Earlier this month, experts from Alvarez & Marsal, BC Group and boutique consultancy VeryFide hosted a roundtable on the digital asset industry. A round-up of four key findings from the roundtable’s discussions with experts.
1. Rapid growth of digital assets
In 2021, Bitcoin hit a record high of more than $68,000 and the digital asset ecosystem aggregate market reached a value of $2.1 trillion as of October 2021, higher than the GDP of Italy or Canada.
Commenting on the industry’s growth in the past 12 months, Gary Tiu, Group Executive Director and Head of Regulatory Affairs at BC Group, said: “In 2021, yes, we saw record net inflows in funds, and the entry of new players. For example, in the UK the number of Financial Conduct Authority-registered cryptoasset operators doubled from 15 to circa 30 in the last three months of 2021.”
“At the same time, the UK regulator continued to expand its public list of unregistered players to caution investors against risk. Singapore saw a similar trend, with some high-profile application withdrawals, and there are now more unregistered entities on the regulator’s caution list than the number of pending applications.”
Out of these developments, Tiu said three lessons can be drawn for the industry:
The pace of regulation is accelerating
The regulated digital asset sector is consolidating
The mainstream financial ecosystem is now connected to the digital asset space through regulations.
Henry Chambers, Senior Director at Alvarez & Marsal, continued: “2021 was an inflection point for the industry. As digital assets saw more mainstream adoption, there has been a growing need for professionals to innovate and be able to respond to the emergent trends that affect individual, institutional and corporate users in terms of compliance, trading and custody, but also in disputes and litigation.”
2. Evolving and diverging regulatory landscape
The global regulatory landscape has evolved considerably in the past 12 months – with wide-ranging regulatory approaches including China and India banning cryptocurrencies outright to Hong Kong laying down foundations for a regulated framework and El Salvador becoming the first country to formally introduce Bitcoin as legal tender.
Commenting, Gary Tiu said, “The current regulatory picture remains fragmented at a global level. However, most international financial centres are moving towards policy convergence. The message is clear: digital assets have long-term prospects as an asset class, in asset and wealth allocation. As a medium for financial instruments, there is still room for development.”
In response to the Hong Kong Monetary Authority’s discussion paper proposing the regulation of fiat-backed stablecoins, issued on January 12, Henry Chambers said, “HKMA’s consultation paper on stablecoins is timely; it is forward looking and reaffirms that Hong Kong remains a crypto hub looking to self-regulate by learning from other markets’ practices. It shows that stablecoins have a future in settlements and payment.”
Underlining the APAC region’s progressive regulatory approach to digital assets, the Monetary Authority of Singapore granted its first license to a digital asset business in August, with a key difference to Hong Kong being that it enables retail access to the market.
Commenting on the differing approaches, Sandy Grieve, Managing Director of VeryFide Consulting observed: “It is tempting to cast a competition between the two markets but there is plenty of room and growth opportunities in the industry for both markets to play a part. It is not a winner takes all situation. Each market can carve its own niche, where one could champion capital raisings while the other could become the go to place for DeFi development, for example.”
3. Increasing threat of digital asset fraud
According to recently released figures from Chainalysis, illicit transaction activity reached an all-time high of $14 billion in 2021, up 79% year-on-year (2020: $7.8 billion). Putting these numbers in context, Henry Chambers noted: “Total transactions reached a record $15.8 trillion in 2021. As a proportion of overall transactions, illicit activity reached its lowest level last year, albeit remained large in absolute value.
“Digital assets are attractive to criminals – large amounts of value can be moved pseudo anonymously in the DeFi space and deep liquidity pools have enabled illicit transactions to proliferate. Notwithstanding this, fundamentally the blockchain is a very powerful tool to prevent and detect fraud.”
“Public blockchains are essentially a ledger of transactions from the inception of the token, meaning that transaction flows can be visualised and traced, either through a public blockchain explorer or with specialist tools,” he continued.
“At Alvarez & Marsal we help clients combine the ability to follow transactions with traditional forensic techniques with a view to linking wallet addresses to individuals. Other forensic techniques we employ include blockchain heuristics and monitoring coupled with KYC/AML procedures. Having safeguards like this acts as a deterrent to those seeking to use crypto assets for illicit purposes.”
Underscoring the importance of regulation, Gary Tiu said: “Important elements of control are missing in the DeFi environment compared to the regulated space, including auditors, banking records, asset segregation and governance structures. Regulation is essential and Hong Kong and Singapore are at the forefront. The UK and Singapore have also made effective use of the ‘naming and shaming’ approach against unregulated players, and Hong Kong can learn from this.”
4. Further digital asset adoption in 2022
It is expected that institutional adoption will continue in 2022 and the launch of crypto ETFs will further legitimise digital assets and boost mainstream adoption.
Predicting industry developments in 2022, Sandy Grieve said: “The watchwords for 2022 are regulation and consolidation. Regulation is necessary, important, and largely welcomed by industry participants, and it will drive consolidation due to the overheads associated with compliance requirements.”
Gary Tiu shared similar observations for 2022: “Hong Kong regulatory requirements are strict and match the standards of mature financial ecosystems. This is a natural barrierto-entry for new players trying to enter the regulated digital asset space. As a result, I expect traditional financial institutions will seize this opportunity to meet market demand. I expect that, within 6 months, private banks, and asset and wealth managers will be offering digital asset services to their clients in Hong Kong.”
“As mainstream adoption of digital assets continues, I am expecting to see a greater number of fraud, scam, theft, and ransomware cases. In view of this, it is imperative that all market participants take proactive steps to prepare, including ensuring that they are as educated as possible about the products they are involved with and their associated risks,” concluded Henry Chambers.
Sourced from Consultancy Asia