

Ranking of the top ten countries with the social trend of "earning while playing" Figure 8 Source: DappRader, Meltwater

In general, the collision between Southeast Asia's millennials and Generation Z players and the digital assetization of NFT props in games has produced a huge underlying fission effect, which has directly promoted the popularity and usage of crypto assets in the region. It also means that a new narrative paradigm has emerged in the field of crypto assets in Asia, which will help to balance the US-dominated market institutions to a certain extent.

4. Compliance supervision: Singapore and Hong Kong become Asian centers

1. The regulatory framework needs to be improved and compliance channels are still scarce

Asia has a large population, with complex ethnic, religious and cultural circles, and great differences in economic development between regions. Regulators are still in the initial stage of understanding crypto assets. Therefore, different countries and regulatory agencies often make assessments based on the interaction with their governing goals related to finance, energy, etc., and have different interpretations of the crypto industry. Moreover, according to changes in actual circumstances, they will also adopt inconsistent plans. The reasons for this result include not only the ethnic, religious and cultural reasons mentioned above, but also are closely related to the country's political and economic development policies.

In East Asia, regulators in China, Japan, South Korea and other countries have a clear risk-averse tendency. They are more concerned about the speculative risks brought about by the high volatility of cryptocurrencies rather than the potential prospects of the digital financial era.

Of course, this overview is not comprehensive. Although China has taken the most severe crackdown on cryptocurrencies, it has always encouraged and supported the non-currency industrial blockchain + integrated applications, which is completely different from the United States' focus on crypto finance and infrastructure.

Another example is Japan. Although the country announced the legality of Bitcoin transactions and the benefits of sales tax exemption as early as 2017, Japan's business environment is not very free, and the almost harsh regulations on ICOs and derivatives have made the industry lack vitality, which is incomparable to Singapore's outward-looking open policy.

In Southeast Asia, Singapore has become the leader, while the Philippines, Indonesia, Malaysia and others have an open attitude. Other Southeast Asian countries are mainly taking a wait-and-see attitude on the issue of digital currency.

In fact, under the premise of vague or wavering official policies, the crypto asset industry has unlimited growth opportunities, which means that the emerging crypto industry in the emerging economies of Southeast Asia can be operated with caution. The lack of government supervision may reduce the constraints on the industry, but in the absence of a clear statement from the government, the crypto market is still a marginal industry and there are always uncertain legal risks.

Current status of cryptocurrency regulation in Southeast Asia Figure 9 Source: Babel Finance compiled from public information

Of course, going further, Asian regulators’ understanding of crypto assets is still incomplete, and regulating the decentralized crypto market also faces many practical obstacles. Only Singapore and Hong Kong have initially explored a relatively open and standardized path, which we will discuss in detail below.

In general, Asian regulators are open to the research and development and application of blockchain technology, while ICOs involving cryptocurrencies vary from country to country and region. However, the overall regulatory goals are basically the same, namely to maintain financial stability and moderate financial innovation, safeguard the legitimate rights and interests of participants, and ensure the integrity and continuity of market operations.

2. Regulatory barriers: high compliance costs, CBDC and crypto payment competition

From a global perspective, the pace of crypto regulation in Europe and the United States is faster and the plan is clearer. The relevant regulatory agencies in the United States issued a joint statement in November 2021, pointing out the regulatory path related to the crypto asset industry. The European Central Bank also released a new version of the Electronic Payment Regulatory Framework (PISA) that month.

Returning to the Asian perspective, relatively speaking, the policies of Asian countries/regions towards the crypto industry vary greatly, and there is no regulatory consensus like Europe and the United States. The current compliance obstacles are mainly:

1) High compliance costs may keep crypto funds away from regulation

Crypto hedge funds in Asia currently cannot obtain a complete set of services like traditional funds. For example, many aspects such as bank account opening, fund custody, insurance support, financial auditing, etc. are still unclear. Similarly, for professional investors, they will put forward a series of requirements for crypto funds due to channel compliance, private key security, management stability, etc.

In addition, how to conduct compliance filing is also a long and complicated task.

On the one hand, the interim compliance opinions required by the regulator are relatively complex and vague, and it takes a lot of time and money to meet the basic filing conditions. Currently, only a few funds in Asia have been approved, and none of them are open to small and medium-sized investors. This has raised the threshold for compliance filing and also limited the flexibility and management scale of investment funds.

For example, BX, one of the first licensed exchanges in Thailand, was closed due to high compliance costs. Another example is that for compliant crypto hedge funds registered in Hong Kong, not only are customers required to be professional investors (with assets of more than HK$8 million), but they must also insure 100% of online virtual assets (hot wallets) and 95% of offline virtual assets (cold wallets) on the platform.

On the other hand, crypto funds are very different from traditional operating rules in terms of executing trading strategies, protecting privacy information, paying taxes, etc. For example, fund managers may need to operate frequent arbitrage strategies, but the assets are not actually transferred on the chain in centralized exchanges, and if they are placed in a custodial wallet, they cannot meet the low-latency strategy requirements. All these will cause crypto funds to actively stay away from or evade supervision, and even turn to DeFi applications (such as derivatives trading protocols, etc.).

2) Asian countries’ demands for financial stability are greater than their expectations for cryptographic means outside the legal currency system

Except for Japan, South Korea, Singapore and other countries, most Asian countries are developing countries. This background determines that Asian regulators tend to prefer a stable financial order on which economic development depends, and it is difficult to transfer market intervention rights to other financial means outside the conventional monetary system.

As the world's largest emerging economic market, Asian governments have always implemented foreign exchange controls to varying degrees based on historical experience to limit excessive capital outflows and frequent currency fluctuations. Although encryption payment technology has many advantages such as low cost, high efficiency, and strong privacy, it can fill the gap in financial services that banks cannot reach, but from the perspective of the government, such an uncontrolled financial system is likely to disrupt the existing market order, thereby weakening the international competitiveness of emerging economies and developed countries.

Of course, the government is not responding passively to this challenge. We have seen that many Asian countries have begun to issue their own central bank digital currencies (CBDCs) or stablecoins. For example, the Tourism Authority of Thailand launched TAT Coin to revitalize the local international tourism industry.

3) The current regulatory system for crypto investment is not clear, and the regulatory atmosphere is relatively introverted and conservative

In general, Asian regulators are not opposed to equity funds investing in crypto projects, and the existing private equity fund management regulations are relatively mature and complete. However, the regulatory regulations and law enforcement activities for direct implementation of cryptocurrency-related businesses are still unclear, which is mainly reflected in:

• Define attributes for crypto assets/cryptocurrencies, etc. The attribute definition of this new thing determines a series of subsequent regulatory rules, and even clearly defined regulatory agencies cannot promote effective regulatory measures and only include them in the existing judicial system for temporary treatment.

Table 3 Source: Babel Finance Collected from public information

• There are no specific regulations on the infrastructure required for investment in cryptocurrency/virtual assets. Crypto hedge funds are different from traditional funds. Due to the particularity of cryptocurrency/virtual assets, new technical infrastructure and supporting processes and procedures are required, including fundraising restrictions, investor requirements, custody account establishment, fiat currency exchange, KYC/AML/CFT, tax management, etc. Currently, only Hong Kong and Singapore have some clear requirements and market support for this.

• Regulatory coordination among regions. The investment application of cryptocurrencies is borderless, which requires cooperation between countries to clarify cross-regional crypto financial issues. Tokyo tax institutions have announced a tax evasion incident. A photo studio in Tokyo helped Chinese customers convert cryptocurrencies into yen, and helped them transfer about 27 billion yen to Japan to invest in real estate within three years. This requires China and Japan to establish a communication mechanism to discuss how to effectively implement their respective regulations to handle them together.

Although we still face the above practical obstacles, countries/regions represented by Hong Kong and Singapore have begun to set an open regulatory example, and we will discuss this in detail in the next section.

3. Asian Crypto Center: Hong Kong, Singapore

1) Hong Kong

With its geographical, rule of law and technology advantages, Hong Kong has always been an Asian financial center. According to public information, Hong Kong currently has more than 600 financial technology startups and companies, nearly 1,900 licensed asset management companies, and 174 banks (including 12 virtual banks). The annual compound growth rate of asset management scale in the past 10 years is as high as 16.06%. In 2020, the scale of fund management companies in Hong Kong reached HK$21.08 trillion.

The traditional habit of large fund managers in East Asia in the past is to set up GPs and funds in Cayman and then set up fund administrators in Hong Kong to manage the funds, but in this field of crypto investment, it faces more regulatory demands.

Regulatory agencies

The Securities and Futures Supervision and Administration Commission (SFC) is independent of the government civil service structure and is responsible for overseeing the operation of Hong Kong's securities and futures markets, and is also responsible for related investment activities for cryptocurrencies.

In 2019, the Hong Kong SFC released a preliminary regulatory framework for cryptocurrencies, saying that it will not regulate non-security assets or tokens such as BTC and ETH, and proposed a regulatory sandbox plan, requiring practitioners to comply with existing KYC, AML/CTF and other regulations.

In addition, the Hong Kong Monetary Authority (HKMA), the Hong Kong Financial Affairs and Treasury Bureau will also conduct coordinated supervision of crypto activities.

Regulatory policies

In terms of cryptocurrency, Hong Kong SFC divides it into securities tokens, functional tokens and virtual commodities (such as Bitcoin), and incorporates securities token business into regulatory sandboxes with a "voluntary licensing system". Its interpretation of securities tokens is: representing equity (right to collect dividends and have the right to participate in the distribution of remaining assets when the company is liquidated); representing debt warrants (the issuer can repay the investment principal to the token holders and pay interest on the specified date or redemption); and can be used to obtain "collective investment plan" income.

At the same time, it leaves some regulatory space for the rapid development of the industry, the Hong Kong Treasury Secretary said it can generally determine whether any digital form value should be defined as a virtual asset, either in general or in terms of specific circumstances.

The latest regulatory trend is that the Hong Kong Treasury Bureau completed a public consultation in May 2021, planning to establish a mandatory licensing system for VASPs (Virtual Asset Service Providers), a virtual asset service provider, to formally include it in the regulatory system. According to the consulting documents, the activities covered by the regulation include virtual asset transactions, transfers, custody and management, and financial services for issuing virtual assets. According to the definition of a special organization, virtual assets are "assets that express value in digital form, and the relevant assets can be bought, sold or transferred in digital form, or used for payment or investment purposes."

Specifically in terms of crypto asset management supervision, Hong Kong SFC issued regulations on investment in virtual assets such as cryptocurrencies in 2018, providing a path from declaration communication, inclusion in the sandbox, and then reviewing reports to become a licensed institution. In the current situation, Hong Kong's traditional funds (Non-crypto focused fund) can use 10% of their portfolio in cryptocurrencies without additional licensing conditions. Once funds and brokerage companies investing in virtual assets exceed 10%, they need to register with Hong Kong SFC and can only be sold to professional investors.

Compliance License

Hong Kong implements a financial license management system, and the SFC stipulates 12 regulated activities, among which the trading platforms, funds and asset management platforms related to cryptocurrencies are Class 1, Class 4, Class 7 and Class 9 licenses. For example, institutions involving cryptocurrency asset management such as HashKey Capital, Blockwell Global, and Huobi Asset have obtained Class 9 licenses.

Table 4 Source: Hong Kong Securities and Exchange Commission, Babel Finance

It should be noted that the above licenses are limited to professional investors in Hong Kong, which means that licensed institutions cannot provide services to small and medium-sized investors, and will also give up some flexibility.

The Securities and Futures Ordinance (Chapter 571 of the Hong Kong Law) defines "professional investors", which are summarized briefly and have the following meanings:

a. Any individual (“Individual Professional Investor”) owned by a portfolio of not less than HKD (or any equivalent foreign currency) owned by his or her spouse or child (“Individual Professional Investor”);

b. Any trust company with a total assets under entrusted of not less than HKD 40 million (or any equivalent foreign currency);

c. Any company with (a) a portfolio of not less than HKD (or any equivalent foreign currency); or (b) a total assets of not less than HKD (or any equivalent foreign currency);

d. The sole business is any company that holds an investment project and is wholly owned by any one or more individual professional investors or persons mentioned in 2 or 3 above.

Note: (a) Portfolio refers to securities, cash and virtual assets, but does not include real estate.

Of course, there are also some crypto institutions that have not yet obtained the above license or operate other financial businesses, which will apply for a trust business license (TCSP) and other companies to gain some compliance advantages first.

Table 5 Source: Babel Finance Collected from public information

2) Singapore

Singapore's attitude towards crypto assets is more open than that of Hong Kong, and its regulatory framework is clearer, and it is a leading position in the global crypto finance field.

According to data, the total number of registered and licensed fund managers in Singapore reached 787 in 2020, with the total asset management scale increasing by 17% to SGD 4.7 trillion, of which the scale of alternative asset management increased by 15%, and more than 80% of the funds came from outside Singapore. In addition, Singapore and the Philippines are the base camps of many GameFi "investment institutions" game guilds in the GameFi industry.

There are more than 120 crypto venture capital institutions established in Singapore and more than 40 crypto hedge funds, accounting for 19% of the number of Singapore's financial technology companies. Here we bring together a large number of crypto-native or friendly leading institutions such as Huobi, Three Arrows Capital, DBS, Babel Finance, KuCoin, QCP Capital. In the future, it is foreseeable that Singapore will continue to maintain its leading position as a global crypto technology center and provide other Asian countries and regions with good reference and demonstration role in supervision such as trading, listing, tokenization and custody.

Regulatory agencies

The Monetary Authority of Singapore (MAS) exercises the functions of the country's central bank (except for issuing currencies) and the SFC to directly regulate and guide cryptocurrencies.

In addition, the Accounting and Enterprise Control Authority (ACRA) is responsible for the registration and management of Singapore companies and non-profit organizations, and many non-profit blockchain funds in Asia (such as the Litecoin Foundation) have registered with this department as legal status. The Economic Development Bureau of Singapore (EDB) is responsible for providing subsidy preferential policies and other non-financial assistance to various types of enterprises and investors. The department initiated support policies for blockchain entrepreneurship projects in 2018 and 2019.

Regulatory policies

Unlike Hong Kong, Singapore's crypto regulations are more open and inclusive, and do not require customer asset isolation, customer suitability assessment, wallet insurance, single legal entity, professional investor requirements, and an open registration policy for ICO projects. Therefore, overall, Singapore's crypto industry is developing more rapidly.

Singapore MAS currently defines virtual tokens as "virtual products" and is divided into three categories: application tokens, payment tokens and securities tokens.

For payment tokens, exchanges are licensed and regulated in accordance with the provisions of Singapore's Payment Services Act (PSA). Securities tokens and asset-backed tokens (such as real estate and bonds) are applicable to the Securities and Futures Act (SFA), and application tokens are basically not regulated.

In terms of taxation, the Singapore Taxation Authority (IRAS) issued a revised version of the "Crypto Income Taxation Guide" in April 2020, stipulating that different tax measures should be implemented according to the function and purpose of the token.

Currently, Singapore's MAS's supervision focuses on the qualification and license of digital payment currency service providers, and does not make detailed regulations on crypto asset investment.

In terms of digital payment supervision, Singapore MAS requires all DPT (digital payment token) service providers to register and obtain licenses in the Payment Services Act (PSA), which officially came into effect in January 2020, and stipulates two parallel regulatory frameworks: "specified system" and "license system". Among them, the licensing system consists of three categories: Money-Changing (currency exchange license), Standard Payment Institution (standard payment institution license), and Major Payment Institution (large payment institution license). Crypto institutions for Singapore customers should obtain one of the above licenses, or be included in the regulatory sandbox first to develop their business during the exemption period.

In addition, Singapore and Hong Kong also emphasize protecting investors' rights and interests, frequently issue risk prevention warnings, and strictly control illegal acts such as money laundering, fraud, tax evasion, and terrorist financing.

Compliance License

Singapore MAS implements a license for crypto payments. Currently, only four institutions, including Australian crypto exchange Independent Reserve, Singapore's fintech company FOMOPay, DBS Bank Digital Exchange (DDEx), and crypto payment service provider TripleA, have obtained the license. However, according to official statements, institutions in the exemption period can continue to conduct business.

In terms of financial license management related to encryption, Singapore MAS is divided into trust licenses and capital market service licenses (CMS). Institutions engaged in asset management activities in Singapore should hold a CMS fund management license or register as an RFMC with the Monetary Authority of Singapore. Therefore, Singapore fund management companies can be divided into two categories: Licensed FMC (LFMC) and registered fund management companies (RFMC). Although the latter does not need to obtain an official license, they are subject to many restrictions on business development.

Table 6 Source: Singapore CMS, Haitong Securities Research Institute, Babel Finance

Conclusion: WAGMI

Crypto assets officially "break the circle" in 2020 and gradually entered the mainstream financial market. With the iterative innovation of the crypto financial market itself and the increasingly close interaction with the real world, crypto assets, an indispensable media in the crypto world, have entered a stage of active expansion around the world.

Regionally, the United States is the main driving force in this field, but the Asian market has also achieved great development, with the most active emerging economies, a large number of potential users, and a burst of fintech power. It is foreseeable that the Asian crypto market will usher in exponential growth and will have a positive impact on the global crypto finance and application fields.

From an industry perspective, the Asian crypto asset management industry will continue to be dominated by venture capital funds and supplemented by crypto funds. Given the relatively complete legal environment of equity venture capital in Asia, unrestricted equity investment funds will continue to inject funds and resource support into emerging crypto industries; large crypto funds will continue to pursue a relatively narrow but highly valued compliance identity. However, in the long run, the advancement of regulatory bills and investment infrastructure will still lag behind the influx of investors. On the other hand, crypto funds will not be limited to pure over-the-counter bets to buy too much. DeFi, GameFi, and NFT may play an important role in the ecological construction of crypto asset management.

From a regulatory perspective, Singapore and Hong Kong have already made embracing gestures, and some Asian regions have also begun to soften their stance of suppressing bans and transformed into more prudent and orderly standards aimed at protecting participants and combating potential illegal behaviors. Considering the many potential opportunities and risks in the emerging field of crypto assets, giving the industry certain boundaries of activity and fault tolerance opportunities while maintaining financial stability and consumer rights may become a general consensus and regulatory standard for many Asian countries.

The beginning is simple and the completion is huge. Crypto digital assets are reshaping the global financial market at an unprecedented speed. Financial technology applications are constantly upgrading and promoting, and the door to compliance is gradually opening. Babel Finance is very fortunate to witness and promote the Asian crypto financial market to the sea of ​​stars. We also look forward to communicating and collaborating with you, "We All Gonna Make It".