The Breakdown - ByBit Vacates United Kingdom as "Crypto Hub" Dreams Falter

Episode Date: September 25, 2023

When he was Chancellor of the Exchequer, British PM Rishi Sunak proclaimed that he wanted to make the UK a crypto hub. Now exchanges and brokers like PayPal and ByBit are leaving because of the unworkability of new regulations. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, September 25th, and today we are updating ourselves on the geopolitical landscape of crypto. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends. Hope you had a great weekend. There are lots of interesting things to catch up on. And today, a slight theme in some of these stories is where different countries are positioning themselves vis-a-vis crypto. Now, the UK has had an interesting relationship with the industry.

They were for a time very harsh. The Financial Conduct Authority in the UK has never seemingly been that into the whole space. But then when Rishi Sunak became Chancellor of the Exchequer, he declared that the UK would be open for crypto business. He wanted to make the UK the most crypto-friendly jurisdiction in the world. Well, of course, over the next few months, through a variety of weird ups and downs, Rishi eventually ended up the prime minister. And of course, it might be reasonable then to ask, is the UK getting friendlier for crypto companies? Well, on that front, Bybit have announced that they will suspend service to UK customers next week in response to regulatory changes. The UK's Financial Conduct Authority, or FCA, will begin enforcement

of new marketing regulations starting on October 8th. The regulations require crypto firms to ensure advertising is clear, fair, and not misleading, as well as presented alongside a risk warning. Advertisements are required to be certified by firms, but this process requires crypto firms to be registered in the UK. So far, UK licenses have been difficult to obtain for non-domestic exchanges. The rules also require a number of technical changes to exchange business operations around new customers. For example, exchanges need to implement a 24-hour cooling-off period, before a new customer is allowed to make transactions. They are also required to put in place client appropriateness testing and client categorization features. These measures could involve

limiting the size, for example, of crypto investments based on the customer's net worth. Now, penalties for noncompliance in these new rules are harsh, with unlimited fines and even criminal charges available as punishments. As you might imagine, the crypto industry has been highly critical of these elements, especially those that require technical changes to platforms. In response to those critiques, the FCA said that they would provide a transition period for firms that request it, potentially giving exchanges until January to come into compliance. Last week, however, the regulator said that they are alarmed at the lack of engagement with foreign firms. Only 24 firms have responded to a survey sent to over 150 companies. The FCA wrote,

quote, this lack of engagement gives us serious concerns about unregistered firms' readiness to comply with the new regime. Now, in their announcement that UK services would be suspended, by bit claimed their, quote, primary objective is to operate our business in compliance with all relevant rules and regulations in the UK. Bybit said that they were making, quote, a choice to embrace the regulation proactively and pause our services in this market. They said that the, quote, suspension will allow the company to focus its efforts and resources on being able to best meet the regulations outlined by the UK authorities in the future. Practically, this means that from Sunday, Bybit will no longer be accepting new accounts

from UK users. Existing users would be barred from making new deposits or increasing existing positions from October 8th. They will have until January to manage and wind down their existing positions. Bybit, as you might imagine, is not currently registered in the UK and is based in Dubai. Importantly, Bybit is not the only firm suspending service to UK customers in light of the new regulations. Last month, PayPal announced that it would temporarily pause crypto services in the country until next year. On top of that, Crypto Exchange, Luno, said that it would be restricting some customer accounts from being able to invest on the platform until further notice. Bybit's CEO Ben Zhao had flagged the firm's exit earlier in September warning of how overly broad

the regulations are. He said, quote, FCA has explicitly contacted all the major players, us, OKX, finance, everyone, and asked what our plan is to deal with this new law. And the new law is that if you use English as a language, they will see you as trying to solicit their users, so you cannot claim that you are in reverse solicitation. Everyone is in trouble. So everyone is thinking of plans of how to deal with this new law. George Morris, a partner at Simmons and Simmons, explained that the marketing regulations had been enforced for securities firms for decades, but were now being expanded to cover the

crypto industry. He said, quote, the rules are extremely complicated and they're quite wide-ranging. It's not just UK firms that are subject to these rules. Anyone with a website that can be accessed in the UK is subject to these requirements. So there are a lot of different elements of this. One challenge is, yes, these advertising standards, but the bigger issue is this whole need to evaluate client suitability and potentially restrict investments. Practically, that either means a ton of financial disclosures from customers that they would have to manage and verify, or there's simply some self-attestation checkbox, which might not be that effective. Basically, with a set of marketing regulations, the FCA have figured out how to limit small

retail's ability to buy crypto in the country. Now, one thing that is notable is that we haven't heard anything from the really big international exchanges yet in terms of how they're dealing with this, but in any case, it seems like a big detriment for UK crypto. As Leon TK put it, so much for the UK being a crypto hub, failing already. Now, speaking to places where there is more optimism, last week was, of course, the token 24. 49 conference in Singapore, and that led to a lot of different discussion around how different the Asian environment for crypto felt as compared to the U.S. and European environments.

Indeed, while Western jurisdictions seem to be bogged down with regulations that are unclear at best or hostile at worst, the vibes in Asia are reportedly immaculate. Major conferences around Asia during September saw an uptick in attendance, and regulatory regimes across South Korea, Singapore, Hong Kong, and Japan appear to be giving the crypto industry a clear set of workable rules to allow firms to reestablish themselves coming out of crypto winter. The bloc's Frank Chaparro spoke with some conference attendees and reported on an optimism emerging in the east. One conference attendee said that South Korean retail is flocking back to crypto. They argued that young investors in particular view real estate and equities as massively

overvalued and out of reach, so we're instead opting to buy cryptocurrency. They said they don't buy houses, but they can buy tokens every week. There is a huge market. Another attendee spoke about the difficulty of accessing the Korean market due to South Korea's notoriously tough corporate climate for international firms. They said the liquidity is insane, but it is siloed in protectionists. You have to speak Korean. On that front, Crypto Custodian Bitko recently partnered with domestic juggerna bank due to the difficulty in accessing the market without a local connection. What's more, one anonymous trading firm said they had been waiting five years to operate as a liquidity provider on domestic exchanges in South Korea. They said when they open up, we can be

first in line. It's a great retail market. To get a sense of scale, the largest Korean exchange upbit regularly outperforms Coinbase in terms of spot trading volumes. Then there is, of course, Hong Kong. Their new regulatory regime is off to a tough start in some ways with fraud investigations into crypto exchange JPX becoming public earlier this month. The most recent update is that there have been 117 million brought in for questioning and losses have been estimated at 178 million across 2265 victims. Local police have said that the ringleaders of the operation are still at large and have enlisted the help of Interpol. Some are referring to JPEX as the largest financial fraud to ever hit the city. Yet despite the major investigation, there are currently no signs that

Hong Kong regulators are seeking to reverse course on unexpectedly open crypto regulations. Indeed, on Monday, the Hong Kong Securities and Futures Commission said that it would be releasing the full list of current applicants to ensure that users are able to identify false claims from exchanges. The theme appears to be the same across multiple Asian jurisdictions, basically that individual incidents of fraud and malpractice haven't tarnished enthusiasm for the industry as a whole. Another conference attendee told Chaparro, this Asia trip blew my mind. The excitement in Korea and Singapore is the polar opposite of what's going on in the U.S. Alex Venevik of Nansen wrote,

After speaking with tons of crypto folks at Token 2049 this week, it was striking how both Singapore and Dubai are dominating mine share right now. Heard a lot of people who either move to one of these or are already based there. Don't think people realize how much network effects will accrue in these cities. Vanek portfolio manager Pranav Kanadi added some color around how local investors are thinking about the space as well. On September 14th, Pranav tweeted, met over 15 multifamily offices in private banks in Singapore this week.

Many have close to zero crypto exposure. Conversations were mostly positive and a key question was, We're in a crypto winter right now, but when should we expect the next bull run? Not a single convoy mentioned the merits of the tech or whether the space survives, feeling optimistic. Now, hopping from Asia over to Europe again for a moment, according to a report from Fortune, Coinbase considered acquiring FTX's European business in the wake of FTX's November bankruptcy.

Apparently, talks never progressed to a late stage, but the preliminary interest highlights how important international expansion is to Coinbase, particularly regarding its derivatives products. Before the bankruptcy, FTX Europe was the only European firm registered to provide perpetual futures trading. And while derivatives trading remains heavily restricted in the U.S., both Coinbase and Gemini have launched offshore trading venues this year to provide derivatives markets to international customers with a keen eye on Asian regions.

For Coinbase, the pivot to derivatives could provide a much-needed boost to flagging spot volumes. According to Kiko Research, derivatives volumes in quarter two of this year were six times larger than Spot. Now, the entity that became FTX Europe was originally acquired in late 2021 for $376 million. The firm was already licensed in Cyprus at the time, which allowed it to access European markets. Since the bankruptcy, the entity, along with its valuable license, have attracted interest from crypto.com and Trek Labs as well. According to documents viewed by Fortune, Coinbase expressed interest immediately after the FTX bankruptcy and again as recently as last month. That said, FTCS Europe has also been in the crosshairs of the U.S.-based FTX bankruptcy team for

clawbacks. The estate launched a lawsuit against FTX Europe executives, claiming that the original acquisition was a horrendous business decision, arguing that FTX effectively paid $376 million for a $2 million operating license, and on top of this, the sale of FTCS Europe seems like a difficult task with active litigation surrounding the firm. In July, the U.S.-based FTX estate said, the FTX debtor's professional advisors have concluded that there is no realistic possibility of a sale. However, last Thursday, they said, the FTX debtors are committed to maximizing the value of FTCS's assets to drive customer recoveries. As such, the FTCS debtors are continuing to evaluate whether there are viable options for the sale of some or all of the assets of the FTX Europe

business. Now, one small aside on Coinbase, Arkham Intelligence claimed to have mapped Coinbase's Bitcoin wallets, and according to Arkham, Coinbase holds almost one million Bitcoin worth around $25 billion at current market prices. This would amount to almost 5% of the Bitcoin in circulation, similar to the amount held in wallets believed to be owned by Satoshi Nakamoto. Arkham's report showed that Coinbase's largest cold wallet holds around 10,000 Bitcoin, and the firm believes that Coinbase has additional Bitcoin holdings which are not yet labeled and could not be identified. According to data published by Coin Gecko, Coinbase only owns around $200 million worth

of this gigantic Bitcoin stash, with the rest attributable to client custody. However, staying on the Europe question and how valuable this Cyprus license actually is, with Europe's Mika regulations coming into force from June of next, next year, some firms are beginning to warn that a clear lack of guidance could lead to disruption. The Mika rules were intended to provide a comprehensive framework, but there are still numerous gray areas. One of the major problems surrounds stablecoins. There is currently no guidance on how Mika Stablecoin regulations will apply to foreign and decentralized issuers. The default scenario seems to be a ban in Europe unless these issuers can obtain the appropriate licensing,

with no arrangement to recognize approvals in other jurisdictions. The European Banking Authority has warned that there will be no grace period for coins already on the market. The EBA and its sister agency, the European Securities and Markets Authority, ESMA, are currently taking public consultation on how the MECA regulations should be implemented. Relatedly, last week, the head of legal at Binance France said during a public hearing hosted by the EBA, we are heading towards a delisting of all stable coins in Europe on June 30th. This could have a significant impact on the market in Europe compared to the rest of the world. Now, Binance CEO, CZ quickly walked back the comments, claiming, it was a question taken out of

context. In fact, we have a couple of partners launching Euro and other stablecoins in fully compliant manners of course. A blog post from Binance explained further, stating that they would be required to de-list stablecoins that fail to gain registration in Europe, and that no licenses have been granted to stablecoin issuers currently. Binance wrote, while we are confident that there will be constructive solutions in place before the mid-2020 deadline, if left as is, this could have an impact on the European crypto market and the competitiveness of European crypto exchanges in a global market. Now, the requirement that stablecoin issuers are EU-based could cause further problems for decentralized organizations. Thomas Vogel, a partner at law firm,

Latham, and Watkins said, a lot of the stablecoin issuers will be or will purport to be completely decentralized, therefore without any point of decision or issuance. This has become a sort of threshold question for a lot of the people we talk to, and as far as I can tell, there is not much guidance. This requirement could also imply a fragmentation of internationally used stable coins like Circle's USDC. There is a potential for Circle to register an entity with the EU for compliance reasons, but the regulations are far from clear on whether this would be acceptable. this is sort of the challenge with Mika. As comprehensive as the regulations are written, how they get implemented is still fairly up in the air. There was commentary around the time that Mika was being

voted upon, that it could either be a big step in giving the crypto industry a clear set of rules to function, or work as a de facto crypto ban depending on how it was implemented and whether enough licenses were granted. Now, with a little over nine months until Mika comes into force, there is still time to ensure that rules are workable for existing firms, but it appears that there is a lot of work left to do in that regard. Anyways, it's definitely a story to keep an eye on, as something that was seen as largely positive could become quite bad quite quickly. However, friends, that is where we're going to wrap for today. Lots going on in this fascinating world of crypto.

Wherever you are enjoying it from, I appreciate you listening. And until next time, be safe and take care of each other. Peace.