Throughout history, the world has experienced 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 that, for now, is confined to the pale blue dot, it has adapted and continued to thrive through the eons. Extinction events, though disruptive, are drivers of evolution.
Such is the world of fintech, over a much shorter and accelerated time frame, but no less fierce. It’s been just over a decade since Satoshi Nakamoto first unveiled to the world his vision for a decentralized transaction network powered by then little-known blockchain technology. This small step has since inspired the global leap to distributed ledger technology, DeFi and Web 3.0. However, the path to the promised land is strewn with pitfalls. In the space of just a few years, we have witnessed the DAO crisis of 2016, the ICO bubble of 2017, and most recently the collapse of Sam Bankman-Fried’s FTX, echoing familiar tales of yesteryear.
It would, however, be foolhardy to jump to a total rejection of the notion of fintech or the underlying technology as another South Seas company. The South Sea Company was a burst bubble that failed, much like FTX, but the New World was real.
While many people may understandably remain skeptical of cryptocurrencies and exchanges given the ongoing disruption, technology is nonetheless having a growing impact on our society. It’s safe to say that both public and private sector explorers are always looking for practical applications of technology and how it should be regulated. Some experimental regulatory frameworks have been introduced and new age sheriffs are being recruited to regulate the 21st century Wild West.
Hong Kong, which has been bruised in its fight to defend its title as one of the world’s leading financial hubs, has recently weighed in with a series of initiatives to push forward in fintech. At the recent Hong Kong FinTech Week, Christopher Hui, the city’s financial services and treasury secretary, proclaimed three pilot projects: the first government-issued NFTs, green bond tokenization, and eHKD. These moves seem to signal the territory’s adoption of the underlying technology and the gradual recognition of assets created, managed and traded via this technology, ultimately heading towards a more digitized economy. The latest policy statement provides much-needed regulatory certainty and a sense of overall market direction.
It remains to be seen how the policies will translate into measurable results. Just as momentum is building, FTX’s calamitous collapse is a timely reminder of new systemic risks and associated legal issues brought about by technology that are not fully understood. And the impact of the recent crash is barely felt outside of the crypto-ecosphere. As of this writing, Bahamian financial regulators have appointed liquidators to manage FTX’s unit in the country, and various allegations of mismanagement of the affairs of FTX and its associated company, Alameda Research, have emerged. The fall of Tokyo-based Mt. Gox, a once-dominant bitcoin exchange, in 2014 may well shed light on how the latest iteration of exchange meltdowns will unfold, but the current episode will no doubt spawn new problems. , particularly from a restructuring perspective.
If Hong Kong is to propel itself in the direction of being a hub for virtual assets, and particularly if retail investors are to have some access to virtual assets, it needs to move quickly to be ready for a range of new legal provisions problems when ambitious companies fail, which unfortunately many of them will fail. There is still little discussion of practical issues, such as the mode and regime of creating a guaranteed interest on virtual or token assets, and the interaction with and protection of these rights via physical court. Our current court-based dispute resolution regime has so far struggled to bridge the online and offline worlds. Not so long ago, the service of documents by e-mail was recognized as valid, and only in certain limited situations.
As we tiptoe into the brave new worlds of decentralized earth and the metaverse, the law must recognize that the lines between the real and the virtual will become increasingly and irreversibly blurred, and perhaps ultimately fused. . At present, arbitration appears to offer the best dispute resolution mechanism bridging the two worlds: it has the flexibility to adapt to the needs of the parties, it allows for relatively quick resolution, and allows the parties and the process to remain confidential.
More importantly, in keeping with the spirit of decentralization, proceedings can be continued from cradle to grave entirely online, and the parties are free to choose an arbitrator of their choosing, who may be an expert in the field, or just someone you trust. a full-fledged peer, instead of a traditional judge bound by the confines of a particular jurisdiction, and who perhaps knows the law better than the technology. Awards can be enforced through traditional courts and Hong Kong, given its close ties to mainland China, offers a unique advantage. Some of the far-sighted institutions here have already issued rules and launched bespoke platforms for online dispute resolution (ODR).
As we continue to navigate these dangerous and uncharted waters, let us not lose sight of the new continent that 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.