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It’s clear that the emergence of ‘the internet’ some
30 years ago had a seismic impact on how we communicate. Back in
the early 90s, the digitisation of information created significant
opportunities in areas such as e-commerce, education, social media
and entertainment.
Fast forward to today, and we are now in the midst of a new,
second digital revolution; and this time, it is built on the
digitisation of assets, where anything of value can be digitised
and exchanged.
It’s a concept that can be applied to a broad range of goods
– from art and fine wine to real estate – and it has the potential
to be transformative in how we conceptualise trade and investment,
opening up new ways to access markets, or indeed create new markets
that didn’t exist before.
Champions of the digital assets revolution point to the
significant benefits it can bring – enabling frictionless trade and
commerce, cheaper capital movements, more robust technology-driven
transactions and fewer restrictions on access to markets.
Leading the world
It’s a revolution that is happening right now – and in few
places it is happening faster than in China, with experts
forecasting that the country is going to lead the world in terms of
digital asset and currency adoption. Even today, the digital
economy represents around 40% of Chinese GDP (Source: MIIT).
This acceleration of digital asset and currency adoption is
being driven by the maturation of the underlying digital platforms
and tools that are supporting digital change, as technology becomes
more and more sophisticated.
The foundation for this is the distributed ledger concept built
on blockchain technology. Now in its sixth generation, today
blockchain is capable of enabling hundreds of thousands of
transactions to be completed every second – compared to around 20
transactions per second when it when it first came into being 20
years ago.
And it can do this in a more secure way and with less cost and
friction than traditional payments typically undertaken through
banks and clearing houses and the SWIFT system.
It’s a concept that central banks, regulators and policy
makers are taking extremely seriously too, with the Hong Kong
Monetary Authority as well as regulators such as the SEC, FinMa,
MiCA and BaFin all creating clear frameworks for digital
assets.
With those regulatory frameworks in place, access to digital
currencies and assets is no longer reserved for institutional
investors – the retail market has access now too.
To put that in context, the World Economic Forum estimates that
the global value of digital assets in circulation will reach $24
trillion by 2027 – or in other words, 10% of total global GDP will
be stored on blockchain in the next five years.
It’s a major shift in how economies approach trade and
financial transactions and China is way ahead of the game.
It announced its commitment to test and launch its own Digital
RMB just over two years ago and this year, an app was launched to
enable anyone in 23 pilot cities across China to access and use the
digital currency. China’s Central Bank’s digital wallet is
one of the fastest-growing apps in China currently with 261 million
individual users having set up e-CNY wallets so far and $13.78
billion worth of transactions having been made using the digital
currency.
But China is not on its own. Testing and piloting is ramping up
across the central bank landscape, and the Digital US Dollar and
Digital Euro are also nearly reality.
This has repercussions for international investing and trading,
of course, particularly in terms of how different digital
currencies and blockchains interact with each other. To that end,
we are beginning to see central banks and regulators collaborating
to enable cross border digital asset exchange.
Key role
So why is this significant for IFCs like Jersey?
Fundamentally, the critical issue at the heart of the future
success of global digital asset adoption is going to lie in the
ability for digital assets to be exchanged across borders and
different blockchain systems.
IFCs like Jersey are experts in enabling capital to be
channelled securely and put to work where it is needed most. They
have the expertise and experience to understand how cross-border
transactions work, and they have the global connectivity to
complement and support the major shift to digital platforms.
China specifically has some major cross-border investment
initiatives under way where digital assets could play a key role.
The Belt and Road project, for example, continues to touch the
Middle East, Africa and Europe but has shifted from an
infrastructure to a digital – encompassing areas such as payments,
logistics and back-office services.
IFCs that can complement and support outbound and inbound
digital asset transactions with China in areas like this have the
potential to play a key role in the development of digital assets
globally.
Second, IFCs like Jersey are specialists in regulation, and
regulation is going to be pivotal as the world shifts to a digital
assets-first mindset. The keyword here is ‘balance’ -
regulation needs to be robust enough to ensure trust can be built
to support mass adoption, whilst it also needs to be flexible
enough to not stifle innovation.
This is right in the sweet spot for IFCs, which have a huge
amount of experience in navigating shifts in international
regulation and compliance.
Jersey early on established itself as a crypto-friendly
jurisdiction when the islands regulator, the Jersey Financial
Services Commission (JFSC), approved the launch of the world’s
first regulated Bitcoin investment fund, GABI Plc in 2017. Jersey
was also one of the first jurisdictions to adopt a regulatory
regime for virtual currencies.
Today, Jersey is recognised as a leading centre in term of
governance, substance and oversight, recognised by global
authorities for the standard of its regulatory regime. This is
reflected in Jersey’s approach to token launches. While some
regulators have prohibited them entirely, and others have given
carte blanche to almost any token promoter, the JFSC has recognised
there is a middle ground; token generating events with proper
substance, backed by a credible promoter. It’s a good example
of regulatory balance in action.
Third, IFCs are often hotbeds for digital innovation in their
own right, offering sandbox environments and incentives to
encourage fintech development.
Jersey has world leading network infrastructure, including
independently verified fastest broadband speeds in the world and
100% gigabit fibre broadband penetration, and a workforce of more
than 13,500 people in financial services and 3,000 people in the
digital sector. In 2017, ‘Sandbox Jersey’ was launched in
recognition that Jersey’s digital infrastructure, coupled with
its access to a well-established finance industry and the support
of an independent government and robust regulator, made Jersey an
ideal testbed for fintechs. Today, Sandbox Jersey helps develop
fintech in a controlled environment and, as a part of the scheme,
the JFSC helps to establish the right environment for companies to
bring fintech products and services to the market.
Jersey’s digital aspiration is to be “the easiest
international finance center to do business with remotely in a
digital world”, with ambitions to accelerate growth in its
finance industry by being at the forefront of digital technologies.
It is delivering this through close collaboration across the
finance industry, Digital Jersey, Government and the JFSC to
promote the adoption of fintech.
With this in mind, earlier in 2022, Jersey Finance refreshed its
fintech strategy to focus on enhancing client
experience and delivering efficiencies, by applying tech to bolster
compliance and risk, improve productivity, and enhance interaction
within financial ecosystems.
These ambitions as an IFC are quite clearly aligned to the needs
of the digital assets space as it develops in a cross-border
context.
Fourth, IFCs have developed deep expertise in the sustainable
finance space, an area that is intertwined with fintech innovation;
fintech plays a substantial role in the growth of sustainable
finance while sustainable finance is accelerating innovation in
fintech. Notably, Jersey Finance launched a long-term strategy and
vision in 2021 aimed at setting the Island on a path to being the
leading sustainable IFC in the markets it serves by 2030.
Jersey is already harnessing the cross-fertilisation of its
digital and financial services sectors to develop innovative
solutions in diverse areas such as impact measurement, supply chain
traceability and blockchain-secured carbon sequestration.
Digital assets will likely play a central part in China’s
endeavours to meet its carbon neutral targets by 2060, an objective
that will require significant FDI. A lot of that will be driven by
digitisation, including financing through digital currency.
There’s no doubt that Asia is moving rapidly towards a
future built on an ability to transact through digital assets and
the repercussions of this globally are significant. For a smart IFC
like Jersey that is agile, nimble and committed to fintech
innovation, coupled with its long-track record supporting clients
in Hong Kong SAR and mainland China, there is a real opportunity to
add value and support the digital asset revolution in Asia with a
European home as it moves into a cross border space.
This article was first published in the Britain in Hong Kong, British Chamber Magazine:
The Future of Fintech (September – October 2022, Issue 80).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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