China wants an Internet 3.0, while Hong Kong gears up for crypto trading launch
This week, our blockchain experts assessed the following topics:
- China wants an Internet 3.0, while Hong Kong gears up for crypto trading launch
- DeFi Chasing TradFi’s Interest Rate Hikes
- An update on the digital Euro
- The battle between the SEC and crypto players enters yet another round
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China wants an Internet 3.0, while Hong Kong gears up for crypto trading launch
Recently, at the Zhongguancun Forum, The Beijing Municipal Science and Technology Commission and the Zhongguancun Science and Technology Park Management Committee, released the ‘Beijing Web 3.0 Innovation and Development White Paper (2023)’. The whitepaper acknowledges the importance of Web3 technology and its role in developing the next iteration of the internet.
However, some commentators argue that the Beijing's Internet 3.0 white paper is more about the metaverse and AI than it is about Web3 and crypto. While the paper touches on Web3 with some focus on non-fungible tokens (NFTs) and a whole lot more on the metaverse, artificial intelligence (AI), XR interactive terminals, and content production tools, it doesn’t touch on cryptocurrencies. This, of course, shouldn’t come as a shocker since China banned cryptocurrencies back in 2021.
Still, the publication of the white paper adds Beijing to the list of cities in China that are working to build their metaverse capacities. During the forum, Yang Hongfu, the director of the Zhongguancun Chaoyang Park Management Committee, also revealed that the city plans to invest 100 million Yuan (~$14 million) in local Web industries annually until 2025. Furthermore, the launch of the white paper has occurred at an interesting time, since Hong Kong also published their plans on implementing their new crypto regulations.
The new rule book, which was announced by the Hong Kong Securities and Futures Commission (SFC), is set to allow retail investors to participate in crypto trading beginning June 1, 2023. Cryptocurrency exchanges will be required to apply for licenses starting in June, with those not willing to do so requested to close shop. In addition, the Hong Kong SFC has also shared that stablecoins will not be provided for retail trading until regulations are established.
Licensed exchanges will be allowed to sell digital currencies that meet specific liquidity and capitalisation requirements. Following the move, crypto exchange Huobi Hong Kong has now started offering crypto spot trading to both institutional and retail clients after applying for the virtual asset exchange license. The exchange plans to list Bitcoin and Ether, among other major coins, that will be eligible for trading in the region. Speculations are rife that the framework Hong Kong has launched around cryptocurrencies will act as a ‘testing ground’ for China as it perhaps considers lifting the ban on crypto trading.
Furthermore, the Cybersecurity and Technology Crime Bureau (CSTCB) of the Hong Kong Police Force has announced the launch of its new metaverse platform called ‘CyberDefender’. The platform is meant to educate the public about the possible threats associated with the metaverse, as well as crime prevention. Some of the crimes mentioned that could happen in the metaverse, just as in the physical world, include investment fraud, sexual offenses, theft, and unauthorised access to systems.
DeFi Chasing TradFi’s Interest Rate Hikes
As yields in Traditional Finance (TradFi) shoot up (U.S. government debt yields are up 5%), the tokenisation of traditional real-world assets is becoming more popular. Demand for tokenised treasury yields is rising with the merged market capitalisation of tokenised money market funds around $500 million.
The rise in the demand for tokenised RWAs backed by interest yielding government bonds is a result of the many different projects that have been launched and are still launching. Some of these projects include Back Finance, OpenEden, and Ondo Finance, among others. Ondo Finance, for instance, launched a tokenised fund based on the U.S. treasuries and corporate bonds earlier this year.
While there’s no denying that TradFi entities are on the outlook for robustly built protocols that they can have confidence in, DeFi requires TradFi to co-design safeguards as well as bring real-world assets on-chain. It’s a symbiotic relationship that can help boost institutional adoption and trust while helping DeFi expand its collateral options, lending capabilities, and product offerings. For DeFi protocols to follow suit with the traditional world, they inevitably have to offer higher interest rates to attract capital and remain competitive.
On a different, however, still related note, the higher interest rates that are manifesting in traditional finance are making its way into DeFi native interest rate products. As such, DeFi flagship project MakerDAO is currently seeking to increase its savings rate to 3.33% from the current 1% rate approved in December 2022. The proposed increase will be voted on by the MakerDAO community and is expected to have a broader impact on rates across the DeFi sector if approved.
An update on the digital Euro
The European Central Bank (ECB) recently published the results of its first Digital Euro prototype. The Digital Euro is a project launched by the ECB to create a currency that can complement cash in a digital form. The prototype exercise was carried out to look at whether there would be sufficient technology to support an offline Digital Euro. Currently, the project is still undergoing evaluation, and the ECB is expected to publish a legislative paper on it in the near future. However, according to Fabio Panetta, a member of the European Central Bank's Executive Board, a Digital Euro will most likely be launched in the next three to four years with no exact timeline issued.
The results come a few months after the ECB chose four organisations, Amazon, Worldline, Nexi, and CaixaBank, to try out front-end prototypes for various scenarios. But the ECB isn’t the only central bank selecting large partners to pilot a CBDC. The Central Bank of Brazil picked 14 institutions, including Microsoft and Visa, to take part in the testing of the Digital Real, its CBDC. The testing process will commence in mid-June 2023. Besides the two large tech companies, major local banks like Banco do Brasil, Bradesco, Nubank (digital bank), and Itaú Unibanco will participate in the testing phase of the CBDC project.
While still on the topic of CBDCs, Japan has made major strides in its CBDC project. It finalised the second phase of its CBDC experimentation and will be proceeding to the pilot stage. Dubbed ‘Proof of Concept Phase 2’, the Bank of Japan’s experiment explored the comparison between an account-based and token-based CBDC. For the latter, no blockchain but a non-RDB (NoSQL) databases were used that are said to have high processing speed and performance scalability. As the study found, both, the account-based and token-based model have their advantages and disadvantages. It also looked at how to manage holding limits if an individual user has multiple accounts with separate intermediaries. The Bank of Japan intends to arrive at a definitive verdict about the launch of a CBDC by 2026.
The battle between the SEC and crypto players enters yet another round
The regulatory feud in the U.S. continues. Gemini, a U.S.-based digital currency exchange, and crypto lender Genesis have submitted a motion to have the lawsuit filed against Gemini’s Earn lending service dismissed. The U.S. Securities and Exchange Commission (SEC) filed the lawsuit in January, accusing the two companies of breaking securities laws by offering users unregistered securities. Following the lawsuit, Genesis filed for bankruptcy.
Before it was stopped in January, Gemini’s Earn service, in partnership with Genesis, made it possible for users to lend their coins and earn a yield. The filed dismissal request now claims that the transactions made on Earn were loans and not securities. Genesis further argued that all the customer-facing operations of the program were handled by Gemini. The latter stated that it only acted as a transfer agent for the program, and called the lawsuit by SEC ‘ill-conceived’. Gemini has also proffered a master claim to refund 232,000 Earn customers over $1.1B in assets.
The ongoing legal battles between crypto companies and U.S. regulators have led to increased scrutiny in the crypto sector, forcing Gemini, like many other crypto companies, to escalate its expansion plans outside the US. The crypto exchange is now in talks with U.K. authorities to discuss a potential move to London. It has also set up a European base in Ireland, an engineering hub in India, and established a business team in Singapore. Just earlier in May, the U.S.’ biggest crypto exchange Coinbase launched an offshore derivatives exchange in Bermuda called Coinbase International Exchange.