Blockchain Research

A commentary in collaboration with Banking Circle.

It can be hard to separate the hype from reality when it comes to Web3. After all, on the one hand, it is being heralded as “the future of the internet” and on the other, its actual definition remains fluid.

We reckon Silvergate wishes it had never served as FTX’s bank. The collapse of the once mighty crypto exchange has had massive ripple effects across the entire decentralized digital currency ecosystem. In the last three months of 2022, investors pulled out US$8 billion in deposits from the bank given its heavy exposure to FTX and it posted a loss of US$1 billion in the fourth quarter of the year. Silvergate’s stock is trading at around US$5.40 a share, down 95% from a year ago.

Most Asian countries are mulling the creation of a central bank digital currency (CBDC), but only China and Cambodia have launched one. We think that CBDCs make the most sense for countries with pressing financial inclusion needs, and with that in mind, the launch of Laos’s first CBDC pilot led by the same Japanese blockchain company that developed Cambodia’s Project Bakong can be viewed as a positive development.

The United Arab Emirates (UAE) has emerged as a leading fintech hub of the Middle East, with one of the region’s most dynamic startup ecosystems. From a regulatory standpoint, it is also taking a leading role, with big plans for both cryptocurrency and a central bank digital currency (CBDC). While many countries have adopted one or the other, the UAE is one of the few that seems open to both.

China’s launch of the digital yuan has prompted a scramble in Northeast Asia among central banks to assess the merits of CBDCs. Japan, South Korea and Taiwan are all at different stages of CBDC testing that they likely never would have begun if it were not for Beijing’s determination to develop a digital fiat currency. That begs an important question: Does the rest of Northeast Asia need CBDCs? After all, the respective initiatives of Japan, South Korea and Taiwan are inherently reactive, in contrast to Beijing’s proactive approach.

What crypto bear market? North Korea stole a record amount of digital assets in 2022 despite the industry facing unprecedented difficulties. Perhaps the Hermit Kingdom knows something others do not and is betting all that purloined crypto will appreciate handsomely in the years to come. Or maybe it’s just easier for the country’s formidable cybercriminals to pilfer digital assets than other types of money given that the crypto industry continues to operate in the shadows. Whatever the reason, Pyongyang made off with a quite haul last year.

The whispers about China potentially reconsidering its ban on cryptocurrency are growing. In fact, some credible (not crypto bros) people are starting to openly moot the possibility, albeit in the most cautious way possible. If asked a year or even six months ago, we would have said that it was highly unlikely given the concerns the central government has about the use of decentralized digital currencies to evade capital controls and how they may foment systemic financial risk. Now we would say that there is a real debate occurring, but that the ban will not be reversed unless the Chinese authorities see compelling economic benefits.

We have published a few commentaries over the past year noting how central bank digital currency (CBDC) adoption in Southeast Asia is pretty slow. Cambodia is an exception, but its digital fiat currency is not exactly a CBDC in the traditional sense – an important distinction to make. Bakong is probably best described as a blockchain-powered retail payments system managed by the Cambodian central bank that allows interoperability among the different players in the country’s payments landscape.

The Chinese government views cryptocurrency as a serious systemic financial risk and has taken strong measures to minimize its usage in the world’s second largest economy. Though China retains a thriving underground crypto ecosystem, Beijing’s different bans on digital assets ensure that the average Chinese citizen will not be exposed to them.That said, Beijing has not expressed any opposition to blockchain/DLT technology; on the contrary, the Chinese government believes that it can use blockchain for a wide variety of applications, from trade finance to improving supply chain safety.

Taiwan’s government has historically had an amicable relationship with the cryptocurrency industry because it functions for the most part outside of the Taiwanese banking system and has not caused them many problems. Further, Taiwan’s conservative retail investors have generally been less eager than most of their counterparts in East Asia to jump into crypto investing, which has made digital assets a niche market on the island. However, the latest crypto bear market, and especially the collapse of FTX, have highlighted why the hands-off approach may need to be adjusted.

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