China’s warning earlier this month that it intended to curb bitcoin trading and mining was the latest indication that the world’s growing army of cryptocurrency backers face bigger headaches than Elon Musk changing his tune and saying Tesla would no longer accept it as payment. The Chinese Vice-Premier Liu He and the State Council said it was necessary to crack down on bitcoin mining and trading behaviour to “resolutely prevent the transmission of individual risks to the social field”. Bitcoin took a beating following the move and was at one point down nearly 50 per cent from its all-time high, while Ether fell to a two-month low last Sunday. And it is not just the Chinese government that is having jitters about the largely unregulated and borderless cryptocurrency market, where some players are intent on keeping the space free of conventional financial rules. The same week, the United States Treasury Department said it would require any cryptocurrency transfer of more than US$10,000 to be reported. “ Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the department said in a release. In Germany , investors have been closely scrutinising a dispute between financial markets regulator BaFin and cryptocurrency exchange Binance over the former’s imposition of a warning about possible security rules violations. Asia-based industry observers say while the intensifying regulatory scrutiny is inevitable given the growing clout of the sector, officials may find some insights from Hong Kong and Singapore on how to deal with the matter. Both financial hubs, among the most plugged-in societies in the world, have for years been calibrating ways to tap the lucrative cryptocurrency market while guarding against money laundering, tax evasion and terrorism financing. Antonio Fatas, a professor of economics at Insead, said the heightened global regulatory scrutiny came amid concerns that the volatility of digital currencies could pose a risk to financial stability. This was also a point raised by US Federal Reserve Chairman Jerome Powell, who indicated that greater regulation may be needed. There had also been an increasing number of hacking episodes in which ransoms were demanded in cryptocurrencies, which had served as a “wake-up call” about the dangers of unregulated money, Fatas said. “There is no doubt that these two phenomena will lead to increasing regulation of cryptocurrencies,” he said, adding that the regulation of cryptocurrency-exchanges and intermediaries had started in some countries. This includes Singapore, where discussions to tighten rules on such digital assets began several years ago. Former deputy prime minister Tharman Shanmugaratnam had in 2018 warned lawmakers of the dangers of digital currencies, saying that cryptocurrencies were “an experiment” – albeit one that was growing fast internationally. Forget bitcoin, this Singapore firm is using blockchain tech to build a smart city The Monetary Authority of Singapore, he said, was closely monitoring the developments and risks. “As of now, there is no strong case to ban cryptocurrency trading here,” said the chairman and minister in charge of the central bank in a written response to questions raised by parliamentarians. “However, there are significant risks in the use of cryptocurrencies. There is a clear risk of money laundering. And there is a clear risk that people will lose a lot of their money by investing in cryptocurrencies.” In the same speech, Shanmugaratnam said the government would soon be subjecting intermediaries – including those who buy, sell or exchange virtual currencies – to laws that tackle money laundering and terrorist financing. Singapore’s enforcement agencies, he went on, were also on the lookout for illegal activities related to cryptocurrency-trading. A year later, a robust framework materialised as part of Singapore’s Payment Services Act. Parliamentary records noted that Singapore was among the first few financial services regulators in the world to introduce a regulatory framework for digital payment token service. Among other things, the act, which took effect in 2020, would require cryptocurrency payment service providers to be licensed, and would place cryptocurrency-exchanges and operators under the purview of Singapore’s central bank. A bill to further tighten the act was passed in January this year, mandating that entities which facilitate the transmission, exchange or storage of cryptocurrency be licensed – meaning the authorities have the power to regulate providers even if they may not possess the money or cryptocurrency involved. Sumit Agarwal, a professor of finance and economics at the National University of Singapore, suggested that the bill was among the many approaches that Singapore adopted in its process of regulating virtual currencies. He pointed to how the central bank had been organising conferences in recent years, bringing together thought leaders, scholars and practitioners to discuss the pros and cons of digital currencies and the regulatory reforms that were needed. Authorities were transparent with what they wanted to do in the cryptocurrency space and sought consensus from various stakeholders, Agarwal added, which would eventually grant it confidence to implement policies. “I think a lot of countries, from Europe to America, can easily wait and see how Singapore does it, and then [draw] a blueprint and learn from it,” he said. Meanwhile, Hong Kong is also tightening its grip on virtual currencies. The Financial Services and Treasury Bureau published its conclusion on legislative proposals last Friday to enhance the city’s anti-money-laundering and counterterrorism financing regulations, following a two-month consultation launched in November. Singapore’s DBS bank to launch digital currency exchange It has proposed imposing a HK$5 million fine and up to seven years’ imprisonment as a deterrent against non-compliant and unlicensed activities. Hong Kong’s government also confirmed it would forbid licensed platforms from servicing retail investors, despite objections by some industry participants. Agarwal, the finance professor, said Singapore and Hong Kong were small and agile, which meant they were better placed to experiment with policies than larger nations like the US. There were typically more stakeholders in bigger countries, adding another layer of complexity. Lim Yee Fen, associate professor in business law at Nanyang Technological University, suggested that both cities were leading the regulation of digital currencies with their cautious approaches, and were mindful of the risks of money laundering and terrorism financing. “Both countries are also keenly aware of the speculative nature of such digital currencies and the risks that people can lose their life savings, which in turn could upset the stability of society and the economy,” she added. Joel Shen, a partner at global law firm Withers, added that Singapore and Hong Kong took a balanced approach to regulation, coming up with regulatory frameworks that did not stifle innovation. “Their regulators are practical, and attempt to strike a balance between consumer protection and giving new technologies room to experiment and grow,” he said. The two cities were also “quite open-minded” towards cryptocurrencies and had been encouraging related businesses, said Hu Jianfeng, assistant professor of finance at the Singapore Management University. He pointed to how Singapore’s largest bank DBS had in December launched a digital currency exchange featuring four top cryptocurrencies – bitcoin, Ether, XRP and bitcoin cash – the world’s first cryptocurrency exchange backed by a traditional bank. But HSBC , Hong Kong’s largest bank, has been more cautious, saying this week that it had no plans to start a cryptocurrency trading desk or sell digital currencies as investment to customers. Still, Agarwal stressed there were differing priorities in different jurisdictions so it was not as simple as plainly copying the strategies from Singapore or Hong Kong. For example, he said China had to stamp out cryptocurrency-mining activities as this consumed a lot of energy and would deal a blow to the mainland’s environmental goals. Countries in Europe, on the other hand, would have to consider higher risks of corruption and illegal activities, which were more rampant there, he said. Countries within the European Union would also need to make sure their policies aligned with other member countries. “There are a lot of issues they would have to worry about,” he said. There are also large differences between countries in the volume of cryptocurrency-trading. In Singapore, for example, authorities said the size of the cryptocurrency market remained small compared to shares and bonds. The combined peak daily trading volumes of three major cryptocurrencies – bitcoin, Ether and XRP – was 2 per cent of the average daily trading volume of securities on the Singapore Stock Exchange in 2020. Non-fungible tokens and digital art: game-changers or just another bubble? Hu, the assistant professor of finance, said Singapore and Hong Kong differ from most cities in being small, open economies that have a critical reliance on international trade. “Compared to the US, EU and China, monetary policy plays a less important role in economic development here,” he said. “This difference in central bank focus can lead to heterogeneous optimal policy regarding cryptocurrencies, which potentially impose threat to central banks and monetary policy control.” Even though the prices of virtual dollars seem to have taken a beating from stricter regulations worldwide, retail investors have welcomed the tighter rules. Xuan, a 29-year-old Singaporean, said regulation would help cryptocurrency become “a more legitimate investment vehicle for the wider crowd”. Xuan, who works in e-commerce, had recently invested a five-figure sum in various digital currencies. Agarwal agreed, saying that the growing tide of regulation would be beneficial, not just for countries but for retail investors alike. “Every time there is a regulation, it gives investors confidence that they are not going to lose their shirts on this,” he said.