Crypto’s tug of war: APAC policy head at Chainalysis talks innovation vs regulation

After years of beckoning policymakers to ply the regulatory guardrails that proponents argue are necessary for onboarding crypto’s next wave of adopters, calls are finally being answered, even if it’s not what industry participants had hoped for.

While the US is criticized for its shoot first, ask questions later policy, elsewhere abroad new financial rules are beginning to take shape.

The Asia Pacific (APAC) region, in particular, hailed as a hotbed of crypto activity, is one such region attempting to strike a balance between innovation and regulatory clarity.

Hong Kong’s checkered past on digital asset regulation has been re-envisioned this year as it seeks to reverse policy put in place during the height of the industry’s previous bull run. Despite China’s firm stance against crypto, the special administrative region is attempting to court firms and once again cement its image as a crypto hub.

Further south, Singapore, like Thailand, has also begun fleshing out granular guidelines surrounding DeFi in what can only be viewed as a more sophisticated understanding of the industry’s plumbing. 

India, meanwhile, has begun strengthening Know-Your-Customer requirements for crypto companies, in a move that’s been welcomed by some in the industry for navigating government concerns.

Blockworks caught up with Chengyi Ong, Chainalysis’ head of policy for APAC, to learn about how policy changes across the region are affecting business decision-making and innovation.

Ong previously spent 10 years at the Monetary Authority of Singapore (MAS) before making the jump to the New York-based blockchain analytics company seven months ago.

Blockworks: As the Head of Policy for Chainalysis in APAC and based on your time at MAS, what unique challenges have you encountered in the regulation and acceptance of crypto within this region?

Ong: If you think about where crypto regulation started, it really started in the anti-money laundering space. This was back when crypto was relatively niche and there wasn’t widespread adoption. 

Things like, consumer protection financial soundness, market integrity — they weren’t really a big issue. The main concern was illicit activity, and that’s where we saw a lot of the early regulation come in.

I think what regulators have been trying to deal with in the region and around the globe, more recently, is things like consumer protection concerns. Obviously, 2022 and all the turbulence of that added a bit of urgency and momentum to the regulatory agenda because two things became clear.

Firstly, that adoption was widespread enough that challenges in the crypto sector could have a material impact on investors as well as potentially over time you would see increasing linkages with the traditional financial system, with the real economy. 

The second thing is that the lack of comprehensive regulatory frameworks around crypto meant that there were no guardrails, so ordinary investors couldn’t interact with digital assets with the kinds of protections that they have in traditional finance.

Blockworks: Some argue that’s an appeal, by allowing trustless entities to facilitate how users conduct their finances, rather than relying on centralized authorities to steer the narrative.

Ong: I think crypto has an appeal particularly because it has the potential to address some of those inefficiencies and inequities that you see in traditional finance. But I don’t think that necessarily means people want to get into crypto without all the safeguards they enjoy in traditional finance. 

So it’s really about this tension about how you harness the innovation and the efficiencies while still having a certain level of risk management and protection. That’s the problem and the challenge that I think policymakers are grappling with, it’s the same challenge that crypto players will have to wrap their heads around. 

Blockworks: In your view, what are some best practices or lessons that other jurisdictions can learn from APAC countries in terms of crypto regulation?

Ong: So what we’ve seen in the past six months in the APAC region is a lot of work to put in place comprehensive regulatory frameworks. By that I mean credential safeguards, market integrity and consumer protections. 

I think this has been really central to the regulatory agenda so far and we’ve seen this across various jurisdictions. So in Hong Kong, for instance, this is a very key plank of the new regulatory regime for virtual asset trading platforms and in Singapore, we’ve seen them take a staged approach. 

What regulators have come out with recently to finalize policy positions is around the protection of customer assets. Likewise, this is very prominent in the Virtual Asset Protection bill in South Korea.

Even though each country is coming up with this regime independently, we’re starting to see some common elements…like customer suitability, custody and segregation of customer assets. 

Blockworks: Recently, there was a landmark court ruling which found Ripple’s programmatic sales of XRP weren’t considered securities. How does this decision influence the policy and regulatory landscape of crypto across APAC?

Ong: If you look at APAC in general, jurisdictions have generally pushed ahead with putting in place crypto regulation even while events in the US have been unfolding. I think what you’re seeing in the US is very unique in that there are political challenges to passing legislation. A lot of the discussion rests around what exactly is a security.

In APAC jurisdictions, there has not been this gridlock and that’s even where you see legislation needing to be passed. So in South Korea, for instance, what policymakers have managed to do is get Parliament behind their Virtual Asset Protection Act and pass that legislation in a very efficient way.

Blockworks: What is your perspective on “de-banking” conversations, especially in the context of digital assets and Australia, where limiting customer access is often argued on the basis of shielding customers from scams?

Ong: There is no question that crypto-related scams are a big issue in Australia. It’s positive that banks are trying to get on the front foot to protect their customers. Wholesale de-banking of the sector is obviously not a good idea. Severing banking access for digital asset players is not in itself an endearing solution to the scams problem.

De-banking, as we’ve seen it in other jurisdictions, can also lead to either digital asset players being pushed offshore or a concentration of players in a small number of banking institutions, where you can then get financial stability or other consumer protection risks.

Blockworks: By limiting access on the retail level some argue that it speaks to the notion of how the banks are thinking customers should use their money. In your view, is there a clash of philosophies between traditional and decentralized finance at play here?

Ong: I think there is a recognition that banks have a risk management focus and they need to be able to manage their exposure to illicit finance. I would make two comments. 

The first is that the transparency of the blockchain gives them potentially better insight into the risk profile of those crypto players that they’re interacting with — a means to manage the risks.

The second thing is we’ve seen other jurisdictions take a constructive and progressive approach toward the de-banking issue. In Singapore, the AML CFT industry partnership between public and private, which involves the banks, has just put out a set of industry best guide practices around how to interact with customers, where digital assets are involved. 

That really sets out in very practical terms with case studies in different situations. What are the things that you should be mindful of? And what are the steps that you can take? — One of which is blockchain analytics.

But the point is that things like that not only help the financial institutions in navigating the risk landscape but they also provide a clearer picture of the expectations that financial institutions have.

Whether that’s going to move the needle for other jurisdictions is an open question. But it’s certainly a step in the right direction. And it speaks to the need for engagement because Singapore’s guidance was created with the input of digital assets players for years. 

This interview has been edited for brevity and clarity.

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