How and why the global centre of cryptocurrency moved back to Asia
By its nature cryptocurrency fills gaps. How big it gets and the form it takes depends on the gaps it fills.
- Closed capital accounts in Asia have increased demand for alternative investments.
- Events such as the Mt Gox collapse saw cryptocurrency's orientation turn towards the USA.
- The rise of internationally public-facing cryptocurrency giants such as Binance has helped shift the focus back towards Asia.
The crypto sphere is always gearing up for a conference, and sometimes it feels like there are slightly more than 52 "blockchain weeks" a year.
But if there's a consistent signal in all the noise, it's probably the Consensus series of blockchain conferences, which have been running annually in New York since 2015. In the other hemisphere, it takes the form of Consensus Singapore which first ran in 2018.
The conference often has separate streams such as "construct" (the technical side of things) and "invest" (the exactly what it sounds like side of things). And this year, the entire Consensus Singapore conference has been rebranded as Invest: Asia, running from 11 to 12 September in Singapore.
Obviously this was no accident.
"As we were putting together the program, it seemed pretty clear that much of the agenda was centered around the financial use case for crypto anyway. It was all about trading the exchanges - basically how you make money from crypto. So we thought the Invest brand... we thought that was really a better fit," explains Wong Joon Ian, CoinDesk managing director of Asia and Europe, who's heading up the program for
Consensus Singapore Invest: Asia.
"I think in Asia the story is much more centered around the retail investor, and how they can interact with the crypto sphere. And the way they interact with it is really through trading on the big exchanges," he said.
This is borne out by the numbers.
"From January 2018 to July 2019 there were 318 new exchanges, and 40% of those exchanges are from Asia," Wong said. "So there's an explosion of exchanges, of which a very large chunk are in Asia.
The data comes courtesy of CoinGecko, whose co-founder Bobby Ong will be at Invest: Asia, presenting "a lot of exclusive research on the state of the crypto markets in Asia," Wong said.
Accounting for international cryptocurrency differences
But how do you account for these differences? There are a number of theories, but Wong reckons it's largely down to a lot of people who are hungry for new things to invest in, on account of closed capital account policies.
"I think it's more to do with existing economic conditions, right? There seems to be a correlation between places with a closed capital account, and whether people are into crypto there."
Capital account openness, and closedness, are measures of how restricted capital outflows are in a given country. China, for example, has a closed capital account policy which restricts movements of money out of the country. One of the effects is that residents have limited ability to invest overseas, relative to countries with more open capital account policies.
Although it doesn't have closed capital accounts to the same extent as China, South Korea's outsized interest in cryptocurrency has similarly been blamed on/credited to a drought of investment opportunities.
Money wants to be free"
"You know, when you try and restrict the flow of money... money wants to be free. You look at Korea, you look at China, you look at Japan, right? Closed capital accounts; people have fewer investment options. So they're hungry... In a paradoxical way, when you close your capital account you create a population that has a higher risk appetite. They want to try out, you know, the wackiest stuff, right?"
Of course, comparative investment wackiness is subjective and it depends largely on the current state of the financial services market in a given location.
"China, for example," Wong said. "I lived in China in the mid 2000s... you hardly knew anyone who had a credit card, for example. So, when you're in that kind of environment it's like, well, what's the difference between a credit card with cashback and Revolut? Right? There's no difference."
"Or, you're selling me this crypto asset, versus some kind of structured product involving, you know, real estate derivatives in Australia [for example]... it doesn't seem like there's a huge difference because, you know, it's all new. All of it is just as normal as each other."
Cryptocurrency is global, and one of the wonderful things its globalism highlights is that novelty is relative around the world. And in a way, cryptocurrency tends to fill gaps wherever it goes. The places it's most popular are often those with the biggest gaps.
In China, Korea and Japan that gap is a lack of investment opportunities. In Russia and the Eastern Bloc it may be a hedge against the government collapse. In Venezuela, as well as Ethiopia, Uganda and many more, it's a comparatively stable currency and store of value. And in the USA it's a working payment network.
Unfortunately, the same conditions which see cryptocurrency take a place as solid investment opportunity also create fertile territory for other scammers.
Scam, scam-scam. Scam? Scam
The problem of investment scammers is much bigger than cryptocurrency though, Wong pointed out, and much bigger than Invest: Asia.
"I don't think Invest: Asia is big enough to move the needle if you're running a scam in China," he said. "That just speaks to the size of the population in China. In general, I think there's lots of financial scams in general in China, right? For example, a couple years ago there was a big peer to peer lending scandal."
"The peer to peer lending was legitimately becoming a hot growth FinTech sector in China, but then people were running these peer to peer scams. Because it was so hot, everyone's talking about it. It creates the conditions for scammers to launch whatever scheme that they want to launch."
"So I think, like, scams in general are big in that market because there's not many new financial products available. People don't have that many ways to grow their money, so they're always on the lookout... unfortunately, that creates the conditions for scammers."
"I don't think crypto is particularly special in that regard... it may even be small compared to some of the bigger scams that go on in China."
Some recent non-crypto financial scams in China are bigger than the three biggest Ponzi schemes in crypto history combined.
Alleged Ponzi scheme PlusToken is believed to have pulled in US$2.9 billion, while OneCoin did about $4 billion, and BitConnect's market cap was around $1.5 billion when it semi-officially bit the dust, for a combined total of $8.4 billion around the world.
Meanwhile, from duping investors in China alone, within the last few years:
- The Shanlin Finance scheme netted the equivalent of US$8.3 billion.
- The Ezubao scheme managed $7.7 billion.
- The Qbao scheme pulled off $10.6 billion.
Chinese police investigated more than 10,000 cases of illegal fundraising in 2018, SCMP reports, with an estimated $42 billion equivalent involved in them all up. This context is probably important for anyone weighing up the rationale of China's "cryptocurrency ban".
The innovation upside
The same elements which make Asia such a cryptocurrency hotbed also allow scams to propagate more easily. But rapid innovation is another side effect of this environment, which may have seen the focus of cryptocurrency shift away from the US and towards Asia over time.
"Increasingly, you're seeing people making bets and pulling out of the US"
"Jeremy Allaire of Circle is also coming to speak," Wong said. "And, you know, he just moved Poloniex out of the US, maybe because of regulatory problems. And so his big point is that the regulatory burden of trying to be compliant with the US, serving US customers, is so high that it starts to become uncompetitive. You know, if you commit to serving US customers, you start getting left behind by much more nimble and innovative people like Binance."
"So I think there's an emerging picture here. The US kind of led on this at the start, right? US regulatory agencies were engaged with cryptocurrencies way back in 2013, when I started covering the space. But it's been very, very slow. Even today we don't have a decision on an ETF. No ETF has been approved."
"Granted, you know, Bakkt, for example, have now got a launch date - Bakkt is also coming to Singapore - they're going to do physically-delivered Bitcoin futures, so that's positive. But it's been many years and very few businesses, even businesses with the level of funding of Circle, are able to keep treading water - to keep spending money waiting for regulatory clarity.
"Increasingly, you're seeing people making bets and pulling out of the US and not serving US customers. And so I think, you know, that trend feeds into this parallel trend of folks offshoring to Asia, and Asian exchanges iterating very quickly."
"Binance, for example, got huge in the ICO boom because they were able to very quickly list a list of hundreds of tokens and allow people to trade those tokens," Wong explained. "So Asia is now becoming a place where the best entrepreneurs in the space can iterate quickly.
"They have fewer concerns about regulation, preventing them from serving customers, and you have very large captive markets that are very interested in the services on offer. So, you know, it does seem as though in many ways, Asia is leading the way over."
For the most part, Bitcoin mining never really left China though.
"Mining remains a very Chinese space. The highlight of my crypto reporting remains going to one of Bitmain's largest mining farms in Inner Mongolia in 2017... that was pretty far out. They had seven warehouses out there, and I think they said about 30% of the Bitcoin hash rate."
The shifting geographical centre of crypto
The locus of the global cryptocurrency scene has gone back and forth over time, Wong explained, largely driven by significant individual entities pulling public consciousness back and forth across the world by "controlling the narrative".
One of the first significant events in this narrative was the collapse of Mt Gox in 2013, which may have cemented a lingering distrust in overseas exchanges among American users at the time. This event also directly resulted in the creation of some of today's top American exchanges such as Kraken, and a renewed appreciation for the more institutionalised exchanges such as Coinbase.
You still had big exchanges and miners in Asia, but they couldn't - they never - took hold of the narrative"
"When folks like Coinbase, etcetera, came around, there was much more institutional money behind it," Wong said.
Incidentally, Coinbase will also be at Invest: Asia this year to talk about its Asia plans, and how it thinks about IEOs.
"I feel like that whole narrative shifted over to the US in the kind of 2014-15-16 years... Mt Gox collapsed, you still had big exchanges and miners in Asia, but they couldn't - they never - took hold of the narrative, right?" Wong said. "It was always viewed as some kind of slightly dodgy operation. Nobody really knew what Bitmain was up to, etcetera."
"I think the ICO scene changed that a bit, because then a new set of players managed to grow very quickly, people like Binance, for example," Wong said. "And the great thing about Binance is they have a really charismatic frontman, which is CZ. And he's able to seize the narrative in ways that previous Chinese CEOs were not able to. And so I would say, you know the rise of Binance really coincides with that tipping point [from the US to Asia]."
"Now you have the world's biggest exchange, they make 400 million and change in revenue a year. They were founded two years ago, which is insane! And they continue to be kind of the hub of attention and of trading in the space."
"What Binance did well was it made it less opaque... I guess Bobby Lee was an early version of CZ, in that he was very vocal. And he was a face, you know? He went to conferences and stuff. I think Binance did that for new generation of crypto investors; people who were looking at hundreds of tokens and not just Bitcoin."
Bobby Lee founded China's first Bitcoin exchange in 2014, BTC China, which was also among the world's largest exchanges by volume for a time. These days he's working on a secretive crypto project known only as Ballet, which will be revealed for the first time on stage at Invest: Asia.
What else to expect from Invest: Asia
This concerted focus on cryptocurrency investment, and emphasis on tokens themselves, has resulted in some creative programming for Invest: Asia, such as the financial hackathon by Singaporean exchange Digifinex.
"We're hosting a financial hackathon by these guys called Digifinex, a Singapore-based exchange, who are pretty big. They're in the top 10 most days by volume," Wong explained. "And this is really their initiative to try and teach university students about crypto assets and how to evaluate them."
"It starts off with a series of kind of seminars and lectures on day one of the conference, to roughly about 100, 150, university students from Singapore. And then after those lectures they'll talk about various theories for valuing crypto assets. The students then go away and like a hackathon they form teams, they construct the model portfolio and investment thesis."
"And then on day two, they basically present that to judges... I think the winner gets 0.5 Bitcoin? I think there's like one Bitcoin up for grabs, basically."
"So that's kind of a cool thing that we're doing in the expo floor. And the other cool thing we're doing is our Changelog stage, which is a format we debuted in New York this year.
"Changelog is all about - there's been all these token projects, right? - We want to grab 15 of the best ones, and give them a stage to actually update people about what they've been doing with their funding, what's coming up next, and also create a forum for people to ask them questions... so we're doing Changelog with a lot of the top Asian projects."
You can also expect appearances from Matrixport, a project spun out of crypto mining giant Bitmain. Invest: Asia will be Matrixport's first on-stage appearance, Wong noted. It could bring a lot of clarity to some of the rumours swirling around it in recent weeks. If they hold true, Matrixport will become the world's largest OTC crypto trading desk and custody service the instant it launches, on account of its underlying partnerships.
Elsewhere, Anthony Lewis, head of research at R3 will be presenting an exclusive body of research about the state of STOs in Asia ("he says STOs are all everyone can talk about, particularly in the real estate space because it aligns so well with a lot of Asian investors are interested in"), the Marshall Islands will be making a big announcement about its Sovereign Cryptocurrency, and much more.
Singapore is one of the world's blockchain hubs at any time. But for a few days next month it will be the world's blockchain hub.
Tickets are available here if you were wondering.
Disclosure: The author holds BNB, BTC at the time of writing.