Fears the U.S. is losing its crypto edge may be overblown. Here’s why
July 21, 2023 Alex Rustok
The crypto world is watching the U.S. to see if recent regulatory developments in the industry could force some much longed for clarity around how to operate a crypto business. The market got a confidence boost in June – thanks largely to a move by asset manager BlackRock to launch a spot bitcoin ETF – after six months of the SEC cracking down on the industry. The path to regulatory clarity is still unclear, however, and investors are worried that as Washington dilly dallies around crypto, the U.S. is losing its competitive edge to the rest of the world. Others, however, say that’s far from the case. “[Europe] is certainly a step ahead of the U.S. with their framework they set up,” Galaxy Digital CEO Mike Novogratz said on his company’s earnings call earlier this year. “Hong Kong is becoming crypto-friendlier … And then, places like Abu Dhabi and Dubai are really pushing the envelope to create a robust crypto regulatory infrastructure and I think you’re going to see businesses migrate there.” It’s already in motion. In April, Coinbase CEO Brian Armstrong said his company would consider moving out of the U.S. It has already received a license to operate in Bermuda and is in talks with regulators in the United Arab Emirates to set up operations in Abu Dhabi. Shortly after, Gemini announced plans to expand its presence across Asia. It appointed a regional CEO and set up its second-largest engineering hub, behind the U.S, in Gurgaon, India. Last month, stablecoin issuer Circle established a regional headquarters in Singapore after receiving a Major Payment Institution license to offer digital payment token services and cross-border money transfer services. And, in that same earnings call earlier this year, Novogratz said Galaxy hired some traders based in Hong Kong. “We’re really excited about that,” he said. “We do think this is a global business and our intention is to continue to grow outside of the U.S. at a much quicker pace than we were growing in the United States. Most of that is regulatory, but a lot of it is also opportunity. … The Asian markets take to crypto, there’s quick adoption there. And now, we’re seeing more and more in the Middle East and Europe.” Other jurisdictions are gaining While the United States is currently embroiled in political and regulatory battles, wrangling the future of the crypto industry, other countries are enticing companies by providing clearer guidelines and being adaptive to innovation. Just this week, Societe General ‘s crypto arm received approval by France’s financial regulator to offer crypto services, including crypto assets. The European Union passed in May the Markets in Crypto Assets (MiCA) legal framework for issuing and trading cryptocurrencies. The next month, Hong Kong implemented a new licensing regime so crypto exchanges can serve retail customers. And last year, Dubai created the Virtual Assets Regulatory Authority (VARA), an independent regulatory body for “virtual assets.” The U.S. is “slowly but surely going to put in regulation, it’s just been more piecemeal than the [Financial Conduct Authority] in the U.K., for example, who is now starting to set out a framework,” said Cantor Fitzgerald’s Elliot Han. Hong Kong, in particular, has tried to position itself as an international hub for crypto. It’s pushing its banks to open accounts for crypto businesses and creating crypto-friendly rules. “U.S. exchanges perceive opportunities in Asia through a lens that promises appropriate regulatory actions – but are less disruptive and more predictable regulatory actions,” said Dean Sovolos, general counsel at B2C2, an institutional crypto liquidity provider. Lily King, chief operating officer of Cobo, a Singapore-based crypto custody provider, said she credits Asian governments with providing clear and comprehensive regulatory requirements as well as adopting “practical, top-down efforts” that allow collaboration and dialogue to support innovation and establish necessary oversight. The downside is the market is smaller and Hong Kong isn’t able to attract capital like Silicon Valley is, said Owen Lau, an analyst at Oppenheimer. However, money is already moving out of the U.S., he added, citing venture capital giant Andreessen Horowitz’s June announcement that it will open its first office outside the U.S. in London, betting that the U.K. will become a crypto hub . “We are losing slowly, and other jurisdictions are gaining,” he said. “At this point, I still think we can fix it if we can get the regulation right. … The problem is how much additional leeway we have … if the damage is done, it’s very hard to reverse.” Galaxy Chief Investment Officer Chris Ferraro echoed that sentiment in a recent “Crypto World” interview. “I am optimistic we will get it right,” he said. “I am fearful that the U.S. will take its time and while that happens, sticky capital and sticky intellectual capital gets formed elsewhere in the world, and then it’s hard to undo.” A lot of talk, not much action At first glance, the trading day looks like assets are leaving the U.S. for exchanges abroad. U.S. exchanges – including Coinbase Pro, Gemini, Bittrex, Gate.io, Poloniex and Kraken – had led the rest of the world in bitcoin reserves, but were dethroned from that position around June 2022, according to CryptoQuant. That was long before the regulatory crackdown began to take hold but around the time crypto lenders started to collapse like dominos and investors lost confidence in the industry. International exchanges – including Binance, Huobi Global, OKX, Bitfinex, FTX, Bybit, KuCoin, BitMEX and Binance Pegged – have seen steady growth since then, climbing to around 1.2 million BTC in July and leading U.S. exchanges’ 660,000 BTC. Just over 50% of bitcoin on exchanges is outside of the U.S. Han noted that Huobi, Binance and OKX have always been among the biggest exchanges and highlighted that crypto has a big user base outside the U.S. He also suggested that some crypto whales, traders who hold large enough sums of crypto to influence the market with their transactions, might have been spooked by the U.S. regulatory pressure and the potential for their funds to get tied up in complication, and moved their money offshore. Anxiety about U.S. crypto regulation has been running high but it’s a lot of talk, and not a lot of action so far, according to Han. “A lot of these companies have said ‘we’re getting suppressed by U.S. regulation, we might have to start thinking about moving,’ … but I don’t think anyone’s building out a massive headquarters in Hong Kong or London or Berlin or anywhere else,” he said. “It’s more that they might put a few boots on the ground – one or two people just to plant the flag and say that they have presence in that area.” As each quarter goes by, if regulation gets tighter and makes it more difficult to do business in crypto, they could add other people or move certain business lines over, he explained. If they already have people in place on the ground, it’s going to make life a little easier for them. “I can’t see anyone going out spending tons of money to build out a huge office in another area when we, quite frankly, don’t know what’s going to happen with regulation here in the U.S. – and I think that’s where the frustration lies,” he said. “People are holding out hope to the last possible minute,” he added. “If the U.S. said something like China and said we’re banning all cryptocurrencies, all crypto mining, all crypto trading, then it’s another story – I don’t think we’ll hit that stage.”
