SEC Considers Regulatory Exemptions For DeFi Platforms: A Bold Leap Forward Or A Risky Gamble?

SEC Considers Regulatory Exemptions For DeFi Platforms: A Bold Leap Forward Or A Risky Gamble?

Decentralized Finance, or DeFi, has stormed onto the financial stage like a disruptive underdog, promising to upend the traditional banking system with its blockchain-based, intermediary-free approach to money management. By enabling peer-to-peer transactions through smart contracts on public decentralized networks, DeFi offers a tantalizing vision of financial empowerment—higher returns, lower fees, and access for all.

Now, the U.S. Securities and Exchange Commission (SEC), under Chairman Paul Atkins, is contemplating a seismic shift: regulatory exemptions for these platforms. Announced at a recent cryptocurrency roundtable titled “DeFi and the American Spirit,” Atkins revealed plans to develop an “innovation exemption” policy, directing staff to explore rule changes that would allow DeFi entities to launch on-chain products with less oversight. This move has sparked a firestorm of debate, with advocates cheering it as a victory for innovation and critics warning of a Pandora’s box of risks—from security breaches to money laundering. I see this as an extreme change, one that could redefine the future of finance or leave us scrambling to clean up the mess when problems inevitably arise.

The idea of regulatory exemptions for DeFi feels both exhilarating and unnerving. On one hand, it’s a chance to unshackle a technology brimming with potential, aligning with the current administration’s ambition to make the U.S. the “crypto capital of the planet.” On the other, it’s a step into uncharted territory, where the absence of guardrails could expose investors to unprecedented dangers. Hester Peirce, head of the SEC’s crypto task force, has argued that code publishers shouldn’t bear responsibility for how others use their work, but she’s quick to caution that centralized players can’t dodge scrutiny by slapping a “decentralized” label on their operations. With the SEC’s Republican commissioners holding a 3:1 majority and pushing crypto-friendly policies, the momentum is clear—but so are the stakes. In this opinion piece, I’ll dive deep into the pros and cons of this proposal, weaving in data and research to ground my perspective, and offer my take on what might happen when the cracks start to show.

The Case for Exemptions: Unleashing Innovation and Inclusion

Let’s start with the upside, because there’s plenty to get excited about. DeFi’s core promise is to democratize finance, and regulatory exemptions could turbocharge that mission. By stripping away the red tape that traditional financial institutions face, DeFi platforms can experiment freely, creating new products that are faster, cheaper, and more user-friendly. Take transaction costs, for example: traditional banks often charge hefty fees for everything from wire transfers to loan origination, while DeFi platforms, powered by smart contracts, can slash those costs dramatically. On average, I believe DeFi lending protocols offered interest rates on savings up to 10 or 100+ times higher than those of traditional banks. For consumers tired of being nickel-and-dimed, this is a game-changer.

Then there’s financial inclusion, a cause close to my heart as someone who’s reported on global economic disparities. Over 1.4 billion people worldwide remain unbanked, according to the World Bank’s 2021 Global Findex report, often because they lack access to physical banks or the documentation required to open accounts. DeFi sidesteps those barriers. All you need is a smartphone and an internet connection—tools that are increasingly ubiquitous, even in developing nations. By December 2021, the total value locked (TVL) in DeFi platforms had soared from $17 billion to over $163 billion, per DefiLIama. That was the peak, currently the TVL is around $116 billion, a figure will probably climb higher in later part of 2025. This explosive growth isn’t just a speculative bubble; it’s a sign that people—especially those underserved by traditional finance—are hungry for alternatives.

Exemptions could also keep the U.S. competitive in the global blockchain race. Countries like Switzerland and Singapore have already carved out crypto-friendly niches with clear, innovation-supportive regulations. Meanwhile, the U.S. has been stuck in a regulatory quagmire, often driving startups overseas. Chairman Atkins has criticized the previous administration’s “heavy-handed” approach under Gary Gensler, which leaned on court battles rather than collaboration. His push for exemptions, paired with support for self-custody as a “foundational American value,” signals a desire to flip that script. If the U.S. can create a welcoming environment for DeFi, it might attract top talent and investment, fueling economic growth. Imagine the Silicon Valley of blockchain emerging stateside—that’s the kind of upside we’re talking about.

The Downside: Security, Accountability, and AML Nightmares

But here’s where my enthusiasm starts to waver. For all its promise, DeFi is a minefield of risks, and regulatory exemptions could amplify them. Security is the first red flag. These platforms, built on relatively new technology, are magnets for hackers. In 2024, DeFi platforms lost approximately $474 million, according to Hacken’s Web3 Security Report, reflecting a 40% decrease from the previous year due to enhanced security measures. As of April 2025, DeFi platforms have lost at least $155 million, based on monthly reports from Immunefi and PeckShield, though this is an estimate as full-year data is not yet available. Even as security has improved, the threat looms large—especially when you consider that a single smart contract bug can drain millions in seconds. I’ve covered enough cybercrime stories to know that bad actors don’t need an invitation; exemptions might as well roll out the red carpet.

Then there’s the issue of consumer protection, or the lack thereof. Traditional finance has its flaws, but it offers a safety net—think FDIC insurance or SEC enforcement actions. DeFi? Not so much. If a platform gets hacked or a scam artist disappears with your funds, you’re often out of luck. The decentralized ethos means there’s no central authority to call for help, and the complexity of these systems can leave even savvy users vulnerable. I’ve spoken to retail investors who’ve lost life savings to crypto scams; the thought of that happening on a larger scale in an unregulated DeFi landscape keeps me up at night.

The Anti-Money Laundering (AML) piece is where things get really dicey. DeFi’s pseudonymity—where users transact without revealing their identities—is a double-edged sword. It’s great for privacy, but it’s a gift to criminals. DeFi accounted for a huge percentage of all cryptocurrency crime. It’s not hard to see why: anonymous transactions make it tough for authorities to trace illicit funds. I’ve spoken to law enforcement officials who’ve struggled to crack cases involving crypto laundering; loosening oversight could turn DeFi into a playground for money launderers and terrorists. The SEC might argue that blockchain’s transparency helps track these activities, but without robust AML frameworks, that’s a shaky defense.

When Problems Arise: A Regulatory Wild West?

This brings me to the question that nags at me most: what happens when things go wrong? In traditional finance, there’s a playbook—regulators step in, investigations launch, and (sometimes) justice is served. DeFi, especially under exemptions, lacks that structure. If a major platform collapses or a fraud scheme unravels, who’s accountable? The code writers, who Peirce says shouldn’t be liable? The users, who might not even understand what they’ve signed up for? The absence of clear rules could leave chaos in its wake, eroding trust in DeFi just as it’s gaining traction.

The 2008 financial crisis looms large in my mind here. Back then, lax oversight of complex instruments like mortgage-backed securities fueled a meltdown that cost millions their homes and jobs. DeFi’s parallels—high-risk products, rapid growth, limited regulation—feel eerily familiar.

The Federal Reserve has expressed concerns about decentralized finance (DeFi) and its potential to create systemic risks, especially through its interconnectedness with traditional financial systems. It was also highlighted that DeFi’s reliance on stablecoins could amplify risks if a major player fails, potentially triggering a domino effect. This is because stablecoins are vulnerable to runs, which could disrupt short-term funding markets and spill over to traditional finance. It also notes that exemptions from regulation might speed up innovation, offering benefits like efficiency and financial inclusion. However, this could set the stage for a crisis, as DeFi lacks the oversight traditional finance has, making it harder to handle systemic risks. Exemptions might accelerate innovation, but they could also set the stage for a crisis we’re ill-equipped to handle.

Investor confidence is another casualty I worry about. Crypto diehards might cheer deregulation, but the average person—say, a retiree dipping into DeFi for better returns—wants reassurance. Without SEC oversight, that trust could erode, stunting DeFi’s mainstream adoption. I’ve seen how volatility and scandals in crypto spook newcomers; exemptions could make that worse, not better.

My Take: A High-Stakes Balancing Act

So where do I land? I’m torn, honestly. I’m thrilled by DeFi’s potential to shake up a stodgy financial system. The data backs up its momentum. Exemptions could supercharge that, positioning the U.S. as a blockchain beacon and delivering real benefits to everyday people. I can’t help but root for a future where a farmer in rural Africa or a gig worker in Detroit can access loans without a bank’s blessing.

But as a practitioner who’s seen deregulation’s dark side, I’m skeptical of going all-in. The amount loss to DeFi hacks—give me pause. The AML risks feel even more urgent; we can’t ignore that there is a spike in crypto-related crime, much of it tied to DeFi. And when problems hit, the lack of a safety net could turn a breakthrough into a breakdown. I keep circling back to Peirce’s point about centralized pretenders—exemptions might let wolves in sheep’s clothing slip through, undermining the whole experiment.

I think the SEC should tread carefully, not blindly. A full-on exemption feels too extreme; instead, I’d advocate for a “regulatory sandbox” approach. Used in places like the Singapore, India, U.K., this lets platforms operate under light oversight while regulators study the risks and refine rules. It’s a compromise that fuels innovation without throwing caution to the wind. Pair that with tiered regulations—tougher for big players, lenient for startups—and you’ve got a framework that adapts to DeFi’s scale.

The Road Ahead: Opportunity Meets Responsibility

The SEC’s move is a crossroads moment. Done right, exemptions could usher in a financial revolution, cutting costs, boosting inclusion, and cementing U.S. leadership. Done wrong, they could unleash a torrent of fraud, instability, and lost faith. The numbers tell a story of both promise and peril. My gut says we need both—boldness to seize the future and vigilance to protect it.

As Atkins and his team shape this policy, they’re not just regulating code—they’re deciding who wins and loses in tomorrow’s economy. I’ll be watching, notepad in hand, hoping they strike a balance that proves DeFi can thrive without toppling over. Because when the dust settles, it’s not just about crypto—it’s about whether we can build a system that’s as fair as it is forward-thinking. That’s the American spirit I’d bet on.

 

Source: https://www.benzinga.com/markets/cryptocurrency/25/06/45863828/sec-considers-regulatory-exemptions-for-defi-platforms-a-bold-leap-forward-or-a-risky-gamb

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

MiCA’s Stablecoin Gamble: How Europe’s Bank Mandate Could Backfire

MiCA’s Stablecoin Gamble: How Europe’s Bank Mandate Could Backfire

The European Union’s Markets in Crypto-Assets (MiCA) regulation marks a pivotal moment in the global regulation of digital assets, particularly concerning stablecoins. This comprehensive framework aims to bring clarity and stability to the burgeoning crypto market within the EU. However, a closer examination of its specific provisions, especially those pertaining to stablecoin reserves, reveals a potentially problematic approach.

As a financial journalist with a keen interest in the intersection of finance and technology and having observed the evolution of digital assets and their regulatory landscapes, I contend that the MiCA stipulation requiring 60% of stablecoin reserves to be held within EU banks could inadvertently introduce instability and hinder the very innovation it seeks to foster. While seemingly aimed at enhancing security, this mandate may instead create new vulnerabilities and fragment the global stablecoin market.

The Stablecoin Landscape

Before dissecting the intricacies of MiCA’s impact, it’s essential to grasp the current dynamics of the stablecoin market. As of early 2024, this sector boasts a market capitalization exceeding $130 billion, a testament to the growing demand for digital assets that offer price stability. Tether remains the dominant player, commanding approximately 70% of this market share. This dominance isn’t accidental; it largely reflects market confidence in Tether’s reserve composition and its consistent ability to maintain its peg to the U.S. dollar.

The success of Tether can be directly attributed to its reserve strategy, which predominantly involves holding U.S. Treasuries and other highly liquid dollar-denominated assets. Tether’s transparency, albeit sometimes scrutinized, through its regular attestation reports provides insights into this strategy.

According to their latest reports, a significant portion, around 85% of their reserves, are held in cash and cash equivalents, with U.S Treasuries forming the lion’s share. This preference for U.S. Treasuries is not arbitrary. These instruments are backed by the full faith and credit of the United States government and offer unparalleled liquidity. The daily trading volumes in the secondary market for U.S. Treasuries routinely average over $910 billion, making them exceptionally easy to buy and sell without significantly impacting their price. This deep liquidity is a crucial factor in maintaining the stability of a stablecoin.

Other significant stablecoins, such as USD Coin, prioritize holding reserves in highly liquid and low-risk assets, including U.S. Treasuries and cash held in regulated financial institutions. This industry-wide preference for U.S. Treasuries underscores their perceived safety and liquidity within the global financial system. The ability to quickly convert reserves into fiat currency during periods of high redemption pressure is paramount for a stablecoin to maintain its peg.

Protectionism Masquerading as Security?

MiCA’s requirement that 60% of stablecoin reserves be held in EU banks appears to be more of a protectionist measure aimed at bolstering the European financial sector than a genuine enhancement of stablecoin security. This assertion becomes particularly compelling when comparing the liquidity of the European bond market to that of U.S. Treasuries. While the EUR government bond market is substantial, it pales compared to the U.S. Treasury market in terms of trading volume and depth. The lower liquidity and often wider bid-ask spreads in European government bonds raise concerns about the ease and cost of liquidating these assets during periods of market stress.

Tradeweb reported in September 2024 that the average daily volume for European government bonds was $49.5 billion. As I do not have the exact average daily trading data from the European Central Bank, I put fair estimated daily trading volumes of around €100 billion for this comparison. This figure is less than one-ninth of the daily trading volume observed in U.S. Treasuries, which is over $910 billion.

This significant liquidity disparity is not merely an academic point; it has real-world implications for stablecoin issuers who need to access their reserves quickly to meet redemption requests. During market turbulence, the ability to quickly and efficiently convert reserve assets into fiat currency is critical for maintaining the stablecoin’s peg. Lower liquidity in the European bond market could translate to higher transaction costs and potential delays in accessing funds, potentially undermining the stability MiCA aims to achieve.

Furthermore, the concentration of reserves within EU banks raises questions about the potential for systemic risk within the European financial system. While diversification is generally considered a prudent risk management strategy, forcing stablecoin issuers to concentrate a significant portion of their reserves within a specific regional banking system could amplify the impact of any localized financial instability.

The Silicon Valley Bank Lesson

The collapse of Silicon Valley Bank (SVB) in March 2023 is a stark and relevant case study highlighting the inherent risks associated with relying solely on the traditional banking system for stablecoin reserves. When SVB experienced a rapid bank run, Circle’s USD Coin, despite being considered a highly reputable stablecoin, temporarily lost its peg, plummeting to around $0.87. This dramatic event occurred even though only approximately 10% of USD Coin’s reserves were directly affected by the SVB failure. This incident underscored two critical vulnerabilities: firstly, bank deposits, even within seemingly well-regulated institutions, are not entirely risk-free, and secondly, the operational limitations of the traditional banking system, such as weekend closures and processing delays, are fundamentally incompatible with the 24/7 nature of cryptocurrency markets.

Imagine the amplified impact if, under MiCA’s regulations, 60% of a stablecoin’s reserves were caught in a similar situation. The inability to access a significant portion of their reserves during a critical period could have catastrophic consequences, potentially triggering a systemic crisis within the European crypto ecosystem and eroding trust in stablecoins more broadly. The SVB episode demonstrated the speed at which confidence can evaporate in the financial system and the potential for contagion to spread rapidly. MiCA’s banking-centric approach, while intended to provide security, could inadvertently create a single point of failure, making the system more vulnerable to such shocks.

The Liquidity Premium of U.S. Treasuries

U.S. Treasuries have earned their reputation as the world’s premier safe-haven asset for compelling reasons, primarily their unparalleled market depth and liquidity. This deep liquidity ensures minimal price slippage even during periods of large-scale liquidations. During the height of the COVID-19 market panic in March 2020, the U.S. Treasury market remained remarkably robust despite unprecedented volatility across global markets. While bid-ask spreads widened temporarily, the market continued functioning efficiently, allowing investors to buy and sell Treasuries relatively quickly. This resilience during extreme stress underscores the inherent strength and liquidity of the U.S. Treasury market.

Conversely, European government bonds, particularly those issued by smaller EU nations, have experienced significant liquidity challenges during various crises. During the Eurozone crisis of 2011-2012, some sovereign bonds became practically untradeable, highlighting the potential for liquidity to dry up during times of stress. For a stablecoin issuer needing to process large redemption requests quickly, such a scenario could prove disastrous, making it difficult, if not impossible, to access the necessary funds to maintain the peg. The historical data demonstrates U.S. Treasuries’ superior liquidity and stability compared to their European counterparts, making them a more reliable asset for backing stablecoins.

The Banking System’s Inherent Vulnerabilities

MiCA’s reliance on the traditional banking system introduces additional layers of risk beyond just liquidity concerns. The banking turmoil of 2023, which witnessed the failures of both SVB and Signature Bank and First Republic Bank in the United States, serves as a potent reminder that even seemingly well-regulated banks can collapse under stress. European banks are not immune to such vulnerabilities. The forced merger of Credit Suisse with UBS in 2023, orchestrated to prevent a broader financial crisis, stands as a recent and prominent example.

Furthermore, unlike U.S. Treasuries held directly, bank deposits are subject to counterparty risk. If the bank holding the stablecoin reserves faces financial difficulties or even fails, accessing those reserves could become problematic.

Additionally, under EU banking regulations, bank deposits are potentially subject to bail-in provisions. In a crisis, depositors (including stablecoin issuers) could see their funds used to recapitalize the failing bank. This introduces a level of risk that stablecoin issuers cannot directly control, which is not present when holding highly liquid government securities. Banks also typically reinvest deposits in various assets, creating additional layers of risk and complexity that are opaque to the stablecoin issuer.

Market Fragmentation and Innovation Barriers

MiCA’s stringent requirements could lead to fragmentation in the global stablecoin market. Major issuers like Tether, who have established their reserve management strategies based on global liquidity and the reliability of U.S. Treasuries, might find the cost and complexity of complying with MiCA’s requirements prohibitive. They might opt to limit their operations within the EU rather than fundamentally restructure their reserve management strategies. This could create a bifurcated market: globally accessible stablecoins operating largely outside the EU and smaller, potentially less liquid stablecoins operating within the regulatory framework of MiCA.

This fragmentation could hinder the seamless flow of capital and innovation within the European digital asset space. New stablecoin projects seeking to launch in the EU would face significant barriers to entry, needing to establish relationships with EU banks and navigate complex reserve requirements before even launching their product. This could concentrate power in the hands of established financial institutions, potentially stifling the decentralized ethos that underpins much of the cryptocurrency movement. The increased regulatory burden and operational complexity could also make it less attractive for innovative stablecoin projects to establish themselves within the EU, potentially pushing innovation to other jurisdictions with more accommodating regulatory environments.

Alternative Approaches to Foster Stability

Rather than imposing potentially risky banking arrangements, regulators could explore alternative approaches focusing on transparency, risk-based assessments, and a broader acceptance of high-quality collateral. One such approach would be enhancing transparency and mandating stablecoin reserves’ auditing regardless of geographical location. Independent audits conducted by reputable firms could provide greater assurance to users.

Another avenue would be to develop clear and objective standards for assessing the quality of reserve assets, focusing on criteria such as liquidity, credit risk, and market depth. This would allow for a more nuanced approach to reserve management, recognizing assets like U.S. Treasuries’ proven stability and liquidity. Regulators could establish a framework that allows for a more diverse range of high-quality collateral, including U.S. Treasuries and other highly liquid government securities from reputable jurisdictions, provided they meet stringent risk criteria. This approach would acknowledge the stablecoin market’s global nature and certain assets’ established role in maintaining stability.

The data and historical precedent are clear: U.S. Treasuries have consistently demonstrated their value as stable and liquid collateral through multiple periods of financial stress. MiCA’s attempt to artificially promote European alternatives through regulatory mandate does not alter this fundamental market reality. A more pragmatic approach would be to acknowledge the global nature of stablecoins and focus on establishing robust standards for reserve quality and transparency rather than imposing geographically restrictive requirements.

Balancing Innovation and Stability

While MiCA’s underlying intentions to protect consumers and ensure the stability of the stablecoin market are undoubtedly laudable, its current implementation risks achieving the opposite of its intended effect. By compelling issuers to hold a significant portion of their reserves in potentially less liquid and potentially riskier assets within the European banking system, the regulation may inadvertently increase, rather than decrease, systemic risk within the European crypto ecosystem.

The stablecoin market undeniably requires thoughtful and effective regulation. However, such regulation should be grounded in market realities, informed by historical data, and designed to foster innovation while mitigating genuine risks.

As the digital asset industry evolves rapidly, regulatory frameworks must strike a delicate balance between promoting stability and encouraging innovation without erecting artificial barriers that could ultimately harm the very users they are designed to protect. A more globally collaborative and less geographically prescriptive approach to stablecoin regulation would likely be more effective in fostering a stable and innovative digital asset ecosystem.

 

Source: https://intpolicydigest.org/mica-s-stablecoin-gamble-how-europe-s-bank-mandate-could-backfire/

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

Hong Kong’s Plan to Greenlight Spot Crypto ETFs: Smart Move or Foolish Gamble?

Hong Kong’s Plan to Greenlight Spot Crypto ETFs: Smart Move or Foolish Gamble?

Crypto ETFs are exchange-traded funds that track the performance of one or more cryptocurrencies, such as Bitcoin and Ether. Crypto ETFs allow investors to gain exposure to the crypto market without having to buy, store, or manage the underlying assets themselves. Crypto ETFs can also offer more liquidity, transparency, and diversification than direct crypto investments.

There is a lot of hype about crypto ETFs in the West, especially in the US, where many fund managers have been applying for the approval of the Securities and Exchange Commission (SEC) to launch spot crypto ETFs, which would hold the actual cryptocurrencies in custody. However, the SEC has been reluctant to approve these ETFs, citing concerns over market manipulation, investor protection, and regulatory compliance. So far, the SEC has only approved crypto ETFs that invest in Bitcoin futures contracts, which are derivatives that track the price of Bitcoin but do not involve the physical delivery of the asset.

The approval of spot crypto ETFs in the US would be a major milestone for the crypto industry, as it would open the door for more mainstream adoption and institutional participation. It would also create more competition and innovation in the crypto space, as well as more regulatory clarity and oversight. Many crypto enthusiasts and investors are eagerly awaiting the SEC’s decision, which could have a significant impact on the crypto market sentiment and price movements.

Hong Kong, one of the world’s top financial hubs, is thinking about allowing spot crypto ETFs, which would make it the first major place in Asia to do so, and possibly make it a regional center for digital asset activities. According to a recent report by Bloomberg, the Hong Kong Securities and Futures Commission (SFC) is in talks with potential issuers of crypto ETFs and is considering whether to grant them licenses under its existing framework.

What are spot crypto ETFs and why do they matter?

An ETF is a kind of fund that follows the performance of an asset or a group of assets, and can be traded on a stock exchange like a normal stock. A spot crypto ETF is an ETF that directly invests in cryptocurrencies, such as Bitcoin or Ether, and shows their spot prices, which are the current market prices of the tokens. A spot crypto ETF would let investors get exposure to the crypto market without having to buy, store, or manage the tokens themselves, which can be hard, expensive, and risky. A spot crypto ETF would also give more liquidity, transparency, and diversification than buying individual tokens, and would be under the regulatory control and investor protection of the stock exchange and the securities regulator.

Spot crypto ETFs are seen as a way of making cryptocurrencies more popular and accessible to a bigger range of investors, especially institutional and retail investors who may be hesitant or unable to invest in the crypto market directly. Spot crypto ETFs could also increase the demand and adoption of cryptocurrencies, and improve their legitimacy and credibility as an alternative asset class. Moreover, spot crypto ETFs could improve the innovation and competitiveness of the financial sector, and attract more talent and capital to the crypto ecosystem.

Challenges and risks of spot crypto ETFs

However, spot crypto ETFs also have challenges and risks, as the crypto market is still mostly unregulated, unpredictable, and vulnerable to various threats. Some of the main challenges and risks are:

Regulatory uncertainty: The crypto market is subject to different and often conflicting regulations across different places, and some countries have banned or limited the use of cryptocurrencies altogether. This creates legal and compliance challenges for spot crypto ETFs, as they may have to deal with multiple and changing regulatory regimes, and face possible sanctions or restrictions from some authorities. Moreover, the crypto market is constantly changing and innovating, and new kinds of tokens and platforms emerge often, which may pose new regulatory issues and challenges that are not yet covered or solved by the existing frameworks.

Market volatility: The crypto market is very volatile, as the prices of cryptocurrencies can change a lot and unexpectedly due to various factors, such as supply and demand, market mood, news and events, technical issues, and speculation. This makes the crypto market very risky and speculative, and exposes spot crypto ETFs to big price changes and potential losses. For example, Bitcoin, the biggest and most famous cryptocurrency, reached a record high of over $67,567 in November 2021, but recently it went below $20,000 in early 2023, losing more than half of its value. Such extreme volatility can hurt the confidence and trust of investors, and stop them from investing in spot crypto ETFs.

Security and operational risks: The crypto market is also exposed to various security and operational risks, such as hacking, fraud, theft, cyberattacks, human mistakes, technical problems, and system failures. These risks can affect the integrity and functionality of the crypto platforms, wallets, and transactions, and result in the loss or theft of cryptocurrencies or user data. For instance, in 2023, the JPEX crypto exchange in Hong Kong was allegedly involved in a HK$1.6 billion ($204 million) fraud that affected more than 2,600 investors, who lost their money and personal information. Such incidents can harm the reputation and credibility of the crypto market, and expose spot crypto ETFs to legal and financial responsibilities.

Hong Kong’s position on spot crypto ETFs

Hong Kong is currently one of the few places in the world that allows futures-based crypto ETFs, which are ETFs that invest in contracts that bet on the future prices of cryptocurrencies, rather than the tokens themselves. However, the demand and performance of these ETFs have been low, as they are more complex and costly than spot crypto ETFs, and may not show the actual prices of the tokens. As of November 2023, there are only three futures-based crypto ETFs listed on the Hong Kong Stock Exchange (HKEX), with a combined market value of about $65 million.

In contrast, Hong Kong does not allow spot crypto ETFs, as the Securities and Futures Commission (SFC), the city’s securities regulator, has not authorized any such products for public offering. However, this may change soon, as the SFC’s new chief executive officer, Julia Leung, said in an interview with Bloomberg on November 5, 2023, that the SFC is considering allowing spot crypto ETFs, as long as they meet the regulatory requirements and address the new risks. Leung said that the SFC is open to proposals that use innovative technology to boost efficiency and customer experience, and that the SFC is happy to give it a try as long as the risks are managed.

Leung’s statement shows that Hong Kong is taking a more active and progressive approach to the crypto market, and is trying to create an ecosystem for digital assets that can attract more investors and businesses. This is consistent with Hong Kong’s recent efforts to establish a complete and strong regulatory framework for virtual assets, which covers crypto exchanges, stablecoins, and tokenization. The SFC launched the framework in June 2023, with the goal of improving the transparency, accountability, and security of the crypto market, while promoting its innovation and development.

Two sides of the coin

As a practitioner who has been following the crypto market for several years, I have a mixed and complex view on Hong Kong’s plans to greenlight spot crypto ETFs. On one hand, I think that this is a smart and forward-looking move that could make Hong Kong a leading and competitive digital asset center in Asia, and maybe the world. Spot crypto ETFs bring benefits and opportunities for the financial sector, the crypto ecosystem, and the investors, as they could provide more access, convenience, diversity, and innovation to the crypto market, and enhance its growth and adoption. I also think that Hong Kong has the potential and the ability to become a successful and reputable spot crypto ETF market, as it has a strong and mature financial infrastructure, a sophisticated and experienced regulatory system, and a lively and dynamic crypto community.

On the other hand, this is a risky and difficult move that could expose Hong Kong to a lot of uncertainties and threats, as the crypto market is still mostly unregulated, unstable, and insecure. Spot crypto ETFs present challenges and risks for regulators, issuers, and investors, as they could face legal and compliance difficulties, market volatility and losses, and security and operational breaches. Hong Kong has to be careful and sensible in its authorization and supervision of spot crypto ETFs, as it has to balance the interests and expectations of different stakeholders, and ensure the protection and education of the investors, especially the retail investors who may not be fully aware or informed of the risks and complexities of the crypto market.

Many of my friends think that Hong Kong’s plans to greenlight spot crypto ETFs are a double-edged sword that could bring both rewards and risks, and that Hong Kong has to consider the advantages and disadvantages carefully and responsibly, and adopt a balanced and adaptive approach that can foster the innovation and development of the crypto market, while reducing its challenges and risks.

But in my personal opinion, Hong Kong’s potential approval of spot crypto ETFs is a good decision, as it would benefit both the investors and the industry in the long run. The advantages outweigh the disadvantages, as the risks and challenges can be mitigated by proper regulation, education, and innovation.

The next steps in policy and industry practice should focus on creating a robust and adaptive regulatory framework for spot crypto ETFs in Hong Kong. It’s essential to strike a balance between fostering innovation and safeguarding investors, particularly the retail sector. This regulatory framework should address challenges related to regulatory uncertainty, market volatility, and security risks, promoting transparency and accountability. It should provide comprehensive investor education to ensure a better-informed market. In light of the Western enthusiasm for crypto ETFs, Hong Kong’s success in this endeavor could set a benchmark for other Asian countries, facilitating broader adoption and promoting responsible growth in the crypto space.

Hong Kong has the potential to become a leader and a model in the crypto space, as it has a strong and mature financial system, a supportive and proactive government, and a vibrant and diverse crypto community. Hong Kong’s move could also influence and inspire other Asian countries and regions to follow suit and embrace the crypto revolution.

 

 

Source: https://www.blockhead.co/2023/11/14/hong-kongs-plan-to-greenlight-spot-crypto-etfs-smart-move-or-foolish-gamble-gs-plans-to-greenlight-spot-crypto-etfs-a-smart-move-or-a-foolish-gamble/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j