• Asia’s financial services hubs will seek to strengthen cryptocurrency regulations and maintain their balancing act in attempting to minimise speculative and compliance risks.

• Less developed countries that lack state-owned fast payments systems are quickly adopting cryptocurrency as a tool for payments and remittances. Financial risks abound and might lead to contagion effects.

• Some governments are likely to rein in the adoption of cryptocurrency, opting for a central bank digital currency (CBDC) or stablecoins (a cryptocurrency whose value is pegged to another asset) issued by domestically registered banks.

• Soft measures, such as bringing in new tax rules, might aid the adoption of cryptocurrency by formalising the trade. However, onerous rates might deter retail investors.

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Attitudes towards the regulation of cryptocurrency vary greatly in Asia, spanning from a ban in China to an altogether more benign approach in the Philippines. The benefits of cryptocurrency adoption, which include lower transaction costs, particularly for remittances, are clear. Some governments, like that of Cambodia, are integrating the underlying technology, blockchain, into their public goods, in order to discourage speculation in cryptoassets. Most economies have banned cryptocurrency mining amid concern over energy consumption, but attitudes towards cryptocurrency as an asset or a mode of payment remain divergent. However, EIU expects curbs on cryptocurrency to expand in most Asian economies over the next five years, as awareness of the associated risks grows.

Remittances, speculation create new opportunities

In the Philippines, where cash remittances account for more than 9% of total GDP, cryptocurrency wallets are becoming the preferred tool for such transfers. Cash remittances increased by 5.2% year on year in the first 11 months of 2021, to US$28.4bn. Cryptocurrency is a cheap way of sending remittances for large unbanked populations, as long as they have sufficient access to smartphones and the internet, as in the Philippines.

The influence of cryptocurrency in the country is clearly visible. Play-to-earn gaming, where players can earn fiat currency by engaging in a gaming activity, is highly popular, providing supplementary income during the covid-19 pandemic. In the medium term, we expect the authorities to promote cryptocurrency use cases with supportive policies, through government initiatives. That said, we do not expect cryptocurrency to become the prevailing method of the payment in the Philippines in the long run, as it is unlikely to be accorded legal tender status.

In many ways the Philippine authorities display the most benign attitude to the regulation of cryptoassets, where transactions are regulated only at the point of conversion to fiat currency. Bank Sentral ng Pilipinas (BSP, the central bank) still relies on investor education to warn the populace about the risks attached to play-to-earn gaming. Nonetheless, BSP has been expanding its regulatory coverage to encompass more virtual asset providers, thus laying down better regulatory clarity than many other economies without dedicated cryptocurrency regulations.

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This attitude can be seen clearly in India, which is reported to have more than 15m retail cryptocurrency investors, most of them speculative in nature. Regulators seem unwilling to provide a formal basis for India’s cryptocurrency trade. A cryptocurrency bill slated for passage in the winter session of the country’s parliament has been delayed, and it is unlikely to be passed during the upcoming session. The lack of regulatory clarity has exposed investors to volatility, problems related to redemption and even outright losses when unregulated cryptocurrency exchanges declare bankruptcy.

Poorly regulated cryptocurrency markets pose risks to the financial system in developing markets. Cryptocurrency dealers and exchanges, usually established on vague legal grounds, lack statutory reserve balances, among other considerations. This raises the risk of bankruptcy, often leading to a loss of deposits and income for retail investors. Higher institutional involvement in the cryptocurrency market is also likely, borne out in part by the increasing correlation between the performance of cryptocurrency and technology stocks. Such involvement, especially if packed into wealth management products and sold to retail investors who lack investment education, raises the vulnerability of banks and investors to the pitfalls of cryptocurrency. The manipulation of illiquid cryptocurrency investments—especially of the homegrown, small-capitalisation variety—looks likely. Patchy technological readiness in developing countries, such as poor connectivity in rural areas, might also mean a higher chance of investors falling victim to cybercrime. The rising adoption of cryptocurrency in countries such as the Philippines is creating such risks.

Reining in with substitutes

Some developing countries, like China and Bangladesh, have issued blanket bans on cryptocurrency trading. Cambodia has provided no clarity on applying for a licence to operate crypto-related businesses, despite a multi-ministry circular stating that one is required; this amounts to a de facto ban. The decentralised nature of most cryptocurrency is likely to have aggravated the concerns of these governments, which view control over the financial system, especially payments, as critical.

Such economies will turn to the development of CBDCs. China has launched pilot CBDC trials in major cities, while Cambodia is also rolling out Bakong tokens, its CBDC equivalent, in a bid to dedollarise its economy. Such developments indicate that central banks are unlikely to reverse course to legalise the development of speculative crypto businesses in any form. However, these countries are not giving up on blockchain technology, and will attempt to create CBDC interoperability to lower the cost of payments (especially cross-border transactions).

Indirect clampdowns remain popular

Despite being slow to issue legislation on cryptocurrency or having refrained from explicitly banning cryptocurrencies, some countries are adopting indirect measures to disrupt the operation of cryptocurrency businesses. These include frequent tax-avoidance raids, mandating that cryptocurrency earnings be subject to a high rate of tax and additional scrutiny in corporate affairs. Although formal tax legislation might be construed as an acknowledgement of the legality of crypto businesses, all of them will represent additional costs to profitable businesses.

In many cases, these costs of compliance are punitive enough to prohibit legalised activities. The Indian government, for instance, may impose a tax on cryptocurrency gains, with rates as high as 35-42%. The imposition of taxation, along with other indirect measures, signifies a diversity of attitudes towards cryptocurrency businesses. Aggressive adoption of indirect measures, particularly in “hostile neutral” countries, will mean frequent and costly disruption for cryptocurrency businesses.

However, towards the end of our forecast period (2022-26), we expect that governments are more likely to tighten regulation as centralised payment infrastructures become more developed. Nevertheless, as the adoption of cryptocurrency rises in those countries, a “sudden-stop” type of regulation might lead to the collapse of cryptocurrency businesses, posing an underlying risk to financial stability (depending on the rate of cryptocurrency adoption in a specific economy).

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