IN 2018, US$1.7 billion worth of crypto currency was stolen - over triple the amount lost the year before, despite the market slump. An astounding US$950 million of those stolen digital assets was taken directly from exchanges or wallets. From a lack of good security practices to chief executives - holders of the only access to the funds - mysteriously dying, digital asset "hodlers" who hold onto their assets are losing out.
We've seen a wave of new innovation in the space, where traditional financial products such as custody services have been reinvented for digital assets. Both businesses and communities have stepped up to build better crypto practices.
We have begun to see governments doing the same - and nowhere has this been more prevalent than in South-east Asia.
S.E. ASIA A DIGITAL ASSET LEADER
South-east Asia is a hotbed of innovation and technical development, so it's little wonder that the region has become a leader in the crypto currency space. Nearly half of all Internet users are in Asia. But within South-east Asia specifically, mobile connectivity is at 141 per cent. In a region of digital natives, digital assets have flourished.
While regulatory frameworks are still a work-in-progress, many South-east Asian regulators are making the effort to understand the disruption, and are working with the digital markets rather than trying to stifle or stop them.
As Michael Titus, of Titus Solicitors in Hong Kong, put it: "The crypto currency market is still in its infancy and is constantly evolving."
We cannot predict where the market will go next, but it's important that we create a structure that both fosters innovation while continuing to protect consumers.
In order to cement the region's position as a global authority, businesses and regulators need to come together to design an inclusive and inventive regulatory framework that enables the markets to flourish while ensuring the security of users and their assets.
HONG KONG: THE BRIDGE BETWEEN EAST & WEST
With its Western approach to capitalism, coupled with its deep links and access to China's infrastructure, Hong Kong has started to build the foundations of a strong regulatory framework.
Unlike in China, crypto is legal in Hong Kong, though the exact details of the regulations are not yet public. The industry clearly holds some sway with government: special exemptions and accreditations are offered to professional investors. While this is a promising start, it is pushing out retail investors and early adopters - the important people whose critical mass will encourage wider-scale success.
Built in haste, the regulations can be difficult to comprehend, or even worse, comply with. But any business that takes money or assets from a customer must be regulated. Rather than focus on regulating or restricting the end-user, governments should be putting more pressure on the places that hold the assets: exchanges and funds.
Perhaps this is most crucial in custodianship. As it stands, entities can opt to self-custody customer assets, without any qualifications. This is risky and irresponsible, and puts both client assets and trust at risk.
According to Mr Titus, "having a professional custodian that is fully licensed and regulated will not only ensure the security of the funds, but also that all the relevant KYC and AML regulations are adhered to." (KYC is Know Your Customer and AML, Anti Money Laundering.)
Custody as a service is fundamental to the infrastructure of a functioning crypto currency market. We need to be keeping clients' money in safe hands, otherwise mass adoption of digital assets is not going to take place. Without secure and neutral custody, digital assets are at risk, putting the future of the ecosystem in danger.
SINGAPORE: A GOVERNMENT THAT'S PLUGGED IN
While Singapore may have a more hands-on governmental approach, this has worked somewhat beneficially for the crypto currency industry, as regulators have been keeping up with and actively encouraging innovation.
The regulators here are applying existing laws around investments and assets to digital ones. While this stops specific discriminatory policies, it doesn't offer consumers full protection in a rapidly-changing landscape.
That said, law-makers have begun to tighten their grip on new methods of fund-raising. A Security Token Offering (STO) was recently blocked from launching. This wasn't on the grounds of not having registered - it had applied for an exemption that would have circumvented the need to register - but for having failed to adhere to an advertising ban.
Clearly, this city-state is still trying to find the right balance between consumer protection and regulatory innovation. As with such a developing industry, it's a work-in-progress, but it's one that Singapore is committed to.
The Monetary Authority of Singapore (MAS), has taken great measures to advertise how welcoming it is to blockchain and crypto businesses.
MAS managing director Ravi Menon has said: "Singapore is a great place where you can collaborate, experiment and scale. We have a strong pool of talent and expertise within the blockchain ecosystem."
With the future in mind, startups and the government seem keen to collaborate on designing laws that are fit for purpose. "As the central bank and financial regulator, MAS is committed to partnering [with the industry] on this journey," Mr Menon added.
JAPAN: THE PERFECT SETTING FOR EXPERIMENTING
One of the earliest major players in the crypto currency space, Japan has managed to keep ahead of the curve despite the major setbacks of the Mt Gox collapse. The regulation that came about as a reaction to the hack created a strong foundation for Bitcoin investing and crypto currency adoption.
While Japan's economy is notoriously closed off to outsiders, within the country there is significant investment in crypto currencies and blockchain technologies. In fact, the government is even experimenting with blockchain payments for the Tokyo Olympics in 2020.
The laws in Japan are favourable to blockchain companies; the industry is allowed to regulate itself. However, while this can be seen as a win for freedom to experiment, it leaves customers exposed to potential bad actors or misconduct.
Fortunately, the government is at least open to communication: it regularly proposes new regulations and reviews the market. This is hopeful, and shows that good leadership that listens has the potential to scale. After all, Japanese yen frequently accounts for most of Bitcoin trading by volume.
The blockchain community needs to engage with regulators so that it can teach them how its industries work, show how regulation can serve the community, and flag the current grey areas that hamper productive innovation.
After all, it isn't about how much regulation but how it is applied, and where it is focused. Protecting users encourages adoption, which accelerates growth, but regulation must be well-considered to avoid destroying the very industries it is setting out to protect.
When reflecting on his hopes for future financial regulation, Mr Titus said that investor protection needs to be a priority, as the market is still evolving.
"The creation of blockchain has opened up an entirely new market which continues to reshape our economy," he said. "It is important for regulators to not stifle innovations that better our society as a whole."
- The writer is founder and group CEO of Legacy Trust Company, a Hong Kong-licensed and public registered trust company