Crypto capital is shifting. This is where the money goes

The global shift in capital didn’t really begin until 2021 when China, one of the most active and largest cryptocurrency markets, imposed a complete ban on crypto-related business activities, especially trading. As many as 10 Chinese government agencies, including the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CRSC), have nailed the crypto coffin by criminalizing interaction with the nascent asset class.

Prior to the full ban, research from the Cambridge Center for Alternative Finance (CCAF) found that the country’s global Bitcoin mining share fell from 75.5% in September 2019 to 46% in April 2021, as Chinese miners moved their operations to the moved abroad. The exodus of miners reflected unfavorable conditions in China and partially foreshadowed the coming ban. Ultimately, the ban was not clearly defined, and recent data from Chainalysis shows that Chinese citizens are still trading cryptocurrency despite the ban.

Where did it go?

The crypto market in Asia Pacific has traditionally been largely dominated by retail, which is reflected in the number of established crypto exchanges in the region. The Chinese ban on cryptocurrency trading and related activities undermined the main strength of the APAC market, pushing crypto capital and projects within the international ecosystem towards more accommodating regimes.

One of them is Singapore, as the Monetary Authority of Singapore (MAS) had established clear guidelines for the legal treatment of cryptocurrencies. Crypto financial services company Babel Finance and crypto custodian Cobo, both China-founded companies, moved their headquarters to Singapore in 2021 following the Chinese crackdown.

At the time, the small but mighty Southeast Asian city-state was the most attractive local option, especially when combined with the evolving pandemic restrictions on other possible destinations. However, with Hong Kong reviving its crypto-friendly stance, many Chinese investors prefer Hong Kong for its cultural similarity to China, allowing for a more seamless transition. This maneuver is part of the autonomous city-state’s broader ambition to regain its status as a global financial center, a distinction tarnished by lockdown restrictions.

The United Arab Emirates, with its high quality of life and lack of income tax, also has what it takes to be a crypto hub. Moreover, authorities in the UAE recognized the opportunities presented by the pandemic and adverse crypto regimes. Dubai and Abu Dhabi have taken aggressive steps to pull business out of APAC and Europe, implementing liberal visa policies, expiring business licenses quickly and offering employees long-term residency. Naturally, this attracted a large number of displaced crypto advocates.

Is fleeing the US a competitive decision?

The United States owns a significant portion of global venture capital, both in and out of cryptocurrencies. It remains uncertain whether these funds will continue to flow out of the US, seeking compliance with the European Union’s highly coveted Markets in Crypto Assets (MiCA) legislation. The question of whether venture capital will comply with these regulations is too early to determine definitively, despite the overbearing attitude of major US exchanges such as Coinbase. Should uncertainty continue in the US, it would be beneficial for exchanges to establish regional subsidiaries, as Coinbase is doing in Bermuda, a British Overseas Territory.

On that note, London and the UK have a vested interest in tokenization, making it relatively easier for US companies to adapt. Despite this, notable differences exist in the UK’s approach. According to a recent report by the Treasury Committee of the UK House of Commons, retail crypto trading “has no intrinsic value and serves no useful social purpose”, compared more to sports betting than to traditional investing. This is despite London’s position as a major international crypto hub and contradicts a report by the commission, which references various cross-border payments and financial inclusion benefits championed by crypto advocates. It also undermines the UK’s wider crypto-regulation talks with the digital asset industry, which concluded last month.

With pandemic restrictions almost a distant memory, those who have migrated their crypto operations – many to “grey list” UAE jurisdictions – may be ready to return. Earlier this year, Dubai-based Bybit announced its intention to expand its activities in Hong Kong. It is important to note that both Hong Kong and Singapore remain international financial centers in their own right. Both are key entry points into APAC markets with different roles to play globally.

Hong Kong, which suffered a mass exodus in 2021 and 2022 due to its close connection to mainland China, has seen a revised regulatory regime reviving prospects for international cryptohub status. Most importantly, however, this is a signal to international companies that Hong Kong is back and open for business.

The MiCA effect

For typical American crypto exchanges, the sheer number of which is overwhelming, the APAC market is a steep hill to climb. Many Asian stock exchanges are already anchored and infinitely more capable of serving the tailored needs of regional retail investors. Asian exchanges have cultural alignment and are more attuned to risk appetite.

It is also imperative to recognize the impact of restrictions on derivatives trading in the US. According to data from CryptoCompare, derivatives trading accounted for just over 70% of the entire crypto market by early 2023. The vast majority of this market was captured by Asian exchanges early on, with the exception of US exchanges to take advantage of it.

In fact, before US crypto companies were pushed abroad, these products remained underdeveloped in the US. In Asian markets, derivatives trading markets are much larger in volume and often precede spot trading products. Therefore, depending on the nature of the service or product offering, it may make more business sense for certain crypto companies to establish themselves in the US first.

However, there are entities interested in taking advantage of the French regime in the short term and of the EU’s MiCA laws from early 2025. There are already more than 70 crypto companies registered in France, including Binance and Bitstamp – and that number will expected to rise to 100 before MiCA takes effect.

Voted late earlier this year, MiCA enables companies to serve the pan-European market, expanding into services such as crypto investing, advisory and portfolio management. The regulatory framework is considered a major win for the European industry, with positive effects expected to reach the crypto banking sector. This is due to the increased focus on consumer protection and enforced accountability measures.

The flowing tide

The regulatory clarity desired by many countries has led to a redistribution of crypto capital from less favorable regimes to more crypto-friendly destinations. Singapore and the UAE seized the growth opportunities presented by the pandemic, establishing them as attractive destinations for crypto companies and individuals. Now Hong Kong is ready to live up to its claim as an international hub for crypto finance in the APAC region.

The US is facing an ongoing period of regulatory uncertainty related to crypto, hurting digital asset companies there, while MiCA has the potential to restore confidence in the crypto market. Overall, the crypto industry continues to evolve and adapt to regulatory changes, with capital flowing to jurisdictions that offer favorable conditions for digital asset businesses. The future of the industry will be shaped by regulatory developments, market dynamics, and the ability of different regions to attract and support crypto innovation.