Cover Story: The case for regulating cryptocurrencies

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 9, 2017 - October 15, 2017.

I see it as an investment asset class similar to crowdfunding, where the return on investment is not guaranteed. With adequate regulations in place and investors knowing the level of risk they are taking, they have the opportunity to spot the right start-up that could be wildly successful. > Lee

People not connected with the finance and the IT world are talking about bitcoin all the time. This does not make me comfortable to take a long position on bitcoin. Smart money is often made by selling off an asset when it is getting too popular. When ordinary people start to see it as a great investing opportunity, it is the time for smart traders to take profit and escape from long positions > Wisniewski

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In recent months, investors have seen regulators around the world introducing laws to outlaw, curb or encourage the use and trading of cryptocurrency in their jurisdictions. This trend could be the catalyst that pushes the digital coin sphere towards the next phase of growth and prices higher, say industry participants.

Certain countries, like Venezuela, have taken an extreme position on cryptocurrency and bitcoin miners can be imprisoned if they are discovered. At the other end of the spectrum, countries like Japan have embraced it by passing new laws to regulate exchanges and recognise cryptocurrency as a legal payment method.

Perhaps the most notable action occurred in China last month. The People’s Bank of China banned all initial coin offerings (ICO) and froze the activities of all cryptocurrency exchanges. Given that China is one of the largest cryptocurrency trading nations, it is not surprising that bitcoin prices plunged 35% after the announcement.

Announcements by regulators in Southeast Asia soon followed. Bank Negara Malaysia said it would introduce guidelines on cryptocurrency by year end. Prior to that, Thailand’s Securities and Exchange Commission said it would “strike a balance between supporting digital innovation and protecting investors from potential ICO scams”.

The reason behind the regulations is simple, says Mark McKenzie, senior analyst at the South East Asian Central Banks (SEACEN) Research and Training Centre. His personal view as an academician is that central banks globally have no experience dealing with this new technology, but in 2008 they all learned one thing they will never forget.

“Central banks and regulators do not want any segment of the financial system to be unregulated. Obviously, this is a big lesson we learnt from the 2008 global financial crisis. The [unregulated] shadow banking system played a significant role in the crisis. We have experiences in other areas, and we can only apply them to the new [cryptocurrency] space.

“Central banks and regulations are not perfect. Imperfections in regulations such weak capital standards contributed to the last financial crisis. Market misconduct and poor stewardship also contributed to the crisis. In the aftermath of the crisis, these factors contributed to a loss of public confidence. In some instances, this resulted in public apathy for bankers and regulations and even certain institutions, and hence the emergence of Bitcoin and other cryptocurrencies. 

“Despite this apathy, I believe central banks and regulations are necessary evils. We may have got some things wrong but we also got some things right. Since the crisis, policymakers have been working assiduously to address remaining deficiencies,” McKenzie says.

There is also the aspect of public interest. People who are not aware of what they are getting into are being scammed with get-rich-quick schemes and dubious blockchain projects and businesses that can cost them their savings.

“In a world without regulations, who looks after the vulnerable in society? At the end of the day, when more people are scammed, they go to the government. And it is, in fact, the government’s responsibility to take care of them. This is the stark reality and consequently, this makes cryptocurrencies a public interest concern,” McKenzie says. 

SEACEN helps its central bank members in Asia-Pacific build central banking knowledge through its learning programmes, research and networking and collaboration platforms.

From a macroeconomic perspective, regulations are needed due to the potential increase of capital flight via cryptocurrency, says an industry player who does not want to be named.

“This is said to have caused central banks globally, as in China, to observe the inflows and outflows on its fiat account in relation to cryptocurrency transactions. This helps regulators understand the level of activity. Central banks are keeping an eye on funds being wired and transferred onshore and offshore that are suspected of being related to the cryptocurrency trade. These could lead them to implement further regulations, including the freezing of accounts undertaking unsanctioned activities, limiting [cryptocurrency] exchange activities and more,” adds the industry player.

“More regulations will be imposed on the cryptocurrency space in Malaysia and globally. Investors should expect this to happen,” says Rene Bernard, president of Access Blockchain Association, a newly established association that promotes blockchain technology in Malaysia.

While more regulations can be expected in many countries, it is not expected to cause the same volatility in bitcoin prices as last month, following China’s ban and freeze of ICO and cryptocurrency exchanges, says Tomasz Wisniewski, chief analyst at Alpari Research & Analysis.

“First of all, the Chinese market is very important for the bitcoin community as the country has some of the largest mining operations and crypto exchanges. Regulatory events in other countries are unlikely to create the same impact that China did. Secondly, we can now expect similar actions from other countries, so the impact should be less, as it always is when a certain action is anticipated,” he says.

Also, regulations are not necessarily a bad thing in the cryptocurrency space, says Wisniewski. “Many users are waiting for these regulations to [be implemented] and see it as a good sign. Smart regulations — which could limit scams and increase investor protection while at the same time not impose too many restrictions on the industry — are more than welcome in the bitcoin community. If regulators move in this direction, the price of cryptocurrency should move higher.”

London-based Alpari Research & Analysis is part of the Alpari Group, a brokerage firm that offers trading services including binary options, foreign exchange and precious metal.



Local industry participants believe that there are certain areas of the cryptocurrency world that need to be regulated, especially around ICO activities. Recently, this fundraising channel, where start-ups raise funds through issuing cryptocurrencies, has seen a sudden influx of new and speculative money flooding the market. At the same time, the number of dubious ICOs is increasing.

Aaron Ting, vice-president of the Malaysian Investors’ Association (MIA) says many ICOs in Malaysia have elements of fraud and people who are unaware have been scammed. “In the interest of the public, the ICO space should be regulated.”

While this fundraising channel is still considered new, there have already been dubious cases in Malaysia. EcoBit, probably the first ICO initiated by local players and marketed to a local audience, was placed on Bank Negara’s Financial Consumer Alert list in June.

Climate Protectors, according to reports, was given a 30-year concession by the Kelantan government to protect the state’s 396,000ha of permanent forest reserves. In addition, Climate Protectors would audit the carbon credits available in the forest reserve and trade these credits on the international carbon credit stock exchange to generate a profit for stakeholders.

According to its marketing materials, EcoBit has plans to set up the EcoBit Sanctuary Asia project on Carey Island, which would see the establishment of an aquaponics farm, spirulina farm, hotel, coconut plantation and blockchain bank.

Following Bank Negara’s announcement, some marketing materials posted on the EcoBit website were taken down. This includes the video of a signing ceremony between the representative of Climate Protectors Sdn Bhd, the company behind EcoBit cryptocurrency, and the Kelantan government.

The United Nations and Kelantanese government denied being involved with EcoBit after Bank Negara’s announcement. From June to the time of writing, there has been no further news on EcoBit’s project.

However, players have differing views on how this fundraising channel can be regulated. MIA’s Ting says the association has recommended to the Securities Commission Malaysia (SC) to regulate ICOs using the special purpose acquisition company (SPAC) model.

A SPAC is a public-listed company that raises funds through an initial public offering. However, it does not have an existing business that has generated profit and revenue. All it has is a proposal to acquire strategic assets within a specific industry with the funds raised, within a specific timeline.

The SC released the regulations on SPACs in 2009, and they have been tightened over the years. Under the current regulations, SPAC promoters are required to own at least 10% of the paid-up capital of the SPAC they are promoting. And instead of getting an almost 100% discount on buying the shares of the SPAC they are promoting, promoters now have a 90% discount. These new regulations are intended to give these promoters more “skin in the game” and for them to be held responsible for their proposed business and investors.

Also, at least 90% of investors’ money in a SPAC has to be placed in a trust account and can only be used for specific purposes. Any asset acquisitions done by the promoters must have the approval of 75% of the shareholders.

Ting says, like SPACs, ICOs do not have existing products and services, not to mention a profit-generating business. What they have, is a white paper, akin to a business proposal, and a line-up of team members that would enhance its credibility. Based on these, the team raises funds from the public and embarks on the development of the products and services it promises, with its success remaining highly uncertain.

“All these features of an ICO are similar to the SPAC model. The key difference is that a SPAC is regulated by the SC while ICOs remain unregulated.

“Yes, the team behind an ICO would say that they have conducted the KYC [know-your-customers] and AML [anti-money laundering] procedures and all, but how would you know if they have really done it or whether they meet the minimum standards required by the regulators?”

While Robin Lee, founder and CEO of HelloGold, agrees that the ICO space should be regulated to protect investor interest, he says the SPAC model is too strict to be applied to the nascent cryptocurrency industry.

“SPAC regulations have been in place since 2009. And there are very few of them in the market today. [The regulations] are too strict and may not be applicable to a nascent industry [like ICOs].”

HelloGold is a mobile application which allows people to trade gold online. Lee has raised funds via an ICO to develop HelloGold’s business. He says regulators should come up with a more flexible regulatory framework to push for more transparency and more disclosure from those who raise funds via an ICO. They should be able to provide key documents to the regulators and investors to show that what they claim is true.

They should also have more engagement with investors, such as conducting a few “Ask-Me-Anything” events before raising funds to allow investors to ask them difficult questions, which is what HelloGold did before launching its ICO, says Lee.

Investor education is equally important. Awareness campaigns and activities should be carried out — not only by regulators but also industry players — so investors have the knowledge they need to ask the right questions and be aware of the risk they are taking on.

“There is always a risk when regulators jump straight in to regulate a nascent industry. This would give people the impression that the regulated industry is safe. Investor awareness is key. And industry players have to take the initiative to regulate themselves to push the industry forward.”



Industry players also agree that cryptocurrency can be perceived as both a currency and investment asset class, although the latter usage is more common. McKenzie says cryptocurrency, particularly bitcoin, still has a long way to go to become a currency as it is still not widely accepted around the world. Most of its users are keeping and trading it for investment or speculative purposes and it is not used to buy real goods and services.

In addition, bitcoin has experienced huge price fluctuations — an important factor that hinders people from using it as a currency.

“It is obvious. Let’s say you have a severe disease and want to sell your house to pay for your hospitalisation. Would you sell your house in bitcoin or cash? You would prefer cash as the hospital won’t accept bitcoin. This is in addition to the fact that the price of bitcoin is volatile if you were to keep it over time to pay your medical bills. It still has a long way to go,” he says.

Recently, cryptocurrency news portals, such as CoinDesk Weekly, published discussions on the same topic and concluded that cryptocurrency is considered more an investment asset class, at least for now.

CoinDesk cited two key reasons why cryptocurrency, mainly bitcoin, has not been widely accepted as a currency. The first is that governments, central banks and regulators globally “have yet to establish a regulatory framework to manage cryptocurrency risks” and it is not a legal method of payment in most countries.

While Japan has passed a law that recognises bitcoin as a legal mode of payment, and several large retailers in the country announced that they will accept bitcoin, CoinDesk says there is no proof that a significant number of people are using it now.

Another key reason is the drawbacks of using cryptocurrency in day-to-day business operations by businesses. These include rising transaction fees and erratic confirmation times (for transactions to be completed).

There is a stronger case to make that cryptocurrency (including bitcoin, ether and other alternative coins) is being used as an investment asset class by people around the world.

Bobby Ong, co-founder of CoinGecko, a cryptocurrency data website, says the number of bitcoin (which is the main currency in the crypto world) transactions has increased from one transaction a day in 2009, to 250,000 a day on average this year.

“It is about demand and supply. And the demand for cryptocurrency has increased tremendously over the year. People are seeing it as an alternative investment. They hope to enhance their overall investment returns by allocating a minor part of their portfolio to cryptocurrency.

“Yes, it is highly speculative, but it does not deny the fact that it is deemed an asset class by itself. People can invest in it provided they understand the risk they are taking,” says Ong.

In his view, cryptocurrency is a form of alternative investment akin to postage stamps and art, where prices are mainly determined by scarcity and collector demand. This is because most of the cryptocurrencies issued through ICOs have no existing, profit-generating businesses. The value of these tokens is highly subjective and speculative based on the views of each investor.

While some compare bitcoin, the first cryptocurrency, to gold due to its limited supply, HelloGold’s Lee does not agree.

He says, at the end of the day, it is not tangible and is not backed by any real economic activity. Also, as low as the supply may be seem, there is the possibility that the software programme that caps the bitcoin supply could be removed at any time for any reason.

Lee’s view is that cryptocurrency is a token associated with ICO fundraising activities that allows start-ups to raise funds and investors to invest in high-risk, high-return businesses.

“I see it as an investment asset class similar to crowdfunding, where the return on investment is not guaranteed. With adequate regulations in place and investors knowing the level of risk they are taking, they have the opportunity to spot the right start-up that could be wildly successful. Investors have to know that the situation is like the internet boom at the millennium. Most companies are expected to die off over time but a few of them will be huge,” he says.

By adequately regulating the industry, Lee says Malaysia could be one of the centres that attracts innovative start-ups, especially those within the blockchain space, to raise funds and develop blockchain technology.

Access’ Bernard, who is now working with the Malaysian Industry-Government Group for High Technology to develop the blockchain industry, says this is what the association will recommend to Bank Negara and the SC. “Instead of regulating it as a currency, it would be [better] to regulate it from an investment asset class perspective for now. We feel that crypto exchanges should be nurtured in a regulated environment, so Malaysian investors in crypto tokens will always have ready access to liquid markets instead of having to turn to unregulated and opaque over-the-counter markets that are fraught with risks and bad actors.”

If the industry is adequately regulated and cryptocurrency as an asset class could grow healthily, it could benefit the country by turning it into a hub for innovative start-ups, especially those within the blockchain industry, to raise funds in Malaysia and develop new technology, says Lee. “Blockchain technology has a lot to do with banks and the financial sector. And it could further establish our country as the centre of global Islamic finance.”


Bubble seen forming in bitcoin, says analyst

While regulations could push up the price of cryptocurrencies, Tomasz Wisniewski, chief analyst of Alpari Research & Analysis, sees a bubble forming in bitcoin prices that could burst in near future. His prediction is based on technical analysis.

“I can see that recent price movements are definitely not bullish. It is copying the typical bubble chart with the recent drop being a denial phase [meaning that market players do not want to admit to a downward trend and hold on to short-term optimism]. If there were to be a bounce, it is expected to be a bull trap [referring to an inaccurate signal that an index has reversed and is heading upwards, when in fact, it will continue to decline]. The current situation, as at Sept 27, could be labelled as ‘return to normal’, he says.

“If the typical bubble chart is about to be copied entirely, what we should see in the near future is a drop due to fear, capitulation and despair. It does not sound too optimistic, does it?”

Wisniewski also says there are some similarities between the 2011 gold price chart and the current bitcoin price chart. “I can see similarities here. The gold price hit an all-time high that year after experiencing years of an upswing. However, there was a reversal in that year, coupled with high average true range values (an indicator that measures volatility), just like what has been shown now through the bitcoin/USD price chart.”

He says there is a lot of hype in the market about bitcoin today, which makes him feel “uncomfortable”.

“People not connected with the finance and the IT world are talking about bitcoin all the time. This does not make me comfortable to take a long position on bitcoin. Smart money is often made by selling off an asset when it is getting too popular. When ordinary people start to see it as a great investing opportunity, it is the time for smart traders to take profit and escape from long positions,” says Wisniewski.