Crypto is leaving the US — and that’s ok

Amidst a US regulatory landscape that’s increasingly disjointed and politically charged, other investors have a simple request: allow me to engage responsibly in digital assets via a clear and balanced regulatory framework that’s been diligently considered.

The recent lawsuits filed by the US Securities and Exchange Commission (SEC) against leading industry participants have brought significant harm to the crypto and broader Web3 industry. 

While causing initial market volatility, these events do actually present an opportunity for the ecosystem to adapt, innovate and explore new horizons. 

Building a solid regulatory framework requires collaboration and dialogue — two key components missing from the SEC’s approach. 

And the consequence? 

Many companies and investors are diversifying away from the US to other jurisdictions that provide clearer guidelines and an environment that nurtures the innovation so innate to the industry. 

Asia, the Middle East and Europe will emerge as the next destinations for crypto to thrive, due to their progressive regulatory frameworks and real support for the digital asset industry.

Regulation by enforcement

The SEC’s interactions with Coinbase have been chaotic, uncooperative and contradictory: from its initial approval of Coinbase going public in April 2021, to its U-turn with the issuance of a Wells notice in Mar. 2023, to June’s hefty announcement that the SEC is suing Coinbase for breaking US securities rules. 

This regulation by enforcement is not conducive to a sensible buildout of the crypto ecosystem and is giving industry participants pause for thought about jurisdictional exposure of their businesses. There is no solid footing for the industry to grow in the US, and it risks losing its status as the innovation capital of the world.

If investors feel protected and if service providers know what is expected of them, more institutions will enter the space — and these alternative jurisdictions are ready to embrace them.

Finding new grounds

As a global financial hub, Hong Kong’s Securities and Futures Commission (SFC) has demonstrated positive engagement with the industry, showing commitment to continuously evolving policy to ensure retail investors have better access to crypto investments. The new licensing regime enables retail trading of cryptocurrencies, introduces transitional arrangements for virtual asset trading platforms and the e-HKD Pilot Programming. 

Dubai has been at the forefront of crypto regulation, establishing VARA, the world’s first independent regulator for virtual assets. VARA’s comprehensive approach covers numerous licensed activities such as custody, broker dealer and staking. As of Jan. 2023, Dubai has been home to more than 500 crypto startups. 

Europe has made significant strides in regulatory clarity with the approval of the Markets in Crypto Assets (MiCA) framework. This comprehensive policy covers a broad range of digital assets, offering guidance and addressing regulatory uncertainties. It also offers passporting amongst member states, enabling easy access to the largest single market in the world. The inclusion of guidelines for service providers creates a solid foundation for the EU’s crypto activities and provides businesses with a clear framework to operate within.

Blockchain is borderless, so regulators should collaborate

The ramifications of the enforcement actions pursued by the SEC extend beyond US borders; their actions impact investors across the global Web3 ecosystem. Yes, other jurisdictions are proving more favorable, but global regulators also need to collaborate and build a framework for the ecosystem.

Keen to attract crypto companies to Hong Kong and the UAE, the central banks of these respective jurisdictions announced plans in late May to strengthen their financial cooperation — and work together on regulating virtual assets. 

From finding ways to make cross-border trade easier, to exploring how UAE companies can use Hong Kong’s financial infrastructure platforms to access markets in Asia and mainland China, this is a clearly strong statement that these jurisdictions are friendly to crypto.

Blockchain is borderless, and so likewise, jurisdictions need to engage in collaborative discussions and build a responsible framework for the ecosystem to thrive. The positive steps taken by the UAE and Hong Kong are proof that regulators can collaborate across borders and the US can learn from this.

Diversification underway for US-based Web3 firms

It’s likely more US-based Web3 companies will continue to expand or even completely move overseas, and that investors will seek regulatory clarity in other jurisdictions. The legal battle between the SEC and industry participants will likely be a lengthy one — just look at Ripple. 

The consequential market uncertainty has the potential to accelerate this migration. Case in point, venture capital firm a16z announced plans to open their first international office in London later this year, citing a more predictable business environment as one of the main factors behind the decision.

For both institutional and retail investors to enter the crypto space safely, we need transparent and balanced regulation. 

Those who can offer clear rules of the road have the potential to lead Web3 innovation — and it’s looking like it won’t be the US who comes out ahead.

Calvin Shen has over 10 years’ financial services and investment experience across fintech start-ups and asset management. As the Managing Director at Hex Trust, Calvin works with global clients to provide bespoke blockchain and custody solutions to help them bridge the worlds of digital assets and traditional finance. Prior to joining Hex Trust, Calvin held numerous roles across institutional sales and business development at leading firms such as PIMCO, Deloitte and BNY Mellon. He holds an MBA from Columbia Business School and a BA in economics from UC San Diego, and is a CFA and CAIA charterholder.

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