Crypto companies all over the world have been weathering storms since the Terra-LUNA crash occurred now more than a year ago. The 12 months that followed unraveled much of the hard-earned trust the crypto industry had accumulated. Now, even crypto-native companies and individuals that generated digital wealth legitimately are struggling, either under the regulatory spotlight or with restricted access to traditional banking services.
While it’s important to note that the dynamics of the crypto market involve multiple factors beyond compliance, the data strongly suggest that regulatory clarity is extracting capital from less favorable regimes and distributing it among more crypto-friendly destinations — and that these jurisdictions and the crypto players within them really stand to benefit as a result.
There are indications that Bitcoin previously held in U.S. wallets is being transferred to Asia-based wallets. In a similar fashion, the share of venture capital flow into European-based crypto projects increased nearly 10-fold from 5.9% in Q1 2022 to 47.6% in Q1 2023, suggesting a shift out of the U.S. So, with this global shift in crypto capital, which are the crypto-friendly destinations benefitting from these trends?
Where did it come from?
Digital asset funds have been freely flowing in waves all over the world since crypto’s inception, which was magnified by pandemic-induced travel restrictions. Remote work unlocked new opportunities for international companies and independent professionals, with which the capabilities of crypto overlapped. This perfect storm enabled many to benefit from and leverage locational flexibility, a major factor in keeping crypto wealth freely flowing.
The global shift in capital really began in 2021 when China, one of the most active and largest cryptocurrency markets, imposed an outright ban on crypto-related business activities, specifically trading. As many as 10 Chinese government agencies, including the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CRSC), put a nail in the crypto coffin by making it a criminal offense to interact with the nascent asset class.
Prior to the outright ban, research from the Cambridge Centre for Alternative Finance (CCAF) found that the nation’s global Bitcoin mining share fell from 75.5% in September 2019 to 46% in April 2021, as Chinese miners moved their operations overseas. The miner exodus reflected adverse conditions in China and partially foreshadowed the ban to come. Ultimately, the prohibition wasn’t clearly defined, and recent data from Chainalysis shows that Chinese citizens continue to trade cryptocurrency today in spite of the ban.
Where did it go?
The Asia-Pacific crypto market has been largely historically dominated by retail trading, reflected in the number of established crypto exchanges based in the region. The Chinese ban on cryptocurrency trading and associated activities undermined the APAC market’s greatest strength, pushing crypto capital and projects within the international ecosystem to more accommodating regimes.
One of which is Singapore, given that the Monetary Authority of Singapore (MAS) had issued straightforward guidelines for the legal treatment of cryptocurrencies. Crypto financial services provider Babel Finance and crypto custodian Cobo, both Chinese-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, particularly when combined with the developing pandemic restrictions in other possible destinations. However, now that Hong Kong has revitalized its crypto-friendly stance, many Chinese investors prefer Hong Kong for its cultural similarity to China — thus facilitating a more seamless transition. This maneuver is part of the broader ambition for the autonomous city-state to regain its status as a global financial center, an accolade corroded by lockdown restrictions.
The United Arab Emirates, with its high quality of life and lack of personal income tax, also has all the makings of a crypto hub. Moreover, authorities in the UAE recognized the opportunities that the pandemic and adverse crypto regimes brought. Dubai and Abu Dhabi made aggressive moves to draw business from APAC and Europe, implementing liberal visa policies, fast-tracking business licenses, and offering long-term residency for employees. Naturally, this attracted a large number of displaced crypto advocates.
Is fleeing the US a competitive decision?
The United States possesses a substantial proportion of global venture capital, both within and beyond cryptocurrencies. It remains uncertain whether these funds will continue to flow out of the U.S., chasing alignment with the European Union’s highly coveted Markets in Crypto Assets (MiCA) legislation. The question of whether venture capital will adhere to these regulations is still too early to determine definitively, despite the posturing of large American exchanges such as Coinbase. Should the uncertainty in the U.S. persist, it would be beneficial for exchanges to establish regional subsidiaries like Coinbase is doing in Bermuda, a British overseas territory.
On that note, London and the United Kingdom have a vested interest in tokenization, which makes it relatively easier for U.S. companies to adapt. Despite this, there exist notable discrepancies in the U.K. approach. According to a recent report by the U.K. House of Commons Treasury Committee, retail crypto trading has “no intrinsic value and serves no useful social purpose,” likened more to sports gambling rather than traditional investing. This is in spite of London’s ranking as a major international crypto hub and contradicts a report issued by the committee, which alludes to several cross-border payments and financial inclusion benefits championed by crypto advocates. It also undermines the U.K.’s broader crypto regulation consultation with the digital asset industry, which closed last month.
With pandemic restrictions almost a distant memory, those who migrated their crypto operations — many to “gray list” UAE jurisdictions — may be ready to return. For example, earlier this year, Dubai-based Bybit announced its intention to expand operations in Hong Kong. With that, it is important to note that both Hong Kong and Singapore remain international financial centers in their own right. Both are key access points to APAC markets with distinct roles to play globally.
Hong Kong, which suffered a mass exodus throughout 2021 and 2022 due to its close association with mainland China, has seen a revised regulatory regime resuscitate prospects of international crypto hub status. Most importantly though, this is a signal to international enterprise that Hong Kong is back and open for business.
The MiCA effect
For quintessential American crypto exchanges, of which the sheer number is overwhelming, the APAC market is a steep hill to climb. Many Asian exchanges are already entrenched and are infinitely more capable of catering to the bespoke needs of regional retail investors. Asian exchanges have cultural alignment and are more attuned to risk appetite.
Also, it is imperative to acknowledge the impact of restrictions around derivatives trading in the U.S. According to data from CryptoCompare, derivatives trading represented just over 70% of the entire crypto market at the beginning of 2023. The vast majority of this market was captured by Asian exchanges early on, excluding U.S. exchanges from tapping into it.
More to the point, prior to American crypto companies being pushed overseas, these products remained underdeveloped in the U.S. In Asian markets, derivatives trading markets have a much higher volume and often precede spot trading products. Therefore, depending on the nature of the service or range of products, it may make more business sense for certain crypto companies to establish a presence in the U.S. first.
However, there are entities interested in benefiting from the French regime in the short term and from the E.U.’s MiCA laws as of early 2025. More than 70 crypto companies are already registered in France, including Binance and Bitstamp — with that number expected to reach 100 before MiCA takes effect.
MiCA, which was belatedly voted in earlier this year, allows companies to serve the pan-European market and expands to cover services like crypto investment, advice, and portfolio management. The regulatory framework has been considered a great win for the European industry, the positive effects of which are 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 sought 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 opportunities for growth brought about by the pandemic, establishing them as attractive destinations for crypto businesses and individuals. Now, Hong Kong is prepared to assert its claim as the international focal point for crypto finance in the APAC region.
The U.S. is facing a sustained period of regulatory uncertainty in relation to crypto, which is causing damage to digital asset businesses there, while MiCA has the potential to restore trust in the crypto market. Overall, the crypto industry continues to evolve and adapt to regulatory changes, with capital flowing to jurisdictions that provide 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.