Blockchain Research and Insight - Kapronasia

With the crypto bear market receding and the possible return to a bull market, it is interesting to note that the amount stolen from crypto exchanges fell in 2023. However, the overall number of digital asset hacks still grew. Maybe it was the belief that the bear market would endure that partially deterred the cybercriminals? Probably not. As it turns out, the main reason that less crypto was stolen last year was that digital asset platforms are becoming more sophisticated in their security and responses to attacks, and are working more successfully with law enforcement than in the past.

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.

2023 was a year of incremental progress for the digital yuan and we expect more of the same in 2024. Gradually, hype about China’s central bank digital currency (CBDC) is easing, though it still flares up from time to time. Case in point: that report published by Bloomberg last summer that depicted the mBridge cross-border CBDC initiative as a potential challenger to the US dollar in the global financial system. As much as such narratives may generate clicks, they fail to ring true.

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?

At the recent Singapore Fintech Festival, the city-state’s announcement that it would pursue a wholesale central bank digital currency (CBDC) pilot next year was big news, and justifiably so. As Southeast Asia’s key financial center, Singapore’s monetary policy decisions usually have regional implications.

The Japanese financial services group SBI Holdings has become an aggressive fintech investor, taking stakes in many different digital financial services startups that it views as promising. Earlier this year, it led a US$28 million Series A round in German fintech Pliant, while its digital banking unit SBI Sumishin Net Bank went public in March, becoming the first Japanese online lender to do so – despite the less-than-optimal market conditions. In recent months, SBI has made a series of new investments that show its growing interest in digital assets.

It is hard to believe China used to be a hub for Bitcoin mining. While the crackdown on mining activity has been ongoing for several years now, things got real in August when a Chinese government official was sentenced to life in prison for illegitimate business operations related to running an RMB 2.4 billion (US$329 million) Bitcoin mining enterprise and for unrelated charges of corruption. Maybe it was the corruption that landed the official, Xiao Yi, such a stiff sentence from the Intermediate People’s Court of Hangzhou, but regardless, this type of precedent will probably be enough to deter most people in China from trying their luck at crypto mining.

At the Singapore FinTech Festival last week, IMF managing director Kristalina Georgieva made the case for central bank digital currencies (CBDCs) in her keynote address. She succinctly highlighted most of the key reasons central bankers like the concept of a digital fiat currency: the potential for improved financial inclusion where it is most needed, replacing cash, enhanced efficiency, speed and transparency in cross-border payments.

South Korea is unique in that the majority of its digital banks are profitable. While Kakao Bank generates the most headlines, and has been successful in many regards, its competitor K Bank is the one we find the most intriguing. The reason is that K Bank, majority owned by the telecoms giant KT Corporation, was dogged by financial travails in its early years and even had to pause operations for a while. When the digital lender re-emerged, it was powered by a tie-up with South Korea’s leading cryptocurrency exchange Upbit. While regulatory intentions were good in this case, building a bank on the foundation of crypto seems at the very least to be a bit risky – and it brings into question K Bank’s overall business model.

Constant is the speculation about how China’s central bank digital currency (CBDC) will play a game-changing role in international financial flows, so it was not a big surprise when Bloomberg in August published a report that suggested the Beijing-backed mBridge project (which also includes Hong Kong, Thailand and the United Arab Emirates) might launch even sooner than expected – by year-end – and was on its way to disrupting the dollar’s long-established hegemony. Cutting through the hyperbole is an update on the project from the Bank of International Settlements (BIS) that suggests mBridge is progressing, but that commercialization remains a work in progress.

Web3 investment has been steadily falling since late 2021 as investors take a step back from the mercurial cryptocurrency ecosystem. In the third quarter of this year, investment in Web3 startups fell for the seventh straight quarter, data from Crunchbase show.

India has reportedly launched the next phase of its wholesale digital rupee pilot, according to the Indian media MoneyControl. The digital rupee is now being tested in the call money market where banks borrow from or lend to each other for the short term, usually one day, at market-determined rates, anonymous sources told MoneyControl. The sources added that nine banks participating in this pilot were part of the wholesale pilot of government securities, which was launched on November 1, 2022, to settle secondary market transactions in government securities.

Hong Kong’s full-on push into crypto still seems a bit odd to us. In some way, it appears that the Hong Kong authorities have come to believe that in order to revitalize their financial center’s reputation, they need to do something a bit drastic – such as become fearless promoters of a still unproven type of money and asset class. Compared to Singapore’s approach, Hong Kong’s seems less deliberate, more rushed and higher risk, the bet being that crypto is here to stay and by embracing it now, Hong Kong will reap greater rewards later.

If you want proof that sanctions have limited effectiveness, look no further than North Korea. The hermit kingdom is probably the most sanctioned country on earth, and yet it keeps figuring out ever more nefarious ways to access foreign currency. Its mammoth crypto hacks are in a class by themselves, as while there are plenty of criminals that steal decentralized digital currencies, North Korea is among one of the only states that invests considerable resources in such crimes.

The Philippines is moving forward, at least tentatively, with plans to develop a wholesale central bank digital currency (CBDC) and has selected a technology partner for its first digital peso pilot Project Agila. Bangko Sentral ng Pilipinas (BSP) has decided to go with Hyperledger Fabric, an open-source blockchain framework hosted by the Linux Foundation.

Why is it that central bankers are always more enthusiastic about CBDCs than anyone else? That seems to be the case with India’s digital rupee, which appears to not be seeing especially fast uptake in its second year of testing. In July, the Reserve Bank of India (RBI) asked Indian banks to step up their participation in pilot programs because it wants to increase transactions.

With its announcement of stablecoin regulations, Singapore is betting that these “safer” cryptocurrencies have staying power and will play an increasingly important role in the future of financial services. The decision is consistent with the city-state’s interest in developing itself as a digital asset hub for institutional investors. It also gives Singapore a leg up on Hong Kong, which is also trying to be a cryptocurrency hub of sorts, but has yet to introduce any regulatory framework for stablecoins.

Cambodia’s Project Bakong is unique if only for the fact that it is a functional blockchain-based CBDC – one of the few in the world along with the digital renminbi and the Bahamas’ sand dollar. In its first few years of existence, Bakong mainly been used domestically and with reasonably good – if not pathbreaking – results: 8.5 million users (more than half of the Cambodian population) and US$15 billion in transactions as of the end of 2022. It is no surprise that Bakong’s creator, the Japanese fintech firm Soramitsu, now wants to expand Bakong’s presence regionally by making it the centerpiece of a regional digital payments network connecting Japan with Southeast Asia.

As a medium-income country with a high rate of financial inclusion for the region – more than 80% of Thais have a bank account – Thailand is not the first country we would expect to briskly adopt a digital fiat currency. The purported benefits of a CBDC become nebulous without a pressing financial inclusion need. For that reason, we suspect that the Bank of Thailand has been in no rush to launch a digital baht. But that doesn’t mean it isn’t interested in test driving one – hence the retail CBDC pilot that recently got underway.

One should always take what crypto diehards say with a few shakers of salt, but especially when it comes to liberalization of China’s digital asset policies. A popular narrative right now is that because Hong Kong is reimagining itself as a crypto hub, that this experimentation will pave the way for mainland China to do the same. While a relaxation of Beijing’s crypto controls cannot be ruled out, it remains unlikely because of the associated systemic financial risk, concerns about money laundering and the central government’s preference for strong capital controls. The selection of Pan Gongsheng as the top Communist Party official at the People’s Bank of China (PBOC) adds weight to the argument that crypto liberalization remains elusive in the mainland.

It is hard to win with cryptocurrency regulation. Its absence exasperates the worst elements of the digital assets ecosystem, but when regulation finally arrives, it is often roundly criticized. Such is the case with South Korea’s first standalone digital asset bill, which focuses on investor protection.

The month of June has been a busy one for digital assets in Singapore. Several more big names have been approved for a Major Payments Institution (MPI) license, while the Monetary Authority of Singapore (MAS) published a new white paper outlining its vision for purpose-bound money. What is becoming clear about Singapore’s approach to digital assets is that the city-state wants to capture the promising aspect of these new forms of money while ring-fencing its economy and citizenry from the unsavory elements of cryptocurrency.

The Bank of China's recent issuance of $28 million in digital structured notes on the Ethereum blockchain is a significant development that has been met with both applause and skepticism. This move, the first of its kind by a Chinese financial institution, signals a potential shift in China's stance towards public blockchain-based digital assets. However, the question remains: Is China truly ready to embrace this new frontier?

Ever since lifting its Covid controls, Hong Kong has been on a mission to burnish its financial center credentials that were damaged by its long closure to the world during the pandemic as well as the political turmoil that preceded it. One key part of the city’s strategy has been to embrace digital assets even as other jurisdictions like Singapore tread a more cautious path. While much media attention has focused on Hong Kong’s dance with crypto, the former British crown colony also seems determined to roll out a central bank digital currency (CBDC).

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