Point Zero, ReHashed

Singapore, Switzerland and the future of crypto regulation

THE SAME, BUT DIFFERENT

Switzerland and Singapore teamed up to kick off the inaugural Point Zero Forum in Zurich this past week. The two financial hubs pausing their competition at the top of the global competitiveness charts to collaborate on what hopes to become the world’s top public - private conversation in fintech.

The two jurisdictions make for interesting bedfellows. One, at the foothills of the Alps, dates its founding back to the late middle ages. Beautiful 17th century architecture graces the lake inlets: tranquil, understated, elegant. The aesthetic epitomized by Zurich’s most well-recognized landmark: Grossmünster - a Romanesque-style Protestant Church dating back to the 11th century. One gets the impression that while Switzerland is on the cutting edge in terms of policy, much of day-to-day life remains frozen in time.

At first glance, Singapore appears a polar opposite. A glitzy, modern skyline standing guard over the ever-humid Straits of Malacca; its hallmark - the Marina Bay Sands - an iconic three-pronged glass hotel crowned by a colossal yacht. Just three years after celebrating its 50th anniversary, the city-state’s meteoric rise was celebrated by the 2018 debut of “Crazy Rich Asians,” now synonymous with the city itself. The rise to riches is no accident. The cosmopolitan hub is underpinned by world-class governance, an unrelenting work-ethic, and an almost obsessive paranoia in not falling behind.

In that regard, Switzerland and Singapore are quite similar. Two cosmopolitan, multi-lingual hubs (German, French, and Italian vs. English, Malay, Mandarin and Tamil) both known as financial capitals with sound governance, protection of property, and ease of doing business. Both are among the most forward-thinking jurisdictions in attracting talent and capital: particularly in financial services.

As such, the Point Zero Forum presented the most institutional crypto conference yet to convene builders, investors, politicians and regulators to discuss the future of financial services. Speakers ranging from Singapore Deputy Prime Minister Heng Swee Keat to industry kingpins Changpeng Zhao (CZ) and Kris Marszalek (Crypto.com) offered suggestions for the best path forward for an industry once again on the cusp of disruption.

Below are my takeaways from the three day affair.

KEY TAKEAWAYS:

1. Web3 is here to stay; open-data presents a step-change from the platform economy to the protocol economy

2. Singapore and Switzerland are both forward-thinking jurisdictions aiming to foster sustainable fintech innovations through responsible regulation

3. Regulating decentralized networks is tricky and somewhat paradoxical. Many regulatory questions come down to a philosophical stance on free speech.

4. Both jurisdictions are committed to decoupling growth from carbon emissions. “Developed world” capital looking for environmentally-aligned growth in the “developing” world presents a large opportunity.

5. Emerging Asia is undergoing a fintech boom set to unlock access for >1b+

Let’s dive into each below.

1. Web3 is Here to Stay; Why Open Data Matters

Despite the recent negative headlines and price action, most participants agreed crypto-networks have the potential to overhaul financial service infrastructure and large data monopolies.

At its core, web3 is fundamentally about “open data”, “digital property rights”, and more transparent, trustless markets. Users, industry participants, and regulators are largely aligned to the benefits of open data. The open banking movement. The big tech backlash. Growing privacy concerns. All are fundamentally about data; who owns it and who has access.

It’s cliché now, but data really is the new oil. The most powerful companies today are data monopolies who leverage their position as intermediaries of online marketplaces (social, ecommerce, app-store, etc) to extract monopoly rents: squeezing suppliers, reducing competition, and stifling innovation. Despite most of the value being generated by users and marketplace participants, the primary economic beneficiary is the platform.

Yat Siu, founder of Animoca Brands, eloquently explained how web3 introduces digital property rights to combat the current era of “digital colonialism”; to better compensate individuals for the “work” they provide to the network. Opening data siloes enables less friction (e.g. cross-border transactions), less exploitation (e.g. ability to exit tech platforms / less lock-in), and more composability (e.g. all opensource). While very early in a multi-decade journey (and like every early-stage tech, price and speculation will run ahead of traction at times), there is much promise.

The combination of opensource software and embedded financial incentives is transformative. The composability of these money or data “legos” means the compounded gains will accelerate over time; each building block leveraged by the next builder - a 21st century library of Alexandria of 1s and 0s. Two decades from now, there is no reason the entire financial system cannot be running on opensource software. Protocols, not companies, represent the future of financial services and network “businesses”.

2. REG OUTLOOK AFTER THE LUNA / UST IMPLOSION

Unsurprisingly, two forward thinking regulators like the Monetary Authority of Singapore (MAS) and Switzerland’s SIF recognize the multi-decade opportunity of open finance and are keen to maintain their lead as financial hubs in the industry’s next phase of evolution.

However, many panelists stressed the need for responsible regulation to weed out the bad actors and set guardrails for the nascent industry; particularly in light of the events of the last two months.

The shadow of the Luna / UST implosion and subsequent lending contagion weighed heavily over panelists stressing consumer protection and the need to “rebuild trust”. Increased regulation was inevitable, but the unveiling of the industry’s risk-management negligence over the past two months will surely catalyze a justified acceleration.

However, as a DeFi fund manager myself, I found one narrative surprisingly absent: most DeFi protocols held up incredibly well!!

When it looked like UST (the world’s third largest stablecoin of ~US$19b!) may depeg, I was concerned. I foresaw fireworks. I unwound all of my DeFi positions to watch the pending carnage from the safety of USDC in cold storage. You see, everything in decentralized finance is composable; its all integrated. One money lego on top of the other. If a base jenga block evaporates over night, what happens to the rest of the young edifice???

I was ready for blood.

To my surprise… nothing happened. Sure, Luna deservedly went to zero, but no systemic collapse. Outside of one poorly designed protocol (which for months had been highlighted as highly risky and susceptibility to a bank run…), DeFi rails ran smoothly.

Aave, Compound, and MakerDAO liquidated assets transparently and on schedule, Curve and Uniswap kept swapping, crypto-collateralized stablecoins stayed pegged… boring and uneventful. The money robots did their job!

“CeFi” (centralized finance), in contrast, proved much more fragile. Massively over-levered hedge funds like 3AC went bust leaving large holes in irresponsible, undercollateralized crypto lending companies (not protocols!). Companies (not protocols!) like Celsius proved incapable of risk management 101: locking in illiquid assets vs. short-term liabilities. The lenders - Celsius, BlockFi, Voyager, Babel, Vauld and others - were shown to be swimming naked, halting withdrawals, and desperately courting liquidity from industry veterans like Goldman Sachs and FTX.

Understandably regulators will be keen to construct guardrails to reduce the probability of another fiasco. However, banning opensource financial software does not appear to be the solution. As we have seen by the proliferation of opensource software which now underpins much of the internet, the code hardens over time as hundreds and thousands of developers and individuals interact with the code. The bugs are sniffed out. Unfortunately, Luna / UST grew into a giant before the faulty mechanism was exposed, but it is in the minority of such experiments. No one was “bailed out”, risky investors lost money, and well-built protocols proved their metal; inspiring further confidence in their security going forward.

Overall, I find the MAS dual mandate to both promote innovation and regulate responsibly to be compelling. Regulation is nuanced and the pros need to be balanced vs. potential harm. If regulators dig deep into the incidents of 2022, they may be surprised at what they find…

Opensource, audited, and battle-tested DeFi protocols may be the best form of consumer protection available as the industry matures.

3. Regulating Decentralized Finance is Difficult

Marrying states and stateless money. Degens and regulators. KYC and encryption. Regulation and innovation. Trust and trustless protocols.

It’s a difficult balancing act. I do not envy regulators grappling with this conundrum.

How does one “regulate” a decentralized network, made up principally by developers or users outside of one’s jurisdiction, providing services in a sensitive domain, without a centralized entity to hold to account, while not excluding ones own country from the benefits of next generation of the internet?

The paradox is that much of the movement is built to defy (pun-intended) regulation. To empower peer-to-peer (P2P) networks at the expense of traditional hierarchical institutions (like governments, regulatory bodies, and centralized financial institutions many panelists hail from). How does one thread this needle?

At the core, the arguments seemed to boil down to a society’s stance on free speech. Is code a form of speech? Should speech be monitored? Should we stop people from shipping software (speech)? Can our users access software from other jurisdictions? Are we heading towards an inevitable continued “balkanization” of the internet? Is the only way to regulate (and enforce this) effectively Orwellian-style internet censorship of all netizens or a Chinese-inspired Great Firewall? If so, is this politically tenable?

Singapore and Switzerland are both smaller financial hubs who enjoy a special status in the global economy relative to their size largely because of business favorable policies which attract talent and capital. Neither can afford to be overly punitive and exclude their respective country’s from the financial networks of the future.

At the same time, financial services is not consumer internet. Real money of real retail investors is on the line and consumers need to be protected from insidious actors. Incrementally, KYC and AML are not going to disappear.

I suspect a combination of clear guidelines, licensing of good actors, legal action against identifiable bad actors, enforcement through large centralized exchanges, and leveraging on-chain analytics capabilities like Chainalysis will be the path forward for most.

Again, its quite the conundrum, but Singapore and Switzerland appear better equipped to strike a reasonable balance than most.

4. Decoupling Carbon Emissions from Growth

Both Singapore and Switzerland are leaders in ESG investing and keen to find more ways to collaborate across their respective regions. One clear opportunity is the massive pools of ESG-aligned capital in the “developed” world keen for growth opportunities in the “emerging” world.

Despite an unfortunate amount of “green-washing”, many pools of capital in the US and Europe are committed to “stakeholder capitalism”: driving investments which assess impact to all stakeholders, not just shareholders. Two of the most relevant prongs here are environmental and social impact.

Seven million people annually die from pollution (for reference only ~6m have died from COVID). Large asset allocators like BlackRock and Aberdeen with trillions under management recognize the significance of climate risk. “Decoupling growth from carbon emissions is the imperative of our time”.

However, what is the best, actionable path forward?

Today, the west has largely industrialized; the majority of new emissions comes from Emerging Asia (understandable given population size & stage of development).

Is there a way for the growth-starved capital in the US, Europe, and Japan to fund development in the emerging world in an environmentally-friendly way? As financial stewards, can it be done in a risk-mitigated way?

Again, more and better data appeared to be the panelists answer. Both in terms of environmental impact assessment and risk-monitoring. While very early in the journey, blockchains and distributed ledger tech can play a role in providing more transparent data and more frictionless cross-border flows to help allocators fund projects in high-growth parts of the world in a more sustainable way. But it’s still early days.

P.S. Most blockchains are moving away from energy intensive “proof-of-work” consensus mechanisms, requiring substantial hardware and electricity to secure the network and moving to “proof-of-stake” consensus mechanisms based on financial incentives which is much less energy intensive.

P.P.S. While I think we all recognize the climate imperative, I felt discussions neglected the obvious elephant in the room. Energy policy which made Europe dependent on Russian energy sources, spiking inflation, and the impact of retreating globalization on energy production and ESG commitments seemed relevant and surprisingly under-discussed….

5. Financial Access in Emerging Asia = Huge Opportunity

For those who follow my writing, you know I am passionate about financial services in the emerging world. The fintech opportunity in emerging Asia lies at the intersection of two of my most bullish secular growth themes for the 2020s:

• Consumer internet in India and Southeast Asia (fintech in particular)

• Enterprise software in China

• Bio / Genetics in the US

• Crypto networks globally

I have written about blitzcaling credit from the point-of-sale, about emerging Asian fintech chasing “the Ant Model”, about the evolution of payments between the US, China, and India and the takeaways for the cut-throat competition in Southeast Asia between leading eWallets, regional platforms, and financial service incumbents.

Despite the macro headwinds, my research was confirmed at the event through discussions with leaders at Ant Financial, GCash, Advance.ai, Gojek, Coins.ph and more.

Long-story short: I’m bullish!

>2b people gaining access to financial services largely through a combination of platform blitzscaling (China model), public-private partnerships like UPI (India model), and novel, hybrid approaches. To date, however, the vast majority of adoption has been driven by web2 champions and fintech enablers. DeFi has been disappointingly absent from the financial access growth story.

However, I suspect this is likely to change. 2016 → 2021 fostered the web2 internet boom in India and Southeast Asia. SEA alone grew to ~440m internet users and 35 unicorns during a brief five year inflection.

The next five years should provide fertile soil for a similar rise of protocol-based networks. Decentralized finance can play a key role in the continued adoption of financial services in underserved communities, but a few roadblocks need to be addressed:

1. Education and User Experience: DeFi UX is still abysmal (particularly on mobile where ~95%+ of the emerging world accesses the internet). Many geographies also require more “hands-on” go-to-market strategies and web2 quality applications integrating with protocols on the backend to onboard the next 1 billion users into web3

2. On-chain Reputation and Credit-scoring: traditional credit history or credit bureaus are non-existent for the vast majority of unbanked individuals. Many fintech’s bridge the gap through data-analytics on alternative data sets like telco data, eCommerce purchases, and social media behavior to underwrite loans or insurance. New primitives in DeFi for on-chain reputation like SoulBound tokens, improving on-chain analytics, and the rise of on-chain to off-chain lending (O2O) present a massive opportunity to use crypto’s superior rails to match yield hungry capital in crypto with capital-starved growth areas in a cross-border-friendly and transparent manner.

Banking incumbents have a hard time making the economics work for lower-income and rural customers. The fintech movement (hopefully joined by DeFi in the years to come) are driving financial access in underserved communities. We are still in the first inning of a multi-decade journey.

In Conclusion

After a disappointing two months in the crypto markets, I came away from the Point Zero conference in better spirits. Crypto has come a long way from the money-laundering cliché of the Silk Road days. National political figures from leading jurisdictions joining hands with industry leaders to discuss the future of web3; to harness the benefits of open data and more efficient infrastructure in financial services to promote continued flourishing. I actually found it to be quite uplifting and legitimizing for the space as a whole despite the recent headwinds.

Perhaps we are all going to make it after all.