Category Archives: Digital Assets

Notes from Hong Kong

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My personal relationship with Hong Kong stretches back 30 years – to the time I moved there from London in 1994. I arrived on a 1-2 year contract, and ended up living in the city for 6 years. Since then, I have continued to visit at least once a year, and my latest trip earlier this month was the fifth since hotel quarantine was lifted in October 2022, following the global pandemic.

Despite the significant political, demographic, social and economic upheavals of recent years, in many ways Hong Kong remains the same. It still acts as a fulcrum between East and West, and an important trading entrepôt for mainland China and the rest of the world. There are still the evident paradoxes represented by Hong Kong’s ancient traditions and modern values, combining spiritual beliefs with materialistic tastes, and vertiginous high-rises set against mountainous backdrops and waterfront vistas.

From an economic standpoint, Hong Kong remains in something of a lull. People I spoke to commented that the SAR government needs to find new sources of income, especially as the property market (a cornerstone of the local stock exchange) remains patchy, and visitor numbers are only about 50% of pre-pandemic levels.

As I have mentioned in a previous blog, Hong Kong is usually resilient and adept at reinventing its financial fortunes.

For these reasons, the Hong Kong administration is pursuing a fairly aggressive policy of promoting itself as an attractive global venue for the digital asset industry in part to reinvigorate the local capital markets, in part to outpace its regional neighbour and rival, Singapore. (Plus, the SAR acts as something of a test bed for the rest of the PRC.) According to people I spoke with, there is some difference of opinion as to how many digital asset exchanges are actively pursuing a Virtual Asset Service Provider (VASP) license, given that only two licenses have been granted so far, while a number of applications have been withdrawn, refused or rejected for being incomplete.

During my visit, I was granted a 1:1 interview for Brave New Coin with Yat Siu, co-founder and Chairman of Animoca Brands, a leading player in web3.0, NFTs, the metaverse and, potentially, stablecoin issuance. A major advocate of digital property rights, Siu is a very influential figure within the fintech scene, and I expect to see many more announcements from his company leading up to, and during, major events such as Token2049 and Hong Kong Fintech Week. I also met with clients and contacts across crypto exchanges, hedge funds, VCs, brokers and tech providers. All remain suitably bullish on the digital asset sector, although some considered that there needs to be some industry consolidation, to soak up excess infrastructure and to stabilise the entry of institutional fund managers.

Finaly, I found time for some contemporary art exhibitions, confirming that Hong Kong continues to establish its profile in the arena of global culture. There was Bruce Nauman at the JC Contemporary in Tai Kwun, I.M.Pei and Henry Steiner at M+, and even Banksy and Damien Hirst at Sotheby’s Maison at Chater House. Of course, this being Hong Kong, the displays in Sotheby’s showrooms are not too dissimilar to the luxury goods on sale in the surrounding malls.

Next week: Postcript on Tarantino vs Ritchie

 

RWAs and the next phase of tokenisation

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In the blockchain and digital asset communities, there are currently three key topics that dominate the industry headlines. In the short term, the spot Ethereum ETFs are finally due to launch in the USA this week. Then there is the perennial long-term price prediction for Bitcoin. In between, much of the debate is about the future of asset tokenisation, specifically for real-world assets (RWAs). Add to the mix the cat and mouse game of regulatory oversight/overreach and the rapid growth of fiat-backed stablecoins, and there you have all the elements of the crypto narrative for the foreseeable future.

The general view is that tokenising traditional assets such as real estate, equities, bonds, commodities, stud fees, art and intellectual property, and issuing them as digital tokens on a blockchain has several benefits. Tokenisation should reduce origination and transaction costs (fewer intermediaries, cheaper technology); reduce settlement times (instant, compared to T+1, T+2, T+3 days in legacy markets); democratize access to assets (using fractionalisation) that were previously available only to wholesale investors; and give rise to further innovation. For example, imagine hybrid tokens that comprise equity ownership; a right to a share of revenue streams; and membership discounts. Think of a tokenised toll road, or a sports stadium, or an art work that gets hired out to galleries and is licensed for merchandising purposes.

There are still quite a few issues to iron out, such as: the technology standards and smart contract designs that will originate, issue, distribute, track, cryptographically secure and transfer the digital tokens, both on native blockchains and across multiple networks; the role of traditional players (brokers, underwriters, custodians, trustees, transfer agents, payment agents, and share registries), and whether they are needed at all once assets are secured on-chain; and verification, certification and chain of ownership (given that an asset expressed as a digital token is very similar to a bearer bond – my private keys, my asset).

Last week, Upside in Melbourne hosted a panel discussion entitled: “Tokenise This! Unlocking the Value of Real World Asset Tokenisation”. The speakers were:

Richard Schroder, Head of Digital Asset Services, ANZ Bank

Lisa Wade, CEO, DigitalX

Andrew Sallabanks, Head of Strategy and Operations, CloudTech Group

Alan Burt, Executive Chairman, Redbelly Network

Shane Verner, A/NZ Sales Director, Fireblocks

Each of these firms has been working on a number of tokenisation projects such as stablecoins, real estate, government bonds, credit portfolios, fund of funds, and even stud fees. The key message was “faster, cheaper” is not good enough – RWA tokenisation solutions must offer something that is much better than traditional processes, and does not add friction (if anything, it should reduce current friction).

There were frequent references to fiat-backed stablecoins. In some ways, the tokenisation of real estate, bonds and equities is an extension of the tokenisation of money (as illustrated by stablecoins). However, there was no specific mention for the role of stablecoins in RWA tokensiation, for example, as on/off ramps, and as settlement instruments for the pricing, transfer and valuation of RWAs.

From an Australian perspective, the prospect of regulation (particularly for custody, crypto exchanges and brokers, and payment platforms that use stable coins) looms large. Generally, this was welcomed, to provide clarity and certainty. But without some specific provisions for crypto platforms and digital assets, if everything is brought under the existing ASIC/AFSL regime it will exclude many startups and smaller providers due to exorbitant capital adequacy and insurances etc.

Finally, despite the nature of the organisations they work for, all of the panelists agreed that “cryptographic trust is better than institutional trust”.

The potential for tokenising traditional assets has been around for several years. And while it is still relatively early in its evolution, the few listing and trading platforms for tokenised assets that have already launched have struggled to gain traction. They have few listings, limited liquidity, and minimal secondary trading – so, lack market depth. It feels that while the market opportunity may be huge (and the enabling technology is already here), there needs to be a more compelling reason to adopt tokenisation. Hopefully, that will emerge soon.

Next week: Album Celebrations

 

Digital Identity – Wallets are the key?

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A few months ago, I wrote about trust and digital identity – the issue of who “owns” our identity, and why the concept of “self-sovereign digital identity” can help resolve problems of data security and data privacy.

The topic was aired at a recent presentation made by FinTech advisor, David Birch (hosted at Novatti) to an audience of Australian FinTech, Blockchain and identity experts.

David’s main thesis is that digital wallets will sit at the centre of the metaverse – linking web3 with digital assets and their owners. Wallets will not only be the “key” to transacting with digital assets (tokens), but proving “identity” will confirm “ownership” (or “control”) of wallets and their holdings.

The audience felt that in Australia, we face several challenges to the adoption of digital identity (and by extension, digital wallets):

1. Lack of common technical standards and lack of interoperability

2. Poor experience of government services (the nightmare that is myGov…)

3. Private sector complacency and the protected incumbency of oligopolies

4. Absence of incentives and overwhelming inertia (i.e., why move ahead of any government mandate?)

The example was given of a local company that has built digital identity solutions for consumer applications – but apparently, can’t attract any interest from local banks.

A logical conclusion from the discussion is that we will maintain multiple digital identities (profiles) and numerous digital wallets (applications), for different purposes. I don’t see a problem with this as long as individuals get to decide who, where, when and for how long third parties get to access our personal data, and for what specific purposes.

Next week: Defunct apps and tech projects

 

 

Hong Kong – Then and Now

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I’ve visited Hong Kong twice in the last 6 months, and what a difference half a year can make.

Back in October, the Covid hotel quarantine programme for visitors and returning residents had just ended (which largely prompted my visit). I still had to undergo a PCR test on arrival, plus regular testing for the first 7 days of my stay. In addition, for the first 3 days I was unable to dine-in at cafes, restaurants and bars, or visit public places (museums, cinemas, gyms, etc.), until I had a blue “all clear” QR code on a tracking app. Masks were still mandatory for everyone, indoors and outside, but the QR check-in system was only sporadically enforced.

Of course, this being Hong Kong, the 3-day ban did not prevent me from taking taxis or public transport, going to work, or shopping. So, earn, spend, travel!

Compared to my previous visit in August 2019, there were no signs of any public protests (thanks to ongoing legal and political measures), nor many visitors from mainland China or overseas. The number of expats out and about in Central was well down (although I suspect a lot of people were still working from home), and I don’t recall there being many crowds even during peak shopping and business hours in the CBD.

I visited M+, the amazing new art museum in the West Kowloon Cultural District – which was probably the most popular location I saw during my stay, in part because admission was still free. There was a really interesting and charming exhibition of art and design in Hong Kong since 1945, from the context of cultural, social, commercial, industrial and political developments.

On a past visit, the ground had not yet been broken on the Cultural precinct, and the only art exhibition on show was a series of pop-up installations housed in re-purposed shipping containers (a link to Hong Kong’s important role as an entrepôt?).

Staying near Clearwater Bay also meant being among fewer people, and even gave an opportunity to visit a beach I had never seen before – where local residents had posted signs to encourage visitors not to despoil this small and natural idyll amid Hong Kong’s ever-expanding reclaimed land development.

Talking to some local contacts, there was a suggestion that the key motivation for scrapping the hotel quarantine programme in October was due to the Hong Kong FinTech Week being held the following month along with the much-postponed Hong Kong Rugby Sevens tournament (both expected to attract lots of bankers, brokers, traders and investors…). Yes, in Hong Kong, money still talks.

Fast forward to March, and my latest visit was a stark contrast. Not only were airfares much more expensive than late last year, but the number of visitors (especially from the Mainland) had also boomed. Now that there were no PCR tests or mask mandates, and as domestic tourism has opened up, it seems everyone was desperate to get to Hong Kong. Apparently, in the 30 days since the mask mandate was lifted, 1.5 million people had entered the Special Administrative Region, compared to the few thousand monthly visitors in previous months.

During March alone, Hong Kong hosted the Clockenflap festival, Art Basel Hong Kong, Art Central, a major golf tournament and the WOW Web3 Summit, as well as the Hong Kong Rugby Sevens restored its regular (and rightful) spot on the international sporting calendar.

Out and about in Central on a Friday night at the Tai Kwun art and entertainment precinct almost felt like old times, with people competing for taxis along Hollywood Road. I also got my fill of art – Joan Miró at the HK Museum of Art, Yayoi Kusama at M+, modern Chinese art at the JC Contemporary, and installations and pop-up shows at the K11 and Landmark malls.

From a business perspective, most of my meetings centred on the recent consultation process for Hong Kong’s proposed regulations on Virtual Assets, due to come into effect in June this year. It’s expected to boost the number of licensed crypto exchanges and brokerages operating in Hong Kong, and is a significant leap forward compared to past conversations I have had on the topic, where there was a general reluctance to engage in any meaningful discussions. Now it seems, whether encouraged by Beijing, or seeing the regulatory push back on crypto in the USA, Hong Kong is seeking to become a regional and global hub for all things web3, DeFi, tokenisation and digital currencies. (Not content with the WOW Web3 Summit in March, Hong Kong hosted the Web3 Festival earlier in April.)

Hong Kong is usually very good at reinventing its economic profile following business downturns and market setbacks – especially in the areas of trade, technology, commerce and finance. Perhaps the shift towards embracing virtual assets is simply a pragmatic move. While a large part of GDP is still driven by property and traditional finance, there is a recognition among some that the future is digital…

As much as things change in Hong Kong, they also largely stay the same. Back in October, there was 100% compliance with the mask mandate – but the vast majority of passengers ignored the compulsory seat belt regulation on buses. A breach of the former would have attracted a HK$1,000 fine; the latter, HK$5,000 and 3 months’ imprisonment.

Finally, talking of masks, it’s not that long ago that masked protestors on the streets of Hong Kong were a major legal and political issue. Since then, wearing any sort of mask on a public march or demonstration has been illegal. While I was in Hong Kong last month, the city witnessed its first authorised protest march in several years (about the environmental impact of land reclamation). In a new twist on the right of assembly, march numbers were strictly limited, and all demonstrators had to wear a visible number to identify them. From the TV coverage I watched, the march stewards contained the moving protest behind a rope cordon – so that participants did not literally step out of line.

(On this last trip, I also took a side-trip to Macau – more on that next time.)

Next week: Revisiting Macau – Asia’s Casino Theme Park