Which city will win fight to become Asia’s crypto hub?
In this issue
- Asia’s Web3 crown: Ready, set, fight
- US debt ceiling: Win or loss for crypto?
- Metaverse in China: Red carpet
From the editor’s desk
Dear Reader,
Two years.
That’s what I predicted to a roomful of industry and regulatory leaders in Dubai recently, inside the Museum of the Future, at a MENA-APAC meeting of delegations led by Hong Kong-based Finoverse. Two years during which the world outside America has time to build while political intransigence keeps the U.S. crypto industry handcuffed by a lack of regulatory clarity. But the system created by America’s Founding Fathers and enshrined in the U.S. Constitution stipulates that the people can decide. Democracy may be frustrating, but it remains a system that has birthed so many human and capital opportunities. Time may solve today’s problem in two years when Americans head to the polls and potentially see a regime change.
But it’s also what makes the crypto industry nervous. Innovation should not be politicized. Crypto should not be a political football thrown about between the Republicans and Democrats to shine when the policy sun shines, only to retreat into the shadows if it’s politically expedient. One should, and must, demand more.
There is a lot of work being done as I write — there is proposed legislation supported by both sides of the aisle — because there is a recognition that a lot of education (and frankly, professional therapy) may be needed in the embarrassing chapter post-SBF and the FTX implosion that has left many on Capitol Hill scrambling to restore political reputations and footing.
Not all is lost. There are influential voices inside U.S. agencies and Washington’s beltway that have penetrated crypto’s intellectual moat. One should be impressed that they’re navigating a very bureaucratic system, which is limiting in more ways than you know, and yet seeking knowledge and opening paths of communication with the industry. But what makes them powerful? They are listening, learning and evolving their thinking to serve the needs of the country beyond the years they’re serving in office, on how this technology should be integrated into the future digital economy.
They, too, have two years. Two years to observe, learn and watch how the rest of the world is defining the Web3-enabled future — and biding their time when we can all fully engage.
Until the next time,
Angie Lau,
Founder and Editor-in-Chief
Forkast
1. Heat is on
With wind in their sails, multiple Asian economies are racing to become the leader of the emerging Web 3.0 industry as an unfavorable regulatory environment in the U.S. drives its crypto firms to seek better opportunities elsewhere.
- “Hong Kong will more than likely become not just Asia’s crypto hub, but the de-facto crypto hub globally,” Vincent Chok, chief executive officer of Hong Kong-based consultancy First Digital Trust, told Forkast. “The U.S. is in a holding pattern with its regulation paralysis, and Dubai has ambitions to become a crypto hub, but in terms of innovation, Hong Kong still leads.”
- Hong Kong recently piloted its retail central bank digital currency (CBDC), the e-HKD, as part of the city’s bid to reclaim its status as a global digital assets hub. Along with payment giants Visa and Mastercard, U.S.-based blockchain payment platform Ripple Labs is also participating in the e-HKD pilot, even as the company is embroiled in litigation against U.S. regulators over alleged securities law violations.
- Since late 2022, Hong Kong has also unveiled a raft of initiatives to attract digital asset businesses, and at least 80 foreign and mainland Chinese Web3 firms have expressed interest to set up operations in the city.
- Hong Kong’s path to a global Web3 hub is not without challengers. Singapore, Japan and South Korea are also intensifying their quest to grow their digital asset economy and have been rolling out crypto-friendly regulations to attract investment and companies.
- “Hong Kong could be facing strong competition from Japan and South Korea, both of which have advanced regulation for cryptocurrencies. In this regard, Hong Kong could stand as a newcomer and could be obliged to put up some additional efforts to level the playing field,” Denys Peleshok, head of Asia at London-based financial trading firm CPT Markets, wrote to Forkast. “Both countries could provide a larger talent pool that crypto firms could need to develop more rapidly.”
- An April 2023 Statista market report predicts that revenue in the digital assets market will grow at an annual rate of 16.15% to exceed US$102 billion by 2027, with almost a billion users.
- Despite the consensus on the potential of Web3 technologies, Asian economies are taking different approaches to digital assets. “Cryptocurrencies and crypto exchanges are just one part of the entire digital asset ecosystem,” the Monetary Authority of Singapore told Forkast last month in an email. MAS is aiming to encourage innovation in blockchain technology and tokenization while keeping cryptocurrency speculations at bay.
- In the United States, crypto firms are lamenting the lack of regulatory clarity and increasingly aggressive enforcement actions. Crypto exchanges including Kraken, Bittrex and Coinbase have recently been targeted by the U.S. Securities and Exchanges Commission for alleged violation of securities laws, while the SEC and the Commodity Futures Trading Commission continue to disagree over whether cryptocurrencies are securities or commodities.
- “We have seen U.S. regulatory agencies aggressively handling their relationships with crypto firms, even going as far as outright suing them,” Peleshok said. “The initiatives taken by Hong Kong could help nurture a stronger local crypto industry and help attract firms from other countries and from China in particular.”
Forkast.Insights | What does it mean?
Hong Kong is stepping up efforts to become a global hub for digital assets. On top of its recent CBDC pilot, the city has, over the past 12 months, increasingly signaled it is eager to do business through a raft of incentives aimed at the crypto industry. But Hong Kong still faces challenges.
While Singapore and South Korea have been more consistent with their approach to regulating the industry, Hong Kong has to make up for lost ground and a battered reputation after China banned cryptocurrencies on the mainland in 2021, and there were fears that Hong Kong’s government could follow Beijing’s lead.
As the demand for fintech and Web3 grows, Hong Kong authorities will need to find a way to reassure founders and investors that the territory is an attractive place to do business again — and also as a good place for talent to work and live, especially in the aftermath of the government’s curtailment of speech and press freedoms and imposition of draconian Covid-19 control measures that resulted in a brain drain of professionals and companies leaving Hong Kong.
Hong Kong is also grappling with a shortage of engineering talent. The quickest and most superficially obvious way for the territory to plug its skills gap would be to tap mainland China, which currently has an abundance of unemployed young people. The city’s leaders are exploring options to hire more mainland talent, but it remains to be seen whether China’s surplus workers are sufficiently skilled for the needs of Hong Kong’s crypto and fintech companies.
Under China’s all-out crypto ban in 2021, Chinese nationals working for crypto trading companies in other countries were warned that they could be subject to investigations under Chinese law. It remains unclear how that would apply to mainland citizens who working in crypto in Hong Kong.
To bring more digital asset companies and talent back to Hong Kong, authorities must not only establish clear regulations around crypto trading but also offer assurances about the legality of cross-border employment in the sector. The territory’s leaders should also consider why Hong Kong is experiencing an exodus of its own young and figure out a way — beyond the dropping of pandemic-era travel restrictions — to make Hong Kong an attractive place to live and work again.
2. Cliff’s edge
U.S. President Joe Biden said on Sunday he would not accept a debt deal that favors “wealthy crypto traders,” as the U.S. government’s protracted debt ceiling negotiations extended into the digital assets sector.
- Last week, the White House presented a flurry of deficit-reducing proposals to persuade the Republican congressional leadership to raise the government’s debt ceiling, which Republicans rejected, including a plan to close a tax loophole related to cryptocurrencies, according to a Washington Post report that cited unnamed sources.
- At a press conference Sunday in Hiroshima, Japan, President Biden said he was “not going to agree to a deal that protects wealthy tax cheats and crypto traders while putting food assistance at risk” for nearly 1 million Americans.
- In the United States, there is currently a loophole in the tax code that allows investors to claim a tax deduction on losses from cryptocurrency sales even if they then immediately repurchase the same tokens, because the Internal Revenue Service does not classify digital assets as securities. In contrast, the U.S. tax code prohibits investors from deducting losses if they sell and repurchase the same stocks or bonds within 30 days.
- The loophole has attracted the attention of Biden’s administration, which in March proposed eliminating the tax-deductible losses related to wash-trading of cryptocurrencies and to introduce a 30% crypto mining tax.
- The back-and-forth between the White House and the Congress adds uncertainty to the U.S. government’s debt crisis. U.S. Treasury Secretary Janet Yellen reiterated in a letter on Monday that early June is the hard deadline for the federal government to raise the debt ceiling or risk defaulting on its obligations.
- Though Biden and Republican House Speaker Kevin McCarthy have not yet reached a deal to raise the debt ceiling, negotiations appear to be making headway. McCarthy tweeted on Monday that he and Biden “had a productive meeting in our negotiation to responsibly raise the debt limit,” and that “there is a path for” the President “to avoid defaulting on the debt.” Both stressed on Monday that a default is “off the table.”
- The impact of the U.S. debt issue on crypto markets remains unclear. “Continued concerns around the debt ceiling in the U.S. could create an opportunity for cryptocurrencies and Bitcoin in particular as the largest asset in this space,” Denys Peleshok, head of Asia at CPT Markets, told Forkast, adding that market worries about a potential default could push investors to seek safe haven in cryptocurrencies.
- But a U.S. default also has the potential to exacerbate the general bearish sentiment across markets, including crypto, and dampen investor enthusiasm. According to analyses by the Congressional Budget Office and the U.S. Department of the Treasury published this month, a U.S. default could lead to 8.3 million job losses in the third quarter of 2023 and a 6.3% decline in gross domestic product.
- The seven-day moving average of daily transaction volumes on major crypto exchanges has declined since late April and dropped to US$12.47 billion on May 21, over 85% lower than the start of the month, according to data cryptocurrency data tracker Coin360. Daily volumes have since risen to US$26.9 billion by Thursday evening Hong Kong time.
Forkast.Insights | What does it mean?
Crypto’s largest national marketplace has spent most of 2023 turning its back on the industry through a combination of court cases and continued regulatory uncertainty. But trading volumes remain robust.
According to the latest report by the market tracking platform CoinGecko, spot trading volume across the top 10 crypto exchanges was US$2.8 trillion for 2023 Q1, up more than 18% from Q4 2022.
The inclusion of legislation around wash trading in crypto may hit trading volumes — especially on exchanges where it is commonplace — but more importantly, it will bring increased clarity for companies looking to remain in the American market. The lack of regulation is having a greater impact on the U.S. market than rules designed to close tax loopholes. The bigger problem is how long it will take the U.S. leaders and policymakers to create the framework necessary for crypto businesses to thrive.
In March 2022, President Biden signed an executive order that outlined the executive branch’s approach to policymaking around digital assets. In September, the White House released a framework for the “responsible development of digital assets.” And earlier this month, Biden released a proposal to tax U.S. crypto mining firms 30% of the cost of electricity they use while mining.
These are all positive steps, but it’s not enough. Currently, there are more than 50 digital assets-related bills that have been introduced in Congress, reflecting the growing realization — even among American lawmakers — that it is no longer tenable to sit back when it comes to regulating this increasingly important industry.
3. Sweeten the deal
As China’s Zhejiang Province eyes constructing a 200-billion-yuan (US$28 billion) metaverse industry by the end of 2025, one of the province’s districts is rolling out policies to attract local metaverse companies and sweetening the deal with financial support.
- Hangzhou city’s Shangcheng District will offer financial support to metaverse-related firms, which includes companies developing technologies like blockchain, artificial intelligence, virtual reality terminals and high-performance computer chips.
- Metaverse firms in the district are eligible for cash benefits in areas such as research funding to rent. For example, a certified metaverse startup can receive a maximum of 15 million yuan (US$2.14 million) in venture capital from the government while a metaverse company with annual revenue exceeding 10 million yuan may be eligible for an annual research subsidy of up to 3 million yuan (US$427,000), according to the district government.
- Shangcheng District is also building the province’s first metaverse industrial complex, which has signed contracts with at least 20 metaverse-related companies, and will start operations in the first half of 2023, according to a government report in February.
- The adoption of the metaverse for immersive entertainment and education, smart transportation and digital assets could result in the development of “killer apps” in the metaverse industry, said Bao Hu-jun, a computer science professor at Zhejiang University, at a recent metaverse summit in the district.
- The district is dangling carrots as Zhejiang Province seeks to become a metaverse hub. In December 2022, the Zhejiang provincial government published its plan for metaverse development, aiming to establish 10 leading metaverse companies in the country and achieve an annual revenue of 200 billion yuan in the city’s metaverse industry by the end of 2025.
- Hong Kong lawmaker Johnny Ng, who attended the metaverse summit, hopes to see more collaboration between Hong Kong and Hangzhou in Web3, according to a Facebook post on his page Sunday. Ng is a member of Hong Kong’s Legislative Council and China’s advisory body, the Chinese People’s Political Consultative Conference.
- Several other Chinese provinces and cities have also jumped on the metaverse development bandwagon. Shanghai released its metaverse plan as early as July 2022, aiming to build a 350 billion yuan metaverse industry by the end of 2025. Earlier this year, the city unveiled its first batch of 20 metaverse use cases, including virtual hospitals and metaverse replicas of the city’s historic architecture.
- Web3 technology is also drawing the attention of Chinese lawmakers. On May 12, China’s Fuzhou city revealed initiatives to attract investment by blockchain-related companies, including rent subsidies and cash awards, shortly after China established a national research center for blockchain technology in Beijing.
Forkast.Insights | What does it mean?
Hangzhou, home to the headquarters of Chinese internet giant Alibaba, has nurtured a large pool of talent in the country’s internet and technology industries, making it an important base for tech companies and entrepreneurs.
Hangzhou joining a number of major cities and provinces to support metaverse development puts China in a stronger position to drive the growth of what many consider will be central to the next generation of the Web.
China’s metaverse ambitions reveal that the nation is seeking to grow as well as set standards for a young industry that other governments have mostly ignored. However, it is also a recurring theme in China that the government nurtures a nascent industry to grow and thrive only to come back later with an iron fist to tame any market chaos or political threats when industry players become too powerful. For example, in late 2020 China began what many refer to as a big tech crackdown, introducing new regulations covering such areas as antitrust and data protection.
It remains to be seen how China will treat the metaverse sector in the future. These days, the government’s policy sun is shining on its metaverse sector. But if the metaverse grows and evolves in ways that the government cannot control, how would the authorities react? Would there be interventions that resemble the sweeping tech crackdown that only started to ease earlier this year? China has rolled out its welcome mat for metaverse companies, but if recent history is a guide, companies should also brace themselves for potential future policy shifts.
