Regulation in digital asset space

It's every investor's nightmare and a black eye for trust in the industry. Customers of the Hong Kong based crypto exchange Coinsuper have been unable to withdraw money or tokens since November. Police are now involved and there are now calls for broader regulatory oversight in the city. So how did this happen and what impact will this have on exchange activity in Hong Kong and beyond? ‍

‍What does Coinsuper freeze say about the need for mandatory regulation in the digital space?‍

I think it's critically important for regulators and jurisdictions everywhere to think about regulation. I think that the crypto industry has grown to the point where you can't ignore it anymore, you can't just sweep it under the rug. You do need, as a regulator, to deal with these issues head on. I don't think people in the crypto industry should be worried about this. A lot of people try and avoid regulation sometimes, or we see it almost as a dirty word, but any game needs rules. That's what allows us to actually interact and play the game. That said, as important as it is for regulators to come in and be willing to regulate in a codern fashion, I think it's just as important that individual investors also take responsibility for themselves and want to do business with platforms that are regulated.‍

In Hong Kong, exchanges opt in, meaning they apply to be regulated, but not every exchange does and there's recognition from regulators that they have to move away from that model. How should regulation work? ‍

More and more regulators everywhere are starting to look at putting in rules, regulations. Recently, the Hong Kong monetary authority came out of a consultation paper looking at Stablecoins, for example. It's fantastic to see this kind of progress in the industry. It's also very important that they make sure they link this up with other regulators in Hong Kong and that firms are licensed so that there's some degree of oversight for an activity that they are doing. It is just as important to understand as an individual doing business with a firm, what is our actual legal relationship with the firm? Financial services firms do a number of different jobs, but understanding what exactly is going on, what services they’re providing is mission critical.

There’s also other vehicles one could consider like tokenizing security. How might that prevent or limit a situation like the one with Coinsuper in future?

Unfortunately, a lot of people don’t really understand when they hold a token, maybe around an NFT or some other kind of digital asset, that in many cases they have no legal rights or obligations whatsoever. And under the law, if this is not own-able property or if it's not something that's been registered under their name, it may not even be obvious that it has been stolen.

So in this event with Coinsuper, it can be very unclear in terms of what rights investors might have at all. It's not a regulated platform so regulators can't step in. Investors may or may not have signed any kind of legal agreement with the platform, there’s no obligations there. And it may not even be clear as to how ownership of that asset works in the first place.

So tokenizing security can prevent this type of situation in three broad layers:

- regulation, having rules of the game, which is important for firms

- legal contracting relationships, which is equally important to understand how that works between investors and a platform

- understanding what exactly does this asset or the token represent and what kind of rights and obligations are investors getting as the owner of the token.