Hong Kong’s Crypto Regulation Framework: How Hong Kong is Regulating
What India and other nations can learn from Japan about regulating crypto in 2023?
Dear Indian Government and other nations,
Regulating crypto is not just levying heavy taxation on the cryptocurrency traders.
Regulating crypto is not asking banks to stop providing any service to crypto trading exchanges, or blocking a customer’s account.
Regulating crypto is not discouraging Indian entrepreneurs from operating within the country.
Regulating crypto is also not putting a blind eye to what is happening across the rapidly growing industry.
Regulating crypto is much more and there are things we can learn from nations like Japan!
On November 11th, 2022, FTX, a crypto exchange company founded in 2019, but had made its way into becoming a competition to the world’s largest crypto platforms, declared bankruptcy. What followed was the arrest of FTX founder and CEO Sam Bankman Fried and before that a notification by FTX that its collateral amount had fallen in value, and couldn’t be liquidized.
For the people who had invested on or through FTX, this meant that their money, as if not gone at least frozen for an unseeable amount of time.
But for FTX users and investors in Japan, the situation isn’t as grim as that of people who put their money and faith into FTX’s branches in the rest of the international market.
Due to the regulatory measures and oversight mechanisms placed on crypto exchange platforms by the Japanese authorities, investors in Japan can hope to receive their money back soon.
What were these measures taken by Japan that have to save their investors from FTX crisis and what can nations learn from them?
Japan deserves the credit that it learned from the past. In the year 2014 a Tokyo-based cryptocurrency exchange, Mt. Gox handled around 70% of bitcoin transactions that were hacked and 1000s of bitcoins were stolen. Mt Gox fell into bankruptcy resultantly.
There were other incidents of a similar nature, and Japan soon realized that there was a need to regulate these decentralized currencies to safeguard its people’s money.
Japan soon realized that the decentralized public platform that provided absolute freedom also resulted in user vulnerability. As a result, regulatory standards for Crypto Exchange companies were brought in by the Financial Services Agency.
How Japan regulated the Crypto exchanges?
External oversight mechanisms and audits
Exchange companies in Japan are obliged to get themselves audited by external auditors to ensure positive business practices and avoid any misallocation of funds to any possible misdemeanor from the company’s side.
Preference to the Public over institutions
What usually happens when a bank, exchange, or any company for that matter goes under is that its funds are liquified and its major institutionalized lenders and creditors are repaired on priority, that would mean, banks, creditors, conglomerates, etc. The general public and individuals come last on the priority list of people who would receive their money back in such a situation.
But Japan turned the tables over. In a situation where an exchange goes under or bankrupt, the public is the priority to whom the paybacks are to be made by companies to go under before institutionalized lenders, companies, or banks.
Separation of funds
It is common knowledge that banks and exchange platforms use the money invested by their users to further invest and diversify the institution’s interest. In such a situation when the company suffers a loss in their investment, it trickles down to the investors as it was their money that was used in the first place.
To tackle this particular issue, Japanese authorities have directed exchange platforms to keep the public money separate from the exchange’s money, to avoid any mismanagement of funds from the exchange’s end.
Japan’s FSA has directed exchanges to secure over 95% of the available cryptocurrency owned by their users to be put into a cold storage facility to avoid a recurrence of a situation like Mt. Gox’s and to safeguard customer investments from hackers.
The rest 5% can be stored in comparatively less secure servers, but the exchange is required to compensate the consumer in case of any kind of coin theft owned by an individual, from their token reserves.
With crypto coming into the mainstream world governments and authorities are trying to control and bring the crypto industry under their rules and system. With this, the crypto ecosystem is also trying to maintain its decentralized nature with higher investments in privacy and autonomy.
This power struggle leaves the common public and investors vulnerable to hackers and crises.
It is necessary for the authorities and government to move towards creating an environment of regulation and not control and prioritizing, the security of public assets and then the interests of private institutions.
Japan applied the formula of ensuring the safety of public funds and taking precautionary measures, instead of controlling restriction and as a result, they have been able to achieve not just a flourishing but also a safe, secure and booming crypto ecosystem.
In conclusion, I would like to say, first and foremost steps that a government should take is to regulate crypto exchanges and other crypto companies in such a way that incase they go bust, investors are protected. Also, keeping a balance so that emerging crypto companies are able to generate growing profits. And last, think about taxation. If the investors feel safe, and the crypto exchanges grow, it should not be very difficult to apply moderate taxes and generate billions of dollars in revenue.