It was the best of times, and then suddenly it was the worst of times – for those holding crypto, the recent trainwreck of “stable”- coins has left many enthusiasts scratching their heads and questioning their convictions, while skeptics have truly enjoyed their moment of schadenfreude as the fear of missing out among the curious evaporated faster than you can say “Luna”.

Meanwhile, experts in traditional financial regulation appear to be not-at-all-surprised and curiously optimistic amid all the noise. While the prices of individual coins and NFTs appear to be chaotic beyond any reasonable prediction, the acceptance of digital currencies as a legitimate asset class is slowly gaining acceptance, in parallel with ‘regulators’ willingness to actually do something about their popularity before a major market crash occurs.

There have been a myriad of approaches to crypto regulation, all in varying stages of consultation and implementation. Hong Kong, for example, has implemented an opt-in voluntary regime, but many details are yet to be confirmed on who can trade digital assets. Singapore has also set up a voluntary regime, but with delays in granting licenses after a deluge of applications were met by a shortage of staff to process them – since, as Angelina Kwan CEO of Stratford Finance notes, “many of the regulators’ staff have been enticed away to join financial services and crypto firms.” Staffing shortages aside, such delays have been noteworthy in almost every jurisdiction. “Digital assets are a new industry with specific requirements in security, asset management and safekeeping, and trading. The process of granting licenses is onerous, as the devil is in the details,” says Kwan. 

And while there has been movement towards setting up regulatory frameworks, there is still a long way to go before enforcement and inspections become a regular enough occurrence to discourage bad actors. “It’s now undeniable that this is a real asset, but all the different regulators are taking a different stance,” she says, noting that more best practice guidance is very important for the industry to further develop. “Unless you get that regulatory consistency, there will be varying degrees of compliance by market participants.”

Kate Wombell, a compliance specialist and founder of Reglex.io, believes that the lack of global regulatory consistency could in itself become a systemic risk. Those governments who want nothing to do with crypto are going to find themselves having to deal with it one way or another, she says. “A lot of people are just burying their heads in the sand and wishing it would go away – but ‘that’s just not going to happen. We have to regulate it, to bring them into the net,” she says. 

While a ‘caveat ’emptor’ attitude may allow Ponzi schemes and rug-pull fiascos to proliferate further, outright bans may also have a detrimental effect – pushing the trading of digital assets into an unprotected shadow industry. Either way, the demand for these alternative assets needs to be dealt with comprehensively, and in a way that isn’t exclusionary or limited to professional investors, she says. Given that the whole point of ‘decentralized finance’ (DeFi) is meant to be breaking down barriers, one has to wonder what kind of rules would result in a level playing field – or if that is even the point at all? “A lot of people consider that it is just another form of gambling – but, so what if it is? Prohibition is just going to have the effect of making it more dangerous,” says Wombell.

In Hong Kong, the SFC’s “Opt-In” Virtual Asset Service Provider (“VASP) regime has seen only one fully approved VASP with another having obtained approval in principle. With proposed rules circulating that only professional investors could be able invest in crypto – and in the wake of an outright and unexpected ban on digital assets in Mainland China – some of the largest Hong Kong crypto startup companies have decided to leave town in search of more crypto-friendly financial centres, such as the Cayman Islands, the Bahamas, or Dubai. 

By contrast, Singapore has welcomed the market for crypto and isn’t afraid to regulate – seeing it as an important part of being a modern international financial centre. Kwan notes that it was one of the first countries to offer a grandfathering period that would allow crypto firms to operate before their license was approved, under the Payment and Services Act. Yet the city-state has also lost startup unicorns to Dubai and the Bahamas – with all but a handful of crypto firm applicants under the PSA still waiting on their licenses.  

While there are official consultation documents circulating that hint at what a regulatory regime might look like for Hong Kong, the story north of the border suggests a precarious future. “We’re all waiting to see what happens,” says Paul Haswell, a technology lawyer at Seyfarth Shaw in Hong Kong. Haswell sees two possible routes of pressure for resolving the uncertainty – the first being a major consumer scandal in which cries from defrauded individual investors would push the SFC to enact clear rules for crypto trading, or direct pressure from Beijing to do something, drastic or otherwise.

Haswell sees the recent stablecoin crashes as a potentially healthy correction for the future of digital currencies, even if they have a long way to go before widespread adoption in terms of their original purpose of buying and selling things, as opposed to pure speculation. “I think it’s a blip – I don’t think it’s the end,” he says. “Stablecoins can work in theory, when they are backed by an asset like a hard currency. Many investors may not have even realized Terra was just algorithm-based.” With the benefit of such a hard-earned education, Haswell believes unhealthy levels of speculation and resulting crashes may actually teach the market to trade within more sustainable parameters. 

Kwan sees the unbacked stablecoin debacle as a combination of economic forces leading to a correction and a possible classic market manipulation, which has been known to happen in everything from stocks and bonds to derivatives. “I think it highlights weaknesses that people already knew were out there – and if it seems too good to be true, it probably is,” she says, noting that it also illustrates why regulation is so important when it comes to volatile asset classes.

Like it or not, cryptocurrencies are not going away – the question of utility aside, history and human nature have long supported the idea that speculation will always exist for its own sake. Coupled with a slow rise in the issuing of state-backed digital currencies, the long term picture for digital assets could indeed be brighter than the recent turmoil would suggest.