financial innovation

US National Security at Risk Due to China Dominance in Mobile Payments, says former State Department Official

In a Twitter Spaces discussion with Coinbase CEO Brian Armstrong and listeners, former Department of State official Anja Manuel cautioned that the US’s ability to enforce sanctions on “bad actors” like Iran or North Korea could be threatened if it fails to maintain its leadership in financial innovation and payments. According to Manuel, the US’s status as one of the largest global leaders in payments enables it to enforce sanctions on countries and entities that are deemed to be a threat to national security. However, China seems to be catching up in mobile payments, both in sophistication and scale. If China’s payments solutions gain a dominant foothold in the developing world, enforcing sanctions could become significantly more challenging.

The Office of Foreign Assets Control of the Treasury Department enforces US sanctions, including sanctions on crypto wallets related to Russian nationals and groups’ involvement in the war on Ukraine. Manuel acknowledged that sanctions generally work in a world of traditional banks and responsible blockchain firms, but they are less effective when financial technology firms are available to individuals looking to circumvent restrictions.

There are several reasons why maintaining US dominance in financial innovation and payments is essential for national security. First, the ability to enforce sanctions against countries deemed to be a threat to national security is critical. Sanctions are a key tool in deterring countries from pursuing policies that threaten US interests. Second, financial innovation and payments are critical for US economic growth. The US’s ability to innovate and create new technologies has been a key driver of economic growth for decades.

The US government has historically played a significant role in fostering innovation and supporting the growth of new technologies. However, there are concerns that the US is losing ground to other countries, particularly China. China has made significant investments in technology and innovation and has developed a reputation as a global leader in several areas, including mobile payments.

To maintain its leadership in financial innovation and payments, the US must continue to support the growth of new technologies and create an environment that fosters innovation. This will require a significant investment in research and development, as well as regulatory frameworks that support the growth of new technologies while also protecting consumers and national security.

In conclusion, the US’s ability to maintain its leadership in financial innovation and payments is critical to its national security. If the US loses ground to other countries, particularly China, enforcing sanctions and deterring countries from pursuing policies that threaten US interests could become much more challenging. The US must continue to invest in research and development and create regulatory frameworks that support innovation while also protecting national security.

Hong Kong Embraces Web3.0 and Advances as an International Crypto Hub, said Chief Executive

Chief Executive Li Ka-chung expressed his delight at attending the “Convergence of Finance, Innovating the Future” seminar and the Hong Kong Economic Times Business Awards ceremony hosted by the Hong Kong Economic Times. Addressing esteemed guests and friends, Li Ka-chung emphasized Hong Kong’s potential in leveraging its strengths as an international financial center and driving the development of cutting-edge technologies, particularly in the realm of Web3.0.

Renowned for its status as one of the world’s freest economies and the largest offshore RMB hub, Hong Kong boasts a highly open and international market, aligned regulatory frameworks, a robust legal system, and a pool of talented professionals. As a city under the “One Country, Two Systems” framework, Hong Kong enjoys the unique advantage of bridging global and Chinese advantages, acting as a two-way gateway connecting the nation and the world’s financial markets.

The current administration has made significant efforts to consolidate Hong Kong’s position as an international financial center. Notably, in the past two months, the “Bond Connect” Northbound trading link was officially launched in mid-May. Additionally, the Ministry of Finance issued the first tranche of RMB 12 billion government bonds in Hong Kong this month, with a total of RMB 30 billion to be issued throughout the year. Furthermore, the Hong Kong Stock Exchange introduced the “HKD-RMB Dual Counter Model” and dual counterparty mechanism in the local securities market.

Hong Kong has established itself as a leader in financial services and offshore RMB business. Moreover, it has emerged as Asia’s green finance hub, with the issuance of green and sustainable bonds reaching a record high of USD 80.5 billion last year, representing a growth of over 40% compared to the previous year. Hong Kong’s share in the Asian market for such bonds exceeded one-third, positioning it as the leading city in Asia. In February of this year, the government issued the world’s first government-backed tokenized green bond, contributing to the sustainable and responsible development of the virtual asset industry while embracing Web3.0-related financial innovations.

The government’s embrace of financial innovation showcases its determination to develop Hong Kong as an international innovation and technology center under the national “14th Five-Year Plan.” The government unveiled the “Hong Kong Innovation and Technology Development Blueprint” at the end of last year, introducing several policy measures aligned with four major development directions.

Notably, Hong Kong’s commitment to nurturing an innovative and technological ecosystem has received global recognition. According to the “2023 Global Startup Ecosystem Report,” Hong Kong ranked second among the top “Emerging Ecosystems” globally and first in Asia. This ranking affirms Hong Kong’s determination to develop a thriving startup ecosystem and demonstrates its readiness to compete globally and become an international innovation and technology hub.

To enhance the city’s innovation and technology ecosystem, the government has allocated HKD 10 billion to establish the “Industry-University-Research Collaboration Program” aimed at accelerating the commercialization of outstanding research achievements in Hong Kong. Efforts are also underway to establish a microelectronics research institute and an artificial intelligence supercomputing center, providing comprehensive support to local scientific research

Hong Kong's Crypto Rise: Harbinger for China?

Eastern Asia has seen its cryptocurrency market dynamics shift significantly, with a notable decline in crypto activity over recent years, primarily attributed to China’s restrictive stance. However, a wind of change may be blowing from Hong Kong, as the region experiences a surge in crypto-related initiatives and regulatory friendliness, igniting speculations regarding China’s evolving digital asset outlook, according to Chainalysis.

The Eastern Asia Crypto Landscape: An Overview

Eastern Asia, accounting for 8.8% of the global cryptocurrency activity from July 2022 to June 2023, has historically been a significant player in the crypto arena, largely driven by China’s previously bustling crypto trading and mining sectors. Despite the drop in activity, the region still holds a considerable share in the global crypto market, albeit less driven by institutional activity compared to larger markets. The region has displayed a higher inclination towards Decentralized Finance (DeFi) than similarly sized markets like MENA and Latin America.

Hong Kong: The Rising Crypto Hub

Hong Kong has emerged as a potential harbinger of crypto rejuvenation in the region, especially with its burgeoning status as a crypto hub. With an impressive $64.0 billion in crypto received between July 2022 and June 2023, Hong Kong’s activity isn’t far behind China’s $86.4 billion, a noteworthy feat given the vast population difference. The city’s lively Over-The-Counter (OTC) market, facilitating large, private transfers for institutional investors and high net worth individuals, has been a major driver of this crypto influx.

Institutional and Retail Dynamics

The crypto scene in Eastern Asia portrays a mixed bag of institutional and retail dynamics across different countries. For instance, South Korea’s crypto market appears to be the least institutional-driven due to stringent local regulations, whereas Japan aligns closely with global averages concerning retail versus institutional transaction breakdown. Unlike South Korea, Hong Kong sees a considerable share of its transaction volume from large institutional transactions, a characteristic that sets it apart from other countries in the region.

Crypto Platform Preferences: A Regional Perspective

A closer look at the most-used crypto platform types unveils intriguing regional trends. While Japan reflects a balanced activity between centralized exchanges and DeFi protocols, South Korea leans heavily towards centralized exchanges. The aftermath of TerraLuna’s misfortune and the subsequent regulatory revisions could have bolstered South Koreans’ trust in centralized exchanges. In contrast, China and Hong Kong exhibit unique crypto platform dynamics, with a significant amount of activity presumed to occur through OTCs or grey market peer-to-peer channels.

Decoding Hong Kong’s Crypto Surge: Implications for China

The speculation surrounding China’s warming stance towards cryptocurrency is further fueled by recent developments in Hong Kong. The Special Administrative Region has not only been fostering a conducive environment for crypto trading but also witnessed state-owned Chinese entities launching crypto-centric investment ventures. The burgeoning crypto market in Hong Kong, coupled with China’s indirect support towards Hong Kong’s digital asset initiatives, might hint at an exploratory approach by the Chinese government towards understanding digital assets better, without having to alter mainland policies drastically.

Hong Kong’s Progressive Steps Towards Web3 Adoption

Cyberport, a digital community in Hong Kong, emphasized the power of Web3 in the entertainment sector during a three-day annual event, showcasing local enterprises leveraging Web3 technology.

HKD 50 million was allocated to Cyberport to foster a thriving Web3 ecosystem, attracting businesses and talent, and organizing related educational and promotional events.

Hong Kong began tokenizing green bonds as part of its green finance initiatives, showcasing financial innovation.

The establishment of the “Task Force on Promoting Web3 Development” on June 30th, 2023, led by Financial Secretary Paul Chan, aims to promote the sustainable and responsible development of Web3 in Hong Kong.

Hong Kong’s crypto uptrend and regulatory receptiveness could potentially be harbingers of China’s cautious yet evolving stance towards digital assets. While the exact implications for China remain veiled, Hong Kong’s thriving crypto market is undeniably reshaping the regional crypto narrative, possibly laying down a framework for broader digital asset acceptance in the near future.

Senator Lummis Advocates for Clear Crypto Regulations

U.S. Senator Cynthia Lummis (R-WY) has recently reaffirmed her support for the cryptocurrency industry, underscoring that the primary issue lies with bad actors, not the assets themselves. This stance was highlighted during a heated exchange with Senator Elizabeth Warren over the financial implications of cryptocurrencies compared to traditional fiat currencies. She stated,

$900 million in non-crypto (fiat currency) money laundering vs $900,000 in crypto money laundering. Crypto is clearly not the problem. Criminals and bad actors are. It would be a historic mistake to crush an entire emerging industry based on incorrect data.

Senator Lummis, a known advocate for the crypto sector, emphasized the necessity of distinguishing between the innovative potential of crypto assets and the illicit activities conducted by some within the space. In a recent Senate Committee on Banking, Housing, and Urban Affairs hearing, she passionately argued for the establishment of a robust regulatory framework, criticizing the prevailing “status quo” that leaves businesses with unclear rules and consumers vulnerable.

The Lummis-Gillibrand Responsible Financial Innovation Act, reintroduced by Senator Lummis, aims to provide a comprehensive regulatory perimeter for crypto assets. This legislation focuses on combating the use of cryptocurrencies in illegal activities, introducing new penalties for violations, and safeguarding against the misuse of crypto for illicit purposes.

In her statement, Senator Lummis highlighted a significant disparity in money laundering activities, citing that traditional fiat currencies have been used to launder over $900 million, far exceeding the $900,000 linked to cryptocurrencies. This comparison was drawn to argue against overly stringent regulations that might stifle the growth of an emerging industry based on misinformed perceptions.

The debate on Capitol Hill, particularly between Senators Lummis and Warren, sheds light on the differing views regarding cryptocurrencies’ role in money laundering. Senator Warren, citing a case involving the Sinaloa Cartel, called for stricter cryptocurrency regulations. In contrast, Senator Lummis pointed out that the same cartel had previously laundered a substantial amount through fiat currencies, indicating that the issue is not with the crypto assets but with the criminals exploiting any financial system.

Senator Lummis’ efforts in advocating for a clear regulatory framework have garnered support from industry experts who agree that effective regulations are crucial for preventing exploitation of the system by bad actors. These regulations would also provide stability and certainty for investors and businesses involved in the crypto sector. As the crypto market continues to evolve, the actions and decisions of policymakers like Senator Lummis will play a pivotal role in shaping its future.

In conclusion, Senator Lummis’ defense of the crypto industry against undue criticism and her push for thoughtful, comprehensive regulations highlight the importance of balancing innovation with security. Her efforts aim to create a regulatory environment that is conducive to the growth of legitimate crypto enterprises while effectively weeding out unlawful activities.

HKMA Launches Project Ensemble to Bolster Tokenisation in Finance

The Hong Kong Monetary Authority (HKMA) has taken a significant leap forward in the financial technology space by unveiling Project Ensemble, a new initiative aimed at nurturing the burgeoning tokenisation market in Hong Kong. This project marks a milestone in the integration of traditional banking with the innovative capabilities of blockchain technology.

Project Ensemble is set to explore the potential of a wholesale central bank digital currency (wCBDC) as a foundation for the tokenisation of assets. The initiative will create a wCBDC Sandbox poised to launch later this year, which will serve as a testing ground for the settlement of tokenised assets using digital currency. This could include a wide array of real-world assets such as green bonds, carbon credits, and electronic bills of lading.

The HKMA is forming a wCBDC Architecture Community to aid in setting industry standards and strategizing for the future. This community will consist of a diverse range of stakeholders, including local and multinational banks, digital asset industry leaders, technology companies, and a CBDC Expert Group.

Project Ensemble is part of a broader array of initiatives by the HKMA, which includes projects like e-HKD, mBridge, Dynamo, and Genesis, each contributing to the exploration and application of digital currencies and tokenisation of assets. Through these efforts, the HKMA aims to cement Hong Kong’s status as a hub for fintech innovation and international collaboration in the realm of digital finance.

The initiative builds upon previous experiments conducted by the HKMA with prominent financial institutions such as HSBC, Hang Seng Bank, and Ant Group. Looking ahead, the HKMA plans to engage with various international stakeholders, including other central banks and organizations, to broaden the scope and impact of these explorations.

The Chief Executive of the HKMA, Mr. Eddie Yue, has expressed enthusiasm for the project, noting that “Hong Kong has always championed innovation and international collaboration. Project Ensemble will provide fresh impetus to our vibrant financial industry and reinforce our forefront position in tokenised money and assets.”

The announcement of Project Ensemble has been met with interest and optimism by industry observers, as it signals a forward-looking approach to financial innovation by the HKMA and opens doors for global talents and industry players to contribute to Hong Kong’s evolving financial landscape.