Blockchain Research

Since its return to China in 1997, Hong Kong has become the country’s indispensable offshore financial center, with considerable international links. It has engaged in financial innovation, such as the cultivation of the world’s premier offshore renminbi trading hub. However, Hong Kong also faces much more competition from Singapore than it did in the late 1990s, and other Asian cities like Tokyo.

Undertaking cross-border payments involving central bank digital currencies (CBDCs) is a complicated endeavor, and despite some media hype in the summer of 2023, the mBridge project of the Bank of International Settlements (BIS) and the central banks of mainland China, Hong Kong, Thailand and the United Arab Emirates (UAE) did not launch late last year. Many questions remain about the ultimate utility of using CBDCs in cross-border payments as well as any attempt to directly challenge the US dollar in global financial flows. 

We have long held the view that India sees little upside in cryptocurrency, whether as an asset class or for payments – the latter for which it is developing a central bank digital currency (CBDC). Indeed, the Indian government has made a conscious decision to promote the digital rupee while simultaneously gradually reducing the space in which the cryptocurrency market can operate. Recent regulatory actions have tightened the screws on crypto in India and are likely to drive it further underground and offshore.

Although China cracked down hard on cryptocurrency beginning in late 2017, it did not succeed in eradicating demand for digital assets. And unsurprisingly, given the size of the country, it remains unofficially a big crypto market. Data compiled by research firm Chainalysis show that the Chinese crypto market recorded an estimated US$86.4 billion in raw transaction volume between July 2022 and June 2023. Further, the proportion of large retail transactions of US$10,000-US$1 million is nearly twice the global average of 3.6%. While crypto bros would have us believe that a full-throated revival of crypto in the world’s second largest economy is just around the corner, the reality is more nuanced.

Incumbent banks more often than not take a cautious if not skeptical approach to cryptocurrency, so it is surprising to see that Thailand’s Kasikornbank appears to be going all in on digital assets. After all, it was not so long ago that its competitor Siam Commercial Bank (SCB) thought better of acquiring the Thai crypto exchange Bitkub.

China made clear its stance on cryptocurrency with a crackdown that began in late 2017. The Chinese authorities then and now view decentralized digital currencies as more harmful than useful. From Beijing’s perspective, cryptocurrencies empower non-state actors in the financial system in a way that that they believe aggravates systemic financial risk.

In late December, the Chinese venture capital fund Greater Bay Area (GBA) Capital announced that it would set up a US$10 billion Web3 fund – the largest such initiative we know of in China. Unsurprisingly, this fund was established with considerations beyond actual market demand. Because GBA Capital, which is owned by the China Europe International Financial Group, has a state background, its thinking behind this fund is strategic. Beijing is trying to develop the Greater Bay Area as a financial center for China’s Pearl River Delta region. Becoming a domestic Web3 hub might be one way to do that.

Cryptocurrency’s future looks uncertain in many respects, but that is not deterring Hong Kong from doubling down on its digital assets bet. The erstwhile British crown colony seems determined to transform itself into Asia Pacific’s premier cryptocurrency hub at the soonest and recently launched both stablecoin regulation consultation and signaled its intention to allow retail access to exchange-traded funds (ETFs) that invest directly into cryptocurrencies.

One of the biggest pieces of news at November’s Singapore FinTech Festival was the city-state’s decision to award in-license approvals to stablecoin issuers Paxos Digital Singapore Pte and StraitsX. That move came with a cautious endorsement of the less-volatile form of cryptocurrency that is typically pegged to a fiat currency at 1 to 1 and backed by reserves such as cash and bonds.

It has become apparent in 2023 that South Korea intends to regulate cryptocurrencies, an important development given the country’s economic and geopolitical significance. South Korean has long had an active crypto retail investing community, which is one of Asia’s largest, so to a certain extent implementing regulations simply represents regulators acquiescing to reality. The devil, of course, will be in the details, and it is those details that remain hazy. After all, what do regulators mean when they say they will aim to strike a balance between protecting investors and fostering innovation?

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