Singapore, SINGAPORE – Gao Lun is pleased. As he braces against the cold of China’s harsh wintry air, he holds on to his proof of investment, an investment slip into a joint stock company for sailing vessels plying the vigorous overseas trade and domestic trade along the Grand Canal and Yangtze River. In less than a year, his investment into the highly lucrative trade has yielded a threefold investment return. But no, this didn’t happen last week, instead, Gao lives in China’s Song dynasty and the year is 1115 A.D. Almost five centuries before the Dutch started their first joint stock company, the Dutch East India Company, Song Chinese were becoming stupendously wealthy on the financial innovation of the joint stock company. Song China was one of the most prosperous and advanced economies in the medieval world and its commerce was marked by such financial innovations as the promissory banknote and the joint stock company. In comparison, Europe lagged far behind in commerce and business, with a numerical system inherited from the Roman Empire that was singularly ill-suited for complex mathematical calculations, let alone commerce and trade. Nowhere was this more apparent than in 11th century Pisa, where merchants struggled to do business with no less than seven different coinages in circulation. Even the simplest transactions would cause a massive headache, requiring the use of an abacus – a Chinese invention. In order to discover modern finance, as financial historian Niall Ferguson notes, “backward Europe had to import it.” So it should come as no surprise that in the nascent financial world of cryptocurrencies and Initial Coin Offerings (ICOs), Europe, particularly the City of London, has had to follow the lead of Asia.
Asian financial centers such as Singapore and Japan have done much to encourage the nascent cryptocurrency market by regulating cryptocurrency exchanges in the case of Japan or by issuing clear policy guidelines as in the case of Singapore. Both countries have embraced the financial innovations made possible by blockchain technology while doing their utmost to protect the most vulnerable retail investors. The speed and clarity with which regulators in Asia have acted have left European financial capitals such as London scrambling to catch up. Instead of indulge in academic debate over whether the likes of Bitcoin, Ethereum and Litecoin should be shunned or embrace, pragmatic governments in Asia have noted the value of the blockchain, the value of the technology and the potential disruption to legacy financial institutions that these financial instruments will wreak on financial markets as we know them. Eager to be at the tip of the spear, Japan and Singapore lead the pack as South Korea and Hong Kong close in. Meanwhile, China, which has openly embraced the blockchain has banned cryptocurrency exchanges, cautious about their ability to circumvent centralized capital controls.
But while fintech innovation has been rocketing along in Asia, the scions of the City of London have stood with their arms folded, waiting for someone to make the first move. So far the inroads made by the City have been led by publicly traded spread betting companies such as Plus500 and IG Index. But while these companies offer retail investors cryptocurrency derivatives, many of their customers take their cues from news out of Asian markets. Growth and innovation in cryptocurrencies resides mainly in Asia, a region that hosts the biggest cryptocurrency exchanges. But the City is defiant. Oliver Robinson, a director of markets regulation at Aima, a London hedge fund trade body, said there were still significant opportunities to create an institutional digital assets industry in the United Kingdom,
“They stem from what the United Kingdom offers global capital markets more generally – a central timezone, a respected legislative and judicial system and a deep global talent pool.”
But while London may have an enviable timezone, jurisdictions such as Malta which have attracted cryptocurrency exchange giant Binance have proven that laws can change and the ease with which digital asset companies can move, while keeping their talent pools in-situ show that a “deep global talent pool” can nevertheless be operated remotely. To that end, London and other European capitals, hampered by onerous European Union legislation have been slow to cotton on to cryptocurrencies. Monica Summerville, analyst at Tabb Group, a consultancy, said,
“There was a wall of institutional money just waiting for the right conditions – such as adequate technology and regulatory clarity – to enter the market.”
So far, Westminster, weighed down by the burden of Brexit has been unwilling or unable to provide that clarity. In contrast, Japan has already taken the lead to organize its eleven leading cryptocurrency exchanges into a self-regulatory body. Taiwan’s lawmakers are actively leading the push to put that country as a leading cryptocurrency and ICO jurisdiction, while progressive Singapore has been the world’s first government to provide an investor’s guide to cryptocurrency and digital asset investment.
But while Asia, just as in the China’s Song Dynasty, has been leading the way for digital asset innovation, London banks have been reticent. According to Max Boonen, CEO of B2C2, a London cryptocurrency market maker,
“Banks have been unusually strict in dealings with crypto. It’s nearly impossible to open an account for crypto in the UK.”
“The problem is that in the UK there is a perception that banks have issues with anti-money laundering and decided to be a lot more conservative.’
Some of this can be traced back to the Great Financial Crisis of 2008 and what the investigation into its aftermath threw out. In 2012, HSBC, a London-headquartered bank and one of the world’s largest global banks was fined a record US$1.9 billion for money laundering. Around that time it was discovered that Barclays Bank, another British giant, was also guilty of money laundering and fined £72 million.
But Westminster isn’t completely sleeping on the job. This summer, a cryptocurrency task force comprising the U.K. Treasury, the Bank of England and the Financial Conduct Authority is planning to lay out its initial thoughts on how the financial industry could manage the risks associated with handling cryptocurrencies. But European and British crypto-advocates shouldn’t hold their breath. In written evidence this week, the Bank of England, the U.K. central bank informed parliament,
“There was little appetite on the part of banks to take direct exposure to the crypto-asset market in any significant way in the medium term.”
In the meantime, the Asian financial hubs of Tokyo and Singapore have been chugging along, developing the tools and infrastructure necessary to support cryptocurrencies and their associated trades. Already Singapore has emerged as the world’s third largest destination for U.S. dollar capital raised through Initial Coin Offerings. Perhaps when it comes to financial innovation, the sun really does rise in the East.