The Disrupt Weekend

“Earlier this week, Hong Kong’s Securities and Futures Commission (SFC) published the proposed text of its upcoming crypto regulation, slated to go into effect on June 1, and opened it up for public comment. Its scope includes the licensing of crypto-asset service platforms, which were originally only going to be allowed to service accredited investors. The SFC is now seeking input on whether or not retail investors should also be allowed to participate.

So far, this seems like yet another example of a jurisdiction way ahead of the United States in terms of regulatory clarity and willingness to engage with the public on the topic. Yet, lifting the lid a little, it is so much more. It is also an example of the East-West strategy divide, the power of retail and the importance of watching the flows.

It’s about more than licensing. Hong Kong has also budgeted HK$50 million (~$6.4 million) for crypto asset development, including education efforts for individuals and businesses. And Hong Kong’s financial secretary, Paul Chan, announced the launch of a task force composed of policy and industry representatives to explore crypto asset integration. This feels much broader and longer-term than just crypto service provider oversight.

In part, it’s about laying some groundwork for the economic growth of the region. Hong Kong is obviously closely affiliated with China. Events leading up to and during the recent protests made clear to the world that China holds the reins, and that nothing happens in Hong Kong without China’s approval.

Here’s where it gets particularly interesting: China seems to approve of Hong Kong’s crypto moves.

Earlier last week, Bloomberg reported that Chinese officials had been seen at Hong Kong crypto events. They were not undercover. In January, Huang Yiping, a former member of the monetary policy committee of China’s central bank, said in a public speech the country should reconsider its crypto ban.

None of this necessarily means that mainland China will be opening up to crypto markets any time soon – but it could be that China is watching Hong Kong’s moves with a view to relaxing its stance and eventually supporting the integration of global crypto assets into its economy.

This matters, in part, because of size. What’s more, Chinese retail investors tend to be less risk-averse than their U.S. counterparts.

Also, China is one of the few regions of the world actively easing money supply. Earlier this month, the central bank ramped up liquidity injections while keeping the monetary policy rate steady, but analysts expect the committee to continue to cut rates in the second quarter. The number of new loans extended by Chinese banks more than tripled between December and January.

It also matters, in part, because of geopolitics. It is no secret that China would like to see a weakening of the dollar’s international role. China is probably watching with interest the building antagonism toward crypto from Washington, D.C. If the U.S. sees crypto markets as a threat, it could be a threat worth exploring.

So far this year, analysts have been focusing on macro factors as the main driver of crypto market performance, with evolving use cases and technical speculation also a feature of the recovery. It could be that a more significant driver is slowly building on the global strategy stage – specifically, in the geopolitical rivers of the east.”

See Also: ‘Crypto Can Save the Capitalist Narrative’: Animoca Chairman Yat Siu

“U.S. authorities last year controversially banned citizens from using the “coin mixer” Tornado Cash. But Ethereum developers have been working hard on a solution they hope Feds will stay away from: Privacy Pools.

This time round, there’s a feature that proves the user is not a North Korean bad actor or some other type of criminal. The new app works just like Tornado Cash, but when users click the option to withdraw funds, they can generate a zero-knowledge proof which publicly shows they are not using a criminal blockchain address, but without revealing who they are.

The hope is that regulators are less interested in sanctioning [Privacy Pools], because it helps them accomplish their goals.”

“HyperPlay, a Web3 gaming launcher, is now live via early access. Available for all major platforms but optimized for MetaMask users. Besides being just a game launcher, HyperPlay is also a game store aggregator, offering the Epic Games and Good Old Games stores within its interface.

HyperPlay’s launcher “paints” a MetaMask layer in-game on top of the gameplay experience so that users don’t have to minimize their game or otherwise switch windows to complete transactions. Launchers like HyperPlay’s can [also] offer an additional sense of security. HyperPlay examines and vets each game submitted to its launcher.

HyperPlay is solving the distribution problem and freeing game developers from the risk of deplatforming by these monopolies like Apple and Google, or Steam.

Unlike the Apple Store, we’re not taking a 30% cut of your developer’s in-game economy.

Instead of taking a cut of game sales or transactions, Jacob said that HyperPlay will generate revenue through offering “convenience features” within the app, similar to how MetaMask generates revenue.

HyperPlay will offer numerous games at launch, ranging from Undead Blocks to DeFi Kingdoms, The Sandbox, Voxie Tactics, and The Bornless, to name a few. The launcher will support non-crypto games as well as Web3 titles.

I think that gaming in many ways is a bridge by which people discover the larger decentralized web.”

“The idea that blockchain technology and native tokens can represent off-chain assets – financial securities such as stocks and bonds, or commercial rights such as trade receivables and fractionalized real estate or art – has been around for a while.

Time will tell whether the latest wave of tokenization – which has drawn in large Wall Street banks, the Singaporean government and asset managers such as Wisdom Tree and Hamilton Lane – moves this idea beyond the fringe into the mainstream. But there are reasons to believe it has momentum.

One is that technological advances in cryptography since 2018 have encouraged tokenization projects to migrate from those closed, permissioned projects onto public, permissionless blockchain platforms such as Polygon. And that has, in turn, allowed them to tap into the more rapid pace of innovation happening on those chains, including in areas such as zero-knowledge proofs, which enable a balance between the privacy that investors and issuers demand and the advantages of programmability, instant settlement and data transparency.

Another driver behind this advance lies in economic conditions. Inflation and higher interest rates are forcing entities to seek out new markets and trading efficiencies and to free up dormant capital. The pitch behind tokenization is that it achieves all of that.

It would be a real pity if such a regulatory mission were to kill off tokenization altogether because, if managed properly, putting the world’s stocks, bonds and commercial assets on-chain could well reduce systemic risk, not raise it. A tokenized financial system with traceable, instantly settled transactions would be a more transparent and efficient one, with lower risks of the trade failures that happen when settlement is delayed.

As former Treasury official John Rizzo argued in a recent opinion piece, policymakers need to be looking at how tokenization can help foster generational wealth in assets such as real estate by making them available to a wider group. In tokenization, Rizzo wrote, ‘public officials in Washington [D.C.] have an opportunity to come together and focus on powering a revolution in alternative assets that unlocks the storied American Dream for millions.'”

For all their rhetoric about “unbanking yourself,” crypto exchanges, lenders and stablecoin issuers need access to banks. It’s not possible for any crypto company, whether or not it has a U.S. presence, to accept or pay out fiat dollars unless it has a direct or indirect relationship with a U.S. bank.

U.S. dollars are illiquid in the crypto ecosystem, so crypto companies don’t need lending services from traditional banks. And because they might have to pay out those scarce fiat dollars at a moment’s notice, they want any funds they deposit in traditional banks to be held in custody, not used as liquidity for the bank’s other activities. So crypto companies want a type of bank we don’t currently have: a “full-reserve” bank.

In 2019, Wyoming created a charter for full-reserve banks. Its “special purpose depository institution” can receive deposits and provide asset management, custody and related services, but is not allowed to lend and must maintain unencumbered liquid assets of at least 100% of its total deposits. Custodia Bank is a Wyoming SPDI.

Custodia has all the benefits of being a bank with expertise in digital assets – plus, as a depository institution, we’re eligible to connect directly with the Federal Reserve payment system, removing middlemen and layers of fees.

A full-reserve, nonlending bank earning its profits solely from fees on payment and custody services sounds like a sensible solution to crypto’s banking needs. Indeed, many people might think it has wider application, too – after all, it’s not just crypto companies that need safe places to put their savings. If it is 100% reserved there’s no risk from bank runs, and if it is not lending it can’t become insolvent due to bad debts. Even though deposits in Custodia don’t have FDIC insurance, they are completely safe. So why has the Federal Reserve refused to accept Custodia as a member and denied it direct access to dollar clearing?

The problem is not Custodia, it’s the customers. Custodia offers banking and custody services exclusively to crypto businesses. And the Fed’s view of these is more than slightly jaundiced. It regards the entire crypto industry as a hotbed of financial crime. It’s hardly going to give the green light to a bank whose principal business is, in its view, enabling enterprises that are highly risky and at worst actually criminal.

There’s a second problem: Custodia plans to issue its own token. The token would be a liability of Custodia exchangeable at par for U.S. dollars – a “tokenized dollar.” It would be fully reserved, and Custodia has applied for FDIC insurance. A regulated bank issuing fully reserved, FDIC-insured tokenized dollars that could be used on multiple blockchains seems like a great idea. It would make U.S. dollars considerably more liquid in the crypto space and reduce reliance on the likes of Tether. The problem is not the token, it’s the network.

Custodia plans to issue the token on Blockstream’s Liquid network and possibly also on Ethereum. These are public decentralized networks. Custodia would have no control over the ownership and distribution of such tokens. It would be as if it had issued its own banknotes. The joint regulator statement cited above says that issuing tokens on such networks is “highly likely to be inconsistent with safe and sound banking practices.” While regulators perceive crypto as a vehicle for money laundering, terrorist financing and ransomware, and the headlines are dominated by crypto-related frauds, scams and rug pulls, regulated banks are not going to be allowed to issue stablecoins on public networks.”

The biggest ETHDenver ever closed out on Sunday, with finalists in the Ethereum ecosystem conference’s hackathon presenting their builds to a ragged but still energized crowd at Denver’s National Western Complex.

After two weeks of programming, hacker houses, parties and panels that spanned the city of Denver, thousands of attendees had whittled down to a couple hundred diehard developers at ETHDenver’s main stage for closing ceremonies.

ETHDenver, a community-run conference managed by token-holder members in a decentralized autonomous organization (DAO), reached new heights this year; on the first day of the main event, a staffer said there were over 16,000 tickets to be checked in – a sellout.

The conference is poised to grow in size and scope next year, Paller said. He said organizers are in discussion with “countries” over setting up satellite feeder events around the world to which ETHDenver would be the “super bowl.””

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