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Asia rises as key frontier in bitcoin's next stage

Regulatory scrutiny intensifies but China remains mining hub

Regulators across Asia are grappling with the cryptocurrency industry that began with bitcoin's invention 10 years ago.

TOKYO/HONG KONG -- With $300 million in fresh funding, one of the biggest U.S. cryptocurrency exchanges is looking for a foothold in Asia, a signal of the region's growing clout as bitcoin looks into the next decade.

Coinbase on Tuesday said it secured the investment at an $8 billion valuation to fuel global expansion. One of its main targets is Japan, where it is awaiting regulatory approval. Meanwhile, China's strong influence in the creation of bitcoin and diverging regulatory tolerance across Singapore and India have captured the interest of investors and industry players.

Wednesday marks 10 years since "Satoshi Nakamoto," whose true identity remains unknown, published a paper outlining bitcoin, the first cryptocurrency built on blockchain technology. Cryptocurrency has since evolved into a major asset class with an estimated market value of over $200 billion.

While prices have tumbled in recent months and few uses have emerged beyond speculative trading, some companies are bullish on its prospects. 

Advocates of cryptocurrencies' decentralized approach to money -- which is managed by a network of computers rather than central bank authority -- see immense opportunities in Asia. But the region has also exposed its vulnerabilities. Japan is a major trading hub that has stepped up regulatory scrutiny after a series of hacking incidents. China, where much of the computing power that creates bitcoin is based, once let crypto trading flourish but has since turned restrictive. Other parts of Asia diverge from declaring bitcoin illegal to upgrading rules for initial coin offerings, or ICOs -- a popular way for blockchain startups to raise money.

Asia "is a constantly changing landscape," Emily Parker, co-founder of blockchain startup LongHash, said at a financial technology forum in September. "The greatest danger to innovation in the space is not overregulation. Its nobody knowing what the regulations are."

Japan, once favored by cryptocurrency enthusiasts for its light-touch regulation, cracked down on unlicensed trading venues after more than $500 million worth of the asset was stolen from Tokyo-based exchange Coincheck in January. The nation's Financial Services Agency has not approved the registration of a new cryptocurrency exchange since December 2017, and many venues have shut down or been sold off.

Other countries are following suit. Vietnam has deemed the issuance, distribution and use of cryptocurrencies illegal since January, a stance that was reiterated after the alleged theft of up to $660 million in April through scams disguised as ICOs. Also in April, India's central bank ordered local banks to cut ties with cryptocurrency exchanges, a move that prompted Indian exchange Zebpay to close its trading business in September.

Yet Asian financial hubs are cautiously embracing the industry. Vertex Ventures, the venture capital arm of Singaporean state-owned investor Temasek Holdings, said in October it invested in cryptocurrency exchange operator Binance to develop a platform for trading cash currency for cryptos.

Hong Kong has become a haven for mainland Chinese crypto businesses since Beijing closed dozens of domestic digital currency trading platforms last year.

In the Philippines, with bitcoin emerging as a way for overseas Filipino workers to send remittances, authorities are said to be preparing regulations to legalize ICOs. After banning ICOs, South Korean authorities are reportedly under pressure from cryptocurrency holders to scale back the restrictions.

Perhaps the biggest question for bitcoin's future is how China deals with its dominance in the bitcoin mining industry, in which new units are created by computers that solve complex math problems. Instead of individual computers, the industry has become dominated by sprawling networks running specialized hardware in areas with cheap electricity.

For now, China produces more bitcoin than elsewhere and is home to the world's top three manufacturers whose hardware is required for the mining practice. Beijing-based Bitmain Technologies holds three-quarters of the $3 billion global mining equipment market in 2017, according to research company Frost & Sullivan. The market is expected to surpass $17 billion by 2022.

Bitmain also operates some of the world's largest mining "pools" -- networks of computers that let members share processing power as they create new coins. Chinese pools are estimated to account for 70% of global bitcoin mining power.

But the nation's crackdown on ICOs and exchanges last year seems to have scared off some investors. One miner in southwestern China's Sichuan province, one of the country's biggest bitcoin mining hubs, said he does not intend to buy new mining equipment this year.

Regulatory uncertainty and the decline in bitcoin's price have also cast a shadow on market sentiment. In late September, Bitmain filed an application to list its stock in Hong Kong. But Canaan Inc. and Ebang International Holding, the Chinese companies that are the next largest hardware producers after BitMain, have not proceeded further with its share sale after filing initial public offering applications in Hong Kong earlier this year.

"I doubt that mainland Chinese regulations relating to cryptocurrencies will have much impact on many investors' views," said Ben Yates, a fintech lawyer at RPC in Hong Kong. "Many investors with an interest in cryptocurrencies and blockchain technology are by now likely to be accustomed to legal and regulatory challenges."

Asia's rocky regulatory environment has not deterred companies from making forays into the region. "Japan has been an active large market from the very beginning, and has proved resilient as it bounces back from several bad experiences," Mike Lempres, chief policy officer at Coinbase, told the Nikkei Asian Review in a recent interview.

Some observers have said U.S. regulations have become too complex, driving players to overseas markets. Others say the wave of regulations indicates how seriously countries are taking the industry.

"Now that the market has become this big, there are no moves [by any country] to kill cryptocurrency," said Yoshitaka Kitao, president of SBI Holdings, a Japanese financial services group that invests in cryptocurrency-related businesses.

Nikkei staff writers Kim Dung Tong in Ho Chi Minh City, Justina Lee in Singapore, Kiran Sharma in New Delhi and Cliff Venzon in Manila contributed to this story.

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