Throughout history, the world has seen a number of extinction events. The last of these, the Cretaceous-Paleogene extinction, or K-Pg event, wiped out the dinosaurs and led to the emergence of mammals and eventually homo sapiens as the apex species. While life remains a cosmic oddity currently confined to the pale blue dot, it has adapted and continued to thrive over the centuries. Extinction events, though disruptive, are driving forces of evolution.
This is the world of fintech, in a much smaller and accelerated time frame, but no less wild. It’s been just over a decade since Satoshi Nakamoto first revealed to the world his vision of a decentralized web of transactions powered by the then little-known blockchain technology. This small step has since inspired the global leap towards distributed ledger technology, DeFi and Web 3.0. However, the road to the promised land is full of dangers. In just a few short years, we have witnessed the DAO crisis of 2016, the ICO bubble of 2017 and, more recently, the collapse of Sam Bankman-Fried’s FTX, echoing familiar stories of the past.
It would, however, be rash to jump to a wholesale dismissal of the concept of fintech or the underlying technology as just another South Sea company. The South Sea Company was a punctured bubble that failed, not unlike FTX, but the New World was real.
While many people may, understandably, remain skeptical of cryptocurrencies and exchanges given the incessant disruptions, the technology is nevertheless having a growing impact on our society. It can be argued that explorers from both the public and private sectors are still looking for practical applications of the technology and the ways in which it is to be regulated. Some experimental regulatory frameworks have been introduced and new age sheriffs are being hired to regulate the Wild West of the 21st century.
Hong Kong, which has been bruised in its fight to defend its title as one of the world’s leading financial centers, has recently stood on a number of initiatives to advance the fintech sector. At the recent Hong Kong FinTech Week, Christopher Hui, the city’s Secretary of Financial Services and Finance, announced three pilot projects: the first government-issued NFTs, Green bond tokenization, and eHKD. These moves appear to signal the region’s embrace of underlying technology and the gradual recognition of assets created, managed and traded through that technology, ultimately leading to a more digitized economy. The latest policy statement provides much needed regulatory certainty and a sense of general direction to the market.
It remains to be seen how the policies will translate into measurable results. As momentum gathers, FTX’s catastrophic collapse is a timely reminder of new systemic risks and related legal issues brought by technology that are not fully understood. And the impact of the recent crash is barely felt outside of the cryptosphere. At the time of writing, Bahamian financial regulators have appointed liquidators to run FTX’s unit in the country, and various allegations of mismanagement of the affairs of FTX and its affiliate, Alameda Research, have emerged. The fall of Tokyo-based term Gox, a once-dominant bitcoin exchange, in 2014 may well shed some light on how the latest iteration of stock market crashes will play out, but the current episode will undoubtedly create new problems, particularly from the perspective of restructuring.
If Hong Kong is to move in the direction of becoming a virtual asset hub, and especially if retail investors are to have some degree of access to virtual assets, it must evolve quickly to be ready to deal with a host of new legal issues when ambitious ventures fail, which unfortunately many of them will. There is still little discussion of practical issues such as the manner and status of creating a secured interest in virtual or token assets, and the interaction and protection of such rights through a physical court. The existing court-based dispute resolution system has so far struggled to connect the online and offline worlds. It was not so long ago that service of documents by email was recognized as valid, and only in certain limited circumstances.
As we move toward the brave new worlds of decentralized earth and the metacomplex, the law must recognize that the boundaries between the real and the virtual will become increasingly irrevocably blurred and perhaps eventually merged. Currently, arbitration appears to offer the best dispute resolution mechanism that bridges both worlds: it has the flexibility to adapt to the needs of the parties, allows for relatively quick resolution, and allows parties and proceedings to remain confidential.
Most importantly, in the spirit of decentralization, proceedings can proceed from cradle to grave entirely online, and parties are free to choose an arbitrator of their choice, who could be an expert in the field or simply he is a trusted peer, rather than a traditional judge who is bound by the boundaries of a particular jurisdiction and who is perhaps more knowledgeable about the law than the technology. Prizes can be won through traditional courts and Hong Kong, because of its close ties to mainland China, offers a unique advantage. Some of the prudential institutions here have already published rules and launched platforms tailored for online dispute resolution (ODR).
As we continue to sail through these treacherous uncharted waters, let us not lose sight of the new continent—which will hopefully bring humanity our next leap forward.
Co-authored with Plato Cheung, Senior Partner at Baker & McKenzie Hong Kong. and Beryl Wu, partner at Baker & McKenzie Hong Kong.