Q9 Weekly | A Better Tomorrow 英雄本色
4 November 2022
Q9 Capital: www.q9capital.com
A Better Tomorrow 英雄本色
- Dogecoin rally continues following Musk’s Twitter acquisition
- Coinbase suffers sharp declines in revenues and volumes
- Hong Kong wants to be a crypto hub (again)
Bitcoin traded sideways as the Bank of England boosted its interest rate by a jumbo-sized 75bps, matching recent US hikes. BTC ($20.2k) and ETH ($1.5k) continued to sail along at roughly the same levels they’ve maintained for much of the past two weeks.
Dogecoin climbed 59% over the week on the news of Elon Musk buying Twitter. The price of DOGE had already doubled in October on speculation of the acquisition. Binance also invested $500mn in Musk’s Twitter takeover, a small but significant move that fuelled speculation Twitter could eventually be powered by blockchain technology.
Recent figures show average annualised volatility for BTC has hit its lowest point since October 2020.
BTC Implied Volatility, 30 Days, Annualised (%)
Source: CryptoCompare
Ether is heading toward a deflationary future. There has only been 2,196 ETH ($3.4mn) issued since the Merge. Under POW, there would have been 553,312 ETH ($869mn) issued. That’s a 99.6% reduction in $ETH issuance in only 6 weeks.
Deribit, crypto options and futures exchange, was hacked, with $28mn being drained from its hot wallet. The company tweeted that client assets have not been affected, but withdrawals were temporarily halted .
Core Scientific, one of the largest publicly traded crypto mining companies in the US, raised the possibility of bankruptcy in a statement filed with the SFC. The company also disclosed that it will not make its debt payments coming due in late Oct and early Nov. Core’s stock was down as much as 77% on Thursday following the filing, and has lost more than 97% of its value to date. The company is also down to just $26mn in cash.
Hard Boiled 辣手神探
Coinbase (COIN) reported sharp declines in revenues and trading volumes in the third quarter.
The company acknowledged “another tough quarter” as it reported net revenue of $576mn, down from more than $1.2bn a year before and from $803mn in the previous quarter. Coinbase lost $545mn in the quarter, compared to a net profit of $406mn a year before.
Trading volumes and monthly transacting users at Coinbase dropped by 27% and 6%, respectively, from the second to the third quarter.
However, the firm still continues to deploy capital via Coinbase Ventures and recently reached 400 investments globally:
Love in a Fallen City 傾城之戀
Hong Kong wants to be a crypto hub again. On Monday, at the opening of Hong Kong FinTech Week, regulators declared the city’s ambitions to be a virtual asset hub.
The government announced that it will hold consultations for allowing retail investors to invest on licensed platforms and is open to considering crypto futures ETFs. The government said it will also review property rights for tokenized assets and the legality of smart contracts.
Ultimately, the regime’s emphasis is on investor protection. At this point, it seems to be focused on spot trading, and does not allow staking, lending, copy trading nor the bread-and-butter for many exchanges — leverage. But it’s a start.
The irony is that Hong Kong, just a few years back, was already a hub. However, restrictive regulations (no retail) and one of the world’s toughest Covid rules caused the city to lose major global crypto operations and haemorrhage talent. The city says it’s back to business as usual. The question now is whether businesses and talent will return.
Meanwhile, jurisdictions like Dubai have surged ahead with the creation of VARA (Q9 has just received a provisional license with the authority), and major economies like the UK and the US are setting out their stalls. Singapore, however, has signalled to the market that it will ramp up compliance obligations.
Enter the Dragon 龍爭虎鬥
This about-face turn is very much at odds with the mainland. The Chinese government has cracked down on crypto firms operating in the country whilst continuing to move forward with piloting its central bank digital currency, the digital yuan.
However, it very much makes sense. Crypto is one of the most important technologies to emerge in a generation and giving up a seat at the table is strategically unwise. If you are a government thinking about the long term, you want the talent and the innovation to spring from your borders, not elsewhere. The current semiconductor trade war going on between China and the US is evidence that failure to nurture a homegrown version of key technologies leaves you exposed.
China also has a massive USD problem (ie sanctions or arbitrary confiscation) and having the infrastructure to access digital currencies outside of the control of any nation provides necessary optionality.
It’s likely Hong Kong will now develop as a crypto alternative to what Macau is for gambling — banned onshore, but permitted in offshore-China where they still have control over it.
The SCMP already reports that Mainland Chinese financial institutions, strictly banned from involvement at home, are now considering launching crypto related businesses in Hong Kong, where new measures for boosting the city’s status as a crypto hub have drawn interest from the industry.
Hong Kong has always had a beneficial role to play in the movement of capital and goods in and out of China. It looks like it’s going to be business as usual with crypto.
YoY Growth in Transaction Volume for East Asian Countries
Source: Chainalysis
In the Mood for Love 花樣年華
The SFC will now conduct a public consultation on how retail investors may be given a suitable degree of access to digital assets under the new licensing regime. This marks a significant shift from the SFC’s stance over the past four years, which restricts crypto trading on centralised exchanges to professional investors. Eligible investors include individuals with a portfolio worth at least $1mn, or only 7% of the city’s population.
This is positive news. Any regulatory regime which restricts access to crypto products based on wealth is ill conceived and fails to serve its intended purpose. Wealth based tests are deeply classist and reserving crypto markets exclusively for the rich leaves the population at large behind. Knowledge-based access to crypto and associated products (ie, via online suitability tests) is a much fairer system that still protects investors.
A bill to establish a statutory licensing regime for virtual asset providers is now going through Hong Kong’s rubber-stamp legislature and is expected to come into force in March next year and then include a nine-month grace period.
Chungking Express 重慶森林
HK will also permit futures based crypto ETFs to list on the main exchange.
The SFC has been “actively looking to set up a regime to authorise ETFs which provide exposure to mainstream virtual assets with appropriate investor protection guardrails,” says Deputy Chief Executive and Executive Director Julia Leung. “At the initial stage, we expect the underlying assets to be confined to BTC futures and ETH futures traded on the Chicago Mercantile Exchange,”
ETF management companies will also need to “have a good track record of regulatory compliance” as well as three years of experience managing ETFs. “Only [virtual asset, or VA,] futures traded on conventional regulated futures exchanges are allowed”.
Made in Hong Kong 香港製造
Hong Kong can be the Asian hub for crypto. It was in the past. A vibrant ecosystem of exchanges, DAOs, and venture funds would provide the world’s best engineers with a place to flourish. Arthur Hayes succinctly puts it: “even though we live in an internet-connected society, people physically want to be where the action is.”
The government is certainly making positive noises. Hong Kong’s financial chief Paul Chan stated on Monday the city is “open and inclusive” with regards to digital assets.
Christopher Hui (Secretary for Financial Services and the Treasury) also said: “We recognise the potential of DLT and Web 3.0 to become the future of finance and commerce, and under proper regulation they are expected to enhance efficiency and transparency. The Government is prepared to embrace this future, and we welcome the clustering of Fintech and VA community and talents in Hong Kong, and we will promote the sustainable development of financial services across the whole VA value chain.”
These policies and statements would have been welcome over a year ago by the industry, but its better late than never. Hong Kong is a “can do” kind of place. The energy and hustle of its residents is intoxicating. The authorities are saying all the right things. Now we need to see them in action.
Hong Kong actor Chow Yun Fat lighting up a dollar in a Better Tomorrow
In the News…
- Visa planning to launch its own cryptocurrency wallet
- Meta to bring NFT minting and trading to Instagram
- Binance CEO considering buying banks to connect with the TradFi world
- Terra co-founder Do Kwon faces $57mn class-action lawsuit in Singapore
- World Bank backs blockchain project to harmonize carbon registry data
- Twitter will allow users to buy and sell NFTs through tweets
- Zoop teams up with Ready Player Me, raises $15mn
- Crypto venture funding hits year-low in Q3
- DAOs rush to restructure to avoid legal liability
- Hong Kong fintech startup Reap raises $40mn for Web3 payments
