Blockchain ecosystem continues to evolve despite drop in investment
VC investment in the blockchain and cryptocurrency space fell during H1’20, due partly to COVID-19 and partly the intensifying focus on value. Digital asset platform Bakkt’s US$300 million funding round was the largest in the sector in H1’20, followed by cross-border payments firm Ripple’s US$200 million raise.
Vertical-integration taking priority as blockchain consortia focus on driving real value
During H1’20, blockchain consortia continued to shift away from a homogenous approach towards a focus on bringing together value chain partners to develop sector-specific, vertically-integrated use cases. Given the complexity of supply chains, lack of trust and increasing availability of data, it is expected that in H2’20 blockchain activity will focus on enablement. For instance, developing common languages (e.g. data taxonomies) to support blockchain use and foster trust.
Globally, we see virtual asset providers becoming the new digital channels and conduits to collateralized and tokenized assets. Fractional investments in less liquid assets or new types of products and services like tokenized ESG credit supporting the circular economy, I think are the next innovations we are going to see.
Digital Asset Exchange licensing draw attention to Hong Kong (SAR) and Singapore
Licensing of digital asset exchanges was a key topic in H1’20, particularly in Asia. H1’20 saw virtual asset providers examining the regulatory framework release by the Hong Kong Securities and Futures Commission in Q4’19. The framework allows digital asset exchanges to be licensed and regulated under a new sandbox-style approach1, although it is limited to providers with at least one virtual asset considered to be a security.
In June 2020, the Monetary Authority of Singapore implemented the Payment Services Act, which included a licensing regime for digital asset exchange and platforms2. Both licensing initiatives could attract interest from global crypto platforms looking to gain investor trust and user traction.
COVID-19 accelerating government interest in digital currencies — particularly in Asia
COVID-19 has intensified the shift away from cash in many jurisdictions. This has helped accelerate the focus of different governments on digital currencies.
During H1’20, China accelerated its development of a digital renminbi. In May, it initiated a trial of the e-RMB in four cities3. In the same month, officials in China also proposed the creation of a pan-Asian stablecoin in order to improve cross-border trade in the East Asia region4.
Trends to watch for in H2’20
Looking forward, the digital asset trading platforms that obtain regulatory licenses will likely be in a better position to attract trust and institutional money. In the vein of JP Morgan, other corporate players will likely also move forward with issuing their own collateralized tokens. Over the next 6 to 12 months, digital ledger technology (DLT)-focused startups and blockchain consortia will likely also look to blend DLT with other technologies in order to create new products and services.