The cryptocurrency market has been saying for much of 2022 that the U.S. influence over the sector is waning. BitcoinBTC started somewhere in California, and cryptocurrency-related projects are funded by venture capitalists in Silicon Valley, but the growth is going to happen elsewhere. So goes the story. But is this directionally accurate?
CoinbaseCOIN CEO Brian Armstrong brought this debate to the fore this year, saying that if the U.S. cannot get regulation right, primarily in defining how exchanges should operate, Coinbase will have to invest more elsewhere.
In a Senate Banking Committee hearing on Sept. 12 starring lone witness, SEC Chairman Gary Gensler, a handful of Committee members asked about cryptocurrency investing. Gensler did not get into details defining the rules of engagement for exchanges handling investor money. Those who are questioning crypto on Capitol Hill are mainly doing so through the lens of investor protection only and not beating up on blockchain development, aka Web 3.0.
“The FTX collapse showed how dangerous crypto can be. But FTX wasn’t a lone bad apple. It was just the most explosive example of the problems in crypto. It seems like every day before and after FTX collapse, there’s another crypto scam hacker insider taking advantage of people and another few million dollars loss. The problems we saw at FTX are everywhere in crypto,” Committee Chairman Sherrod Brown (D-OH) told Gensler.
“I’ve been around finance for 44 years now and I’ve never seen a field that’s so rife with misconduct,” Gensler said. “It’s daunting.”
Bad guys are one thing. Hackers stealing your SolanaSOL tokens…no one likes these guys. But going after Coinbase and others for essentially not running its exchange like a Charles Schwab home broker is another.
Has the U.S. peaked as a crypto hub for innovation and development? Are other countries standing at the ready to be the new home for the next big blockchain project? I asked around to see what market participants think.
Move On, Move Out or Stay Put?
The battle over the crypto market in the U.S. is centered on how it raises money from investors, how the SEC protects investors from coin issuers, and making the cryptocurrency exchange system similar to what exists today in the securities market.
There are hundreds of exchanges worldwide and thousands of developers building decentralized applications and games on blockchains. For months, many have said if you want to develop this with more regulatory clarity, move to Asia. That became a clarion call this winter when regulators began targeting exchanges in what was dubbed by the market as “Operation Choke Point 2.0”. Forbes writer Billy Bambrough wrote about this in February.
“Crypto businesses that may require the presence of a domestic legal entity, such as companies that are tokenizing American real estate or Treasury bonds, relocating to countries with crypto-friendly regulations is a relatively simple and practical solution to maintain business continuity in the face of Operation Choke Point 2.0,” says Dr. Sam Seo, Representative Director of the KlaytnKLAY Foundation, an open source blockchain company based in South Korea. “I think there are still opportunities in the American market despite the current state of regulatory uncertainty. If you successfully navigate this challenge, then you would have access to one of the largest economies in the world, with first-mover advantage and easier access to America’s pool of Web3 talents that may not be open to relocation,” he says.
At the moment, Asian countries are fighting each other to become a bigger Web 3 blockchain hub. They do not need to attract U.S.-based talent, of which many are foreign nationals from Asia anyway.
Japan is often held up as an example of being “better than the U.S.”
“They created a safety bubble for their citizens with regulations. However, Japan is a sleeping giant in terms of users and buying power,” says Alexandru Carbunariu, CMO of blockchain gaming company Banksters. “We might see Japan in the top 5 of Web3 developer countries. I think when it comes to Asia, it is hard to understand what’s going on overall. The data can be unclear. What’s important is that Asian countries working together will surpass Europe and the U.S. I think in a few years,” he says. “Asia usually focuses on gaming, and despite it being a bad market right now some venture firms are still investing there now.”
Singapore-based blockchain gaming company Oasys has put the U.S. on hold.
“It would be disingenuous to present the US as a pro-crypto jurisdiction at this point in time,” says Ryo Matsubara, director of Oasys. “We still keep a close eye on the U.S. because we believe it will become an important market again. But in the current environment, it’s hard to justify developing and deploying blockchain games in the U.S.”
Oasys’ view may have as much to do with the fact that most gamers here are either playing on the old fashion internet (aka Web2) through their computer or on a game console like the Xbox.
Unlike Web2 games, gamers are not playing to earn money. While there are surely gamer competitions out there, most blockchain games come with a cryptocurrency component to it – either with non-fungible tokens or allowing for in-game purchases with native tokens that are traded on an exchange and purchased by non-gamer investors.
The Grass Is Greener Where Exactly?
There has been some interest from U.S. blockchain projects slowly moving towards Europe. The only problem is that Europe’s Markets in Crypto-Assets (MiCA) regulatory framework cannot interfere with what an EU member nation decides to do on its own.
France, for example, is harder on crypto than the U.S. while EU newcomers Lithuania and Estonia have less restrictions and oversight. In other words, like your mom might have told you once – the grass is always greener over a septic tank.
For exchanges like Coinbase, Japan once again is seen as a good model.
“Japan requires your assets to be segregated on the exchange, which is what protected Japanese users from the FTX blowup,” says Yves La Rose, CEO and co-founder of the EOSEOS Network Foundation in Canada. Segregation of assets has been a point of contention for the SEC with exchanges. The SEC frowns upon exchanges commingling its funds with that of its users.
“The reason Japan requires this kind of segregation is because they learned the hard way from incidents like Mt. Gox and Coincheck,” La Rose says. “Compared to other jurisdictions, Japan is at the forefront of protecting their institutional investors, and retailers through a regulatory framework that other nations could learn from.” Japan’s Financial Services Agency is the country’s only cryptocurrency market rules maker. “This makes things much simpler for any Web3 operation in Japan,” La Rose says.
Japan’s high-tech, almost futuristic society and culture are a good feeding ground for Web3 and crypto investing in general.
Sam Seo of Klaytn thinks Asia “will be a leader in Web3 innovation,” he says. “Beyond the
crypto-friendly regulatory environment of the region, Asia has the advantage of a younger demographic and is culturally diverse. That creates the right conditions for new businesses to form.”
Europe, Asia, and the U.S. have their own distinct approaches to regulatory compliance. Each is influenced by their government’s regulatory stances and economic environments. MiCA’s goal is to provide a harmonized set of rules for crypto investing and related services across the EU member states. It places emphasis on ensuring investor protection and market transparency. If successful, MiCA could serve as an exemplar for industry regulation, says Rachid Ajaja, CEO & co-founder at AllianceBlock (NXRA) in The Netherlands, an infrastructure provider for decentralized tokenized markets.
In Asia, countries like Japan, South Korea and Singapore are seen as the gold standard in market regulation. Licensing regimes for exchanges and reasonable regulatory frameworks have been established.
The U.S., meanwhile, has a patchwork of regulations at the federal and state levels. Regulatory agencies like the SEC and the Commodities Futures Trading Commission oversee the different types of investing products.
“I think it is important for Web3 developers and builders to focus on new solutions that prioritize user experience, privacy, and data control, while still meeting regulatory compliance requirements in your home market,” says Ajaja. “The regulatory approach varies from region to region now.”
U.S. Crypto Too Big To Fail
Is the U.S. influence in crypto really waning? Europe has its new set of rules that everyone in the business seems to like. China and Russia, home to many big blockchain developers and investors, are constantly putting up roadblocks for crypto. If not for Hong Kong, China would not exist on the bitcoin map at all.
The SEC has been going after cryptocurrency players for years. Everyone remembers Ripple. Now Coinbase. Who’s next?
But here is the kicker: the SEC is not winning any cases lately, says Carbunariu. “Also, let’s not forget that Coinbase is traded on the U.S. stock exchange, meaning certain checklists have been made before they went public. In recent years, we have witnessed a tech move from California to Texas, so it’s quite possible that some will move abroad. They might move abroad to cut taxes and staff overhead, or to be under a different regulatory umbrella in Asia,” he says.
Last year, Forbes published its list of top 10 cryptocurrency exchanges out of the roughly 600 worldwide. Coinbase, Kraken, Robinhood and Gemini were in the top 4 U.S. based exchanges. The U.S. would have had five of them if not for FTX, which was still alive back then and ranked at No. 5.
The U.S. is also where most Ethereum mainnets are located, accounting for nearly 40%.
The U.S. is not the number one holder of bitcoin, in terms of percentage of the population that owns it. Brazil is No. 1, with an estimated 41% of the population owning bitcoin, according to the CoinShares blog using CoinMarketCap data. The U.S. was the No.1 within the G7 countries, however.
The death of the U.S. as global crypto hub is highly exaggerated.
“This will change with time. We have seen many Republican Senators talk about wanting to keep this industry in the U.S., but I still think some developers will make a move,” says Carbunariu. “It’s only a matter of time.”
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