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Notes on the HK protests – What’s different from 2014

Vastly different. History never repeats because history happens. Occupy 3.0 can’t be the same as Occupy 2.0, because Occupy 2.0 happened.

The big differences….

People are simply not as angry or upset as they were in 2014. The economy is picking up. Rents aren’t totally crazy. It’s not great, but you don’t have the level of frustration that you had in 2014.

The Chief Executive is not that unpopular. One problem that the previous CE had was that the pro-establishment people never liked or trusted him, and when the pan-democrats turned against him, he had no one. The current CE has the very strong backing of the pro-establishment camp.

You have large segments of the Hong Kong population that were fed up with Occupy 2.0 and can be expected to be against Occupy 3.0. The particularly segment are working class blue-collar people, bus drivers, construction workers, taxi drivers, policemen. These people are people that would vote for Trump if they were in the US. The thing about this group of people is that they are doing economically quite well. During Occupy, this group of people were not mobilized until late in the day, whereas they provide “silent majority” support for the government.

The students are leaderless. Occupy 2.0 were lead by two student groups. Scholasticism under Joshua Wong and the HK Federation of Students. Neither group exists now, because after Occupy, they had vicious internal fights that lead to them collapsing. Also the extradition bill is not something that arouses a huge amount of passion on students. It’s a “please sign this petition to save the whales” as supposed to “I will stand in front of the tank.”

The people that tried to organize this set of protests are the pan-democrats. These are middle aged sensible people with kids, jobs and mortgages. The trouble with having middle aged sensible people leading a demonstration is that they very quickly lose control to “angry youth” that start throwing bottles and trying to storm Legco. A lot of motivation for “angry youth” is rebellion, but they aren’t going to take orders from the sensible pan-democrats any more than from Carrie Lam.

The police have a lot better tactics. The big one is that the police have discovered that smart phones exist. In 2014, the demonstrators were able to coordinate using smart phones and chat groups, and the police had no idea that they were there. This time the police were monitoring the chat groups. Encryption and secret chats don’t work, because the purpose of the group is to broadcast a message getting thousands of people to come to location X, and if you limit the people that read, you defeat the purpose. Also, in 2014, the police had static formations (and I suspect that this comes from the 1967 riots). This time they used the static locations as base areas, but they were willing to move forward. Also, you had tons of reporters following the police, which helps with the media war, and some of those reporters were very pro-police. In the meeting of a police action, it’s easy to get really graphic pictures, but if you have sympathetic reporters also taking pictures, you get them from a different angle.

Notes on the Hong Kong protests

Will be posting questions from quora.

Not being able to register for fintech/blockchain conferences because I do fintech/blockchain

OK. I have a reputation for being grumpy.  Let me explain why.

I’m trying to attend a blockchain conference (it actually doesn’t matter which one.)

Unfortunately, they only take eventbrite/paypal.  It turns out that I do not have a Hong Kong credit card, because all the banks canceled my personal accounts because I do bitcoin.  I do have a US bank account and debit card, but paypal can’t deal with the concept of a HK resident with a US bank account.

Also while I’m doing this, google realizes that I’m interested in fintech, so I get all these ads from banks talking about the stuff they are doing with fintech, and these happen to exactly the same banks that won’t open accounts for me.  It’s really annoying to get an ad, that makes you angry, and having no way of writing back “this ad makes me even more angry, so please stop sending them.”

So I’m spending two or three hours trying to get blockchain.  So when I start going to the conferences and dealing with VC’s and blockchain people, I’m often in a really bad mood.  Having people talk about the wonderful future sometime gets annoying when you talk about the annoying present.

Also the main goal of customer service in that situation is to “deflect anger.”  It turns out that I know why the systems are they way they are.  I can tell you how the payment systems work, so explaining the system doesn’t help.

STO’s – Negotiable / Non-negotiable

I’ve been unsuccessfully trying to do STO’s for a few years now.  So I’ve got quite a bit of experience on what doesn’t work.  One way I think about myself is that I’m like one of the Wright Brothers in 1899.  I don’t have yet the gasoline engine that will let me build an airplane, but I’ve been building gliders and wind tunnels.  What I’m trying to build right now is a “virtual box” that you can put stuff in.

So let me talk about the two types of STO’s and the two legal structures for them.  So suppose a thief breaks into my house and steals some paper from my safe.  They could steal cash, or they could steal bank statements.  If they steal cash, then the cash is gone.  If they steal my bank statements, then that’s annoying but the thief doesn’t get very far.

So that results in two type of tokens with two types of legal structures.  For non-negotiable tokens, you’d want a GP/LP structure with the tokens corresponding to LP shares, and with the GP’s to have power to order forced transfers.  For negotiable tokens, you’d want a trust with the holders of the tokens being the beneficiaries.  These turn out to be radically different structures, but cash and bank statements are both paper, but they are very different types of paper.

I’m more interested in non-negotiable tokens, because my interest it to raise money for small companies and for BRI projects.  Once you deal with stocks and bonds, it is going to be extraordinarily difficult to get negotiable tokens working, not so much because the tech is hard, but because the government really, really, really does not want negotiable tokens for stocks and bonds to move money, and they’ve spent decades making sure it doesn’t happen.  If you try to move stocks and bonds into a negotiable box, then the government will invalidate the transfer.  Yeah, I can try to fight them, but why bother, I’d just use bitcoin.

Negotiable tokens might be quite useful for moving art and maybe real estate.  Art is cool.  I look at things from a physicist’s eye.  So when I look at a HK cash bill or coin, I see art.  When I look at a painting, I see money.  It turns out that they are the same thing for the same reasons.  If you are a famous artist in this part of the world, you are basically printing money, because one of the main uses of art is to store and move money quietly.  The difference between art and real estate on the one hand and stocks and bonds on the other is that you can “possess” art and real estate.  I can take a piece of art and hang it somewhere, and if I’m setting in the apartment, then I’m possessing the property.  I can’t possess stocks and bonds.  If the government says that I don’t own the stocks and bonds, then I don’t own the stocks and bonds.  Once you try to STO art, I’m pretty sure that the government will try to crack down on negotiable tokens, but in the end I think they’ll fail.

Critique of STO platforms – Not making old mistakes

Now that there interesting in STO projects, I’m seeing a lot of people looking for services for STO’s, and some of them are making the same mistakes that I’ve seen in the past.  It’s natural to make the same mistakes, because there are some things that seem simple and logical, but just don’t work.

A lot of my thinking on STO platforms have to do with two sets of failed attempts:

  • Otonomos – This was a failed effort to put corporate filings on the blockchain.  The people involved were motivated and very will meaning, and I have personal experience as a client.  But it turned out to be a mess, and I had to spend a lot of time and energy unwinding the mess that it caused me, but it was good experience because I learned what doesn’t work.
  • Asset tokenization platforms – There are a lot of asset tokenization platforms that raised money via ICO.  Right now, it looks like the one that is heading in the right direction is polymath.

The fact that I end up spending a lot of time with tech that doesn’t work is useful stuff, and I don’t mind too much.  A few years back, the Company Registry had a pretty nifty interface for entering in corporate filings.  It turned out that after six months, the CR found out that their system had giving them garbage, and I had to refile.

So the natural effort is to provide a single end-to-end solution that’s easy to use and integrates with everything and saves time and energy.

Here is why it doesn’t work…

  • Vendor lock-in.  What happens if the platform goes down, or is abandoned?  In my case, Otonomos went out of business, and then I had to spend the effort finding another corporate filings company, and do transfers.  Also, because I’m busy, it turns out that my filings were late, so I had to pay a lot of late fees.  One of the situations is that if I could keep track of my filings, I wouldn’t need to pay a vendor to do it.
  • The importance of human beings – A lot of these services try to remove the human element.  However, with financial services (even minimal ones) you want to increase the human element.  I’m now using a corporate filing service (ask me which one if you are interested) that consists of one human being during everything by hand with paper.  The important thing about having a human being is that he knows me, and knows when to ping me that something important needs to be done.
  • System integration.  Having an integrated system with an “easy to use” front end, in fact causes more problems.  The problem is that people have existing systems, and it turns out that trying to integrate your new system with old business practices causes more time and effort than anything this can possibly save.  For example, Otonomos had a corporate dashboard which allows the board of directors to do resolutions online.  Great.  What happens if you have one director that just refuses to do that?  It turns out that even getting someone to fill out a form or log in is not a minor thing.  And if you *require* people to use an interface, then it’s impossible.
  • Lack of flexibility – The cool thing about paper is that it’s flexible.  If I have to do something different, I take a pen and write something.  Most every system that I’ve seen tries to optimize a single workflow, but if you have to do something outside that work flow then you are gone.  For example, Otonomous couldn’t handle Chinese company names.  Opps

One important thing about security tokens is that the “thing” that is being traded is not the actual object being traded.  Suppose I give you a bar of gold.  You now possess the thing of value.  Now suppose I give you the keys to my apartment.  You have possess the keys, but you don’t possess my apartment.  If I hand you a bar of gold, I just hand you a bar of gold.  Now if I’m handing you keys to my apartment, since the thing that I’m giving you is separate from the key, I can and should be able to rekey my apartment.

If someone hits me over the head, and takes the bar of gold in my bag, they win.  If someone hits me over the head, and they take the keys to my apartment, I’ll just immediately rekey the apartment.  If I can’t rekey the apartment, or if I can’t just throw out the old lock and get a new security system, then I have a problem.

So one thing about STO’s that makes it different from cryptocurrencies and ICO’s, is that any platform that I put the STO’s on are like the security system for an apartment.  I should be able to move everything off system A, and completely reissue the tokens, and then everything goes forward.

The other mistake that people are making is that they aren’t generalizing the tech.  Now suppose I want to type up a private placement memorandum.  I just bring up Microsoft Word and start typing.  If I want to calculate stuff, I just use Excel.  The thing is that I have a program that can *only* type PPM’s or calculate cap tables, this is sort of useless.  I might have a PPM that I want to fix in some random way, and I can do this with Word.  If it turns out that someone needs to print something, I can do it.

Now as far as *why* people are doing it.  It’s because of business model.  Every VC wants to become the next youtube or google.  The problem is that for anything business critical, you don’t want to get locked into youtube, and you can’t do everything on google.  The trouble is that if you decentralize, then it becomes hard to figure out where the toll booth is.

Why regulatory sandboxes make no sense in Hong Kong

tl:dr – It doesn’t make any sense to have a sandbox, when you are playing on a beach.

One thing that I find fascinating is that there is this obsession in Hong Kong with regulatory sandboxes, when they in fact make absolutely no sense in Hong Kong.

So let’s start with where this obsession comes from, and this comes with British colonialism.  One of the problems with the HK bureaucracy is that it has a “colonial mindset.”  In the colonial era, all of the important decisions were made in London, and the job of the HK government was to carry out directives that were made elsewhere.  The unique thing about the Hong Kong government is that the colonial institutions and mindset survive to this day.  The Hong Kong government is simply incapable of doing anything new and original, and so when they talk about innovation, they have to just copy somewhere else.  And so when Mother England comes up with a “regulatory sandbox” the natural reaction is to try to set one up in Hong Kong.

But Hong Kong is just different from London and Singapore  One of the difficulties that the English had setting up a bureaucracy in Hong Kong was that they were just overwhelmed in the 1950’s.  In the 1940’s, the British figured that they would be turning Hong Kong over to Chiang Kai-Shek after the war.  By the time it turned out that this was not happening, they had to deal with millions of refugees from the Mainland.  The response on the colonial government was to just figure out what they could regulate, and this minimal the role of the government out of necessity.  By a happy accident, this resulted in a optimal balance between order and chaos, and all of this was frozen by the Sino-British Joint Declaration in 1984 and the Basic Law of Hong Kong.

So the net result for financial regulation, is that in London and Singapore, you start by regulating *everything* and then deregulating certain parts.  So you absolutely *need* a regulatory sandbox because everything is regulated.  In Hong Kong, everything is not regulated, so you don’t need a sandbox.

Once you see this, then it becomes obvious how crazy the SFC’s proposals on using a regulatory sandbox to regulate crypto-exchanges is.  So crypto-exchanges are not regulated *and legally cannot be regulated* under HK law.  So you create a sandbox so that the cryptoexchanges can be voluntarily regulated, and then you provide exceptions to reduce regulations that they can opt-out of regulations that they voluntarily opted-in.  You provide an exception to regulations that are exceptions to non-regulation.


The other thing is that there is a huge amount of paternalism here.  We want to protect the consumer.  This assumes that the regulators understand the consumer which isn’t a good assumption.  People ask, who is going to protect grandmothers from getting ripped off, and my answer is that a grandmother’s grandkids are going to protect her better than any regulator can.

Quick comments on SFC proposals

The SFC made some proposals on bitcoin regulation in Hong Kong, and it’s been making quite a bit of news. They are trying to do the right things, but I think their approach is going to lead to more confusion and that they are going down the wrong path.

Before going into the proposals, it’s best to read the keynote speech from Ashley Alder, CEO of the SFC.

The most important paragraph that Alder mentions is this….

First of all, it is important to understand that some crypto markets are not legally capable of being regulated by the SFC if the virtual assets involved fall outside the legal definition in Hong Kong of “securities” or “futures contracts”

Those are his words, not mine.  The SFC simply does not have the legal authority to regulate things that are not securites or futures contracts.  But much of the speech is devoted to his view that certain things should be regulated.  The result is that much of the “conceptual framework” for regulation involves the SFC trying to regulate things that they have no legal authority to regulate.  And what you have is a total mess.

Again to quote Alder.

We have seen some of the world’s largest platforms set up in Hong Kong. However, unlike crypto asset funds, a significant part of their activities do not yet fall within the regulatory perimeter of the SFC or any other local regulator.
Nevertheless, given the serious investor protection issues at stake, we see a real need to examine how the SFC might regulate these platforms under our existing legal powers, but without resorting to new legislation. This is the part that requires us to be creative.

To put it in plain English, it’s called the “Securities and Futures Commission”.   They simply cannot regulate anything that’s not a “securities” or “future”.  To the extend that cryptocurrencies are not securities or futures, they cannot be regulated by the SFC.  They think that certain things should be regulated, but they don’t have to legal power to regulate them, so they want to get creative.

Also let me point out that the SFC here is working with cross-purposes with the rest of the Hong Kong government and possibly at cross purposes with Beijing.  Legislation in Hong Kong begins with a proposal by the HK government, and this usually begins with a policy address by the Chief Executive.  Also the legislative process is set up to effectively give Beijing a veto on any new legislation.  There is no mention of new legislation in Carrie Lam’s policy address, so this means no new legislation for this year.

Now if you regard the SFC’s statements as a “request for discussion” or “first draft” then they aren’t necessarily a bad thing.  But as concrete proposals, I think they are completely unworkable.

Part of the problem is that what the SFC is doing is that they are talking with the other securities regulators, coming up with a common approach and then implementing them in their own jurisdictions.  However, this is a terrible approach and simply will not work.  The problem is that different places are different.  The regulatory approach that the SFC is taking is that of London or Singapore, but this ignores the fact that Hong Kong is simply not London or Singapore.  In particular, London and Singapore are more “administrative states” in which the political authorities have a lot of power.

If you try to take this approach in Hong Kong, you run straight into the Basic Law and “one country, two systems” in which you have a constitution structure that requires limited government.  So what the SFC seems to be doing which is to copy London’s regulations in Hong Kong, simply will not work and is dead on arrival.

The basic problem here is that the SFC is putting the cart before the horse.  They’ve decided that certain things need to be done, and are trying to do them.  But they don’t ask why these things should be done, and they are making decisions that they have no authority to make, and that have been made in other places.

Hong Kong is unique in that it is the only place in the world where “capitalism” and “free enterprise” are written into the constitutional law.  The Basic Law of Hong Kong was written with the idea that it’s a very bad thing to take how things are done in Beijing or Shanghai and copy them in Hong Kong.  I think it’s equally bad to take how things are doing in London or Singapore and copy them in Hong Kong.

My own feeling is that the Basic Law provides an excellent foundation for deciding how things are to be done in Hong Kong, and so that when you put together a regulatory structure for Hong Kong, you absolutely have to start with the principles from the Basic Law and work outward, rather than by starting with “best practices” from the rest of the world.  It’s not as if you have much choice in the matter.

So if you take the approach that the SFC is taking of trying to creatively work around the legal framework, you’ll cause a lot more confusion. So over the next few weeks, I’ll try to prepare two documents.  The first is a document on what authority the SFC does and does not have.  The second is an alternative proposal for a regulatory framework.  I think that the proposal by the SFC will not work and is dead on arrival.  However, as a first draft to stimulate discussion, it’s useful.

So as far as the problems that the SFC proposal has:

  • First, the Securities and Futures Commission can only regulate “securities” and “futures”.  To dump everything into “virtual assets” just mixes regulated “securities” and “futures” with everything else that is unregulated will lead to a mess.
  • Second, I wish people in Hong Kong would stop talking about “regulatory sandboxes”.  “Regulatory sandboxes” make absolutely no sense in Hong Kong, and it’s a matter of taking London/Singapore rules and putting them were they are not necessary.  Why have a sandbox when you can play on a beach?
  • Third, the focus is totally wrong.  The SFC simply should not spend it’s time thinking about how to regulate things that it has no business regulating.  What the SFC should focus on is the question of how do you allow existing regulated entities in Hong Kong participate in the world of cryptocurrencies?

So for example rather than focusing on standards for cryptocurrency exchanges (which is a waste of time because they have no legal authority to regulate cryptocurrency exchanges) the question that the SFC should focus on is that if a securities broker wants to offer cryptocurrencies to their clients, on what exchanges would they be allowed to do so?

Anyway, I’m in the process of drafting two documents.  The first describes what the SFC legally can and can’t do.  The second describes what I think will work as a regulatory framework.


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