Skip to content

Presentation on HK and global regulation of ICO’s and a report on blockchain

I’ve done some powerpoints on the regulation of ICO’s/cryptocurrencies in HK and globally

https://drive.google.com/open?id=1xHX_qHknrcRCmJx1LyyhXXuGoyesNF1PkkDIl-iWQdY

https://drive.google.com/open?id=1X19dFRpC4IfVAgrsvmMDuTQXVlTj_F92jVPTUcM8SiQ

And a discussion of blockchain as of 10/2017

https://drive.google.com/open?id=1Qvt0zD-LIVsUdwUN2_mH6yRubLDa_w7Dg96cEBngIaQ

 

Advertisements

Fawlty Towers = My experience with the HK bureaucracy

If you want to understand how I interact with the HK bureaucracy, watch the episode of Fawlty Towers called Waldorf Salad.  I’m the loud mouthed American.

Banks and fintechs what HKMA is getting wrong

http://www.hkma.gov.hk/eng/key-information/speech-speakers/ntlchan/20170929-1.shtml

One of the nice things about the speech is that the head of the HKMA is being extremely defensive which means that someone is screaming at him.  The point that he is making is that banks and fintechs are complementary.  They could be made complemetary, but right now banks are looking at being totally disrupted by fintechs.  Here is the key paragraph where he gets everything wrong.

The paradigm of these newly emerged platforms is that it is highly “customer-centric”, meaning they design everything to provide what the customers want, taking care of many practical and life-style needs of customers. However, when it comes to finance, tech companies need to realise and accept that they have to earn the trust and confidence of customers if they wish to handle their savings and investments. On the other hand, banks need to appreciate and accept that they must revamp the way they offer financial services to their customers.

The problem here is that *no one trusts banks, they trust governments*.  I put my money into a nice safe bank account, because I know that if the bank does something really stupid with my money, that they’ll get a bailout from the government.  Now governments hate the fact that they are forced to bailout the banks, and people hate the fact that their government is forced to bailout the banks, which is why banks have such a big image problem.

1. People don’t trust banks.  People hate banks and trust tech companies a lot more than banks.  People trust governments. Let me ask you a question.  Suppose we live in a world in which there are no government bailouts or oversight.  Suppose the company that holds your money gets hacked or collapses because of mismanagement.  Let’s also assume that there is no government oversight, and if the management wants to spend your money on cocaine and prostitutes, they can.  Who would you put money with?  Microsoft, Google, or Alibaba on one hand or HSBC, Goldman-Sachs, or JPMorgan on the other.

Let’s ask another question.  Suppose you give your money to someone, and they can do *anything* they want with it (including buying expensive cars and houses, and doing things with cocaine and prostitutes).  Under those conditions, who do you give your money to?  A Silicon Valley geek or a Wall Street investment banker.

This poses a lot of regulatory challenges.  Because people trust governments and not banks, if you can create regulatory standards by which tech companies can compete against banks, you kill the only reason that people put money into a bank.  At that point you might try to have the banks use their political connections to keep their monopolies.  They’d love to do that, but they can’t anymore.

2. It’s insane to talk about customer experience when you treat your customers like potential terrorist or drug pushers.  Banks don’t get it.  It’s not about a better user interface or better mobile apps. I don’t care about mobile.  I care about the fact that the bank thinks I’m a drug pusher, and that they are closing the accounts of anyone that is doing anything remotely associated with bitcoin.

Banks seem to think that the only reason that they can’t engage with young people is because they need to get more hip and working with social media.  But they are missing the big picture.  Young people today face the absolute worst economy since the great depression, and it’s because the big banks screwed up the world financial system.  People all around the world are desperate for jobs, and banks can’t seem to come up with financial solutions that take into account how terrible the situation is.  What banks *should* do is to take a lot of the money that they have and invest it in companies that create jobs and stable lives for young people, but the concept of lending out money to small companies seems to be beyond the ability of most banks.

The basic problem is that the business model of commercial banks just doesn’t work.  The standard model is to get a young person in debt with credit cards and mortgages.  The problem with this model is that it assumes that the young person somehow can get a stable job which they can use to pay for the debt, and they can’t.

3.  The freaking business model does not work.  You are a bank before 2008.  How do you make money?  Well you get people to put money into the bank at zero percent, and you lend it out at six percent.  OK.  Except that real interest rates are now zero, and you can’t make money from interest spread.  So what’s your business model?  This is the funny thing.  If you put Microsoft down, and ask them what they do, it’s to make software.  Now ask a bank, “what’s your business?”  Loaning out money?  Cash management?  Maybe, but how then does your business structure support your business process.

You ask why the banks have so much problem with technology.  It’s because it turns out that technology is really, really expensive.  You have to put massive amounts of money into stuff that doesn’t pay back immediate money.  If you are in a situation where your margins are getting squeezed, you just don’t have the money to but into tech, and your technical infrastructure gets worse and worse.  Now in order to stay in business, the banks need new sources of money (ironic isn’t it) so that they can build out their tech systems.  Those sources of money are available, but then you wonder what the banks provide.

4.  The rats are jumping ship if they aren’t getting pushed.  You look at the lawyers and the big accounting firms.  They are jumping into the arms of ICO’s and cryptocurrencies, because that’s were the money is.  Also people sort of assume that the people working in fintechs are socially-maladjusted computer geeks that don’t have the deep financial knowledge of processes in the banks.

If you look at a lot of people working in fintechs, you’ll find a lot of people that were fired by the traditional banks, and more often than not, you’ll find that they were fired for being a bit too outspoken and impatient.  There is a nice quote from Lyndon Johnson, saying I’d rather have people in the tent urinating out then people outside the tent urinating in.  Well, by pushing out the most visionary and imaginative people out of the bank, you now have a big problem.

Let me give you a really simple example of the type of stuff that makes me go crazy.  Where’s my office?  It turns out that I have a home base at home, but I spend most of my time in the coffee houses of Central.  I have my laptop and my mobile phone, and I spend practically all of my time going from meeting to meeting.  So just imagine me working in the bank, and telling my boss, you know, maybe we can provide a better customer experience if we go to their office rather than making them come to ours.  Also, maybe if we go to people’s offices, we can understand what their real needs are.  So will you let me work from a coffee house?  Yeah right……

What are the chances that I could write this blog if I was working for a major bank…..

4.  Rent seeking models don’t work.  So here is the way that big companies used to be able to keep their stuff.  You make friends with rich and powerful people and then have them pass laws that give you a legal monopoly on things.  Sorry that’s not going to work.  The problem that the banks have is that the rich and powerful people in the world are as fed up with the banks as everyone else is.

Also the other thing is that the banks aren’t that rich.  Banks look like they have a lot of money, but in fact they are using other people’s money.  Once it turns out that you can push the banks out and go directly to the money, they have a problem.  The thing about ICO’s is that you have eye-popping amount of money that are moving outside of the banking system.  Now in the old world, the banks could pay off politicians, lawyers, accountants, and other service providers to keep their monopoly.  But in the new world it turns out that the people running the ICO’s have enough money to pay off politicians, lawyers, accountants, and other service providers.

So banks have a *huge* political problem.  Their business model doesn’t work.  No one trusts them.  People are putting their money in other things.  They no longer have the money and and political power to keep their monopolies, and all of the sharks are smelling blood in the water, and the rats are deserting the ship because it pays better.

But I like a challenge.  I’m a fan of alternative history, and I can imagine an alternative reality, where I’m a junior managing director at a major investment bank, and I’m sitting in some office in Central brainstorming with my colleagues, and as we go through the situation we figure out that there is this one key strategy or this really big idea that will kill all of the fintechs, and at that point I start sending out memos, and organizing meetings for the “BIG IDEA”.  And that big idea is ……

Oh wait….  I just realized.  I’m not inside the tent urinating out.  I’m in the outside of the tent urinating in….

Oh well….  Good luck!!!!!

Context on the structure of HK government

Hong Kong is pretty unique in the world that most of the power structures that the British put in have survived.  A lot of this analysis is based on the ideas of Antonio Gramsci.

If you want to understand Hong Kong politics, you have to start with British colonial policy.  The British needed to run an Empire of hundreds of millions of people with a few tens of thousands of immigrants and officials.

What they came up with is start with “divide and rule.”  They divided society into sectors so that no one would be powerful enough to kick them out.  Also they found a group of loyal local supporters who they gave power to through “indirect rule”.  They made sure that local groups and government agencies couldn’t talk to each other, and that all communications went through their loyal supporters.  They made all of the critical decisions were made in London, and passed down to their local administrators.

If you want to read the book on British colonialism, read

https://en.wikipedia.org/wiki/Frederick_Lugard,_1st_Baron_Lugard

In every other former British colony what happened was that in the end, the nightmare of the British (i.e. everyone would start to communicate with each other and kick out the British) ended up exactly what happened.  Whoever kicked out the British were able to develop the horizontal communications networks that the British tried to prevent, and they ended up taking over.

Hong Kong is absolutely unique because the power structures that the British created were kept after 1997.  The colonial power structure explains why Hong Kong has such a difficult time with technology.  Technology requires that you have very deep horizontal communications.  The computer nerds have to work with the MBA jocks.  But the entire structure of HK society is designed to prevent these horizontal networks from existing.

It also explains why HK works so well as an international finance center.  You have the “global society” which is very connected with the global financial community.  It turns out for example, that a computer nerd in Hong Kong would be more likely to have a link to an MBA in London or Toronto than someone locally in Hong Kong.

So what are the problems:

  1. The structure was designed so that all of the key decisions were made in London.   The trouble is that no one (including Beijing) wants to have Beijing run Hong Kong.  So what you then have is a power vacuum in which no one is making decisions.  One problem with HK officials is that you’ll find that they are incapable of actually “thinking”.  This was intentional, because the system was designed so that the people in HK would just execute, and all of the thinking is done in London.
  2. You end up with a “gatekeeper” group that then uses the system for their own purposes.  Because London couldn’t run everything, the tycoons ended up with a lot of power since they were the connection between local society.  However, what ended up happening is that once the British left, the tycoons used their bridge role for their own interests.
  3. The system doesn’t reproduce.  So what happened is that if you were ambitious, the British would tap you on the shoulder, send you to school in London, and you’d run the Empire.  Except that there is no longer an Empire.  What this means is that the system was specifically designed to make sure that the “best and the brightest” in Hong Kong would leave HK.

It’s amazing that the system ran for as long as it did, but what finally caused problems was the global financial crisis, and that’s blown up governance structures all over the world.

I should point out that the idea of law was very key for running the Empire.  The idea of civilization and law gave the British excuses to do what they were doing, and mastery of the law involved understanding English and mastering obscure bits of legal trivia, and it put political power into the hands of people that could speak English.  This had the effect of keeping power in the Europeans, but because it was set up so that if you were someone that could be a danger to the system but didn’t look European, they could pull you in.

So where do I fit in?  So the key thing is that I’m not British.  I’m an American-born Chinese.  It turns out that the United States has managed to create an empire that’s been far more successful than anything the British came up with, and most of my education has been to help run the American empire.  The key reason that the American empire has been so successful is that it relies on convince people of a set of ideas that happen to be aligned with US national interests, and so you can have the world send you stuff without having to bother with spending money on an army or administrators.

Much of American national power involves being able to control science and technology, so you need to train a group of scientists to build better bombs and toasters, but it turns out that you can’t have mere functionaries, but technical people that can think in terms of politics and policy.  Which is where I come in.  In order to run an empire, you also have to get people to *believe* in the goals of the empire, and that involves very effective propaganda, and that’s where Hollywood comes in.  You put out shows like Star Trek and Superman, and that gets people to believe in the principles of the United Federation of Planets or the Justice League of America.

 

Notes on meeting with FSTB

259ddd7b-dc1e-4f00-8434-a73612d6649c-original.png

Just some notes on the meeting with the FSTB on fintech.  That’s me at the end.

It’s been three years since Occupy Central, and one thing that’s been on my agenda is how to promote democracy.  For me the essence of democracy isn’t protests or even elections, but rather having groups of people sitting around a conference room, exchanging views and trying to solve problems.  To the extend that you can using technology to involve more people in the conversation, and in fact solve problems, this is a good thing.

I often talk too much, so one reason I wrote out everything in advance, was so that I could just keep quiet, and listen to what the government had to say.  One thing that I got out of the meeting was that the government said more or less what I thought they would say, which was reassuring.  I also didn’t get the sense that there was going to be any sudden shifts in policy, which is more good than bad.  Also going into a new environment is always enlightening, and so just watching how people interact with each other can be quite useful.

Just a few notes…..

If you want an entertaining primer into how the HK government works, watch the 1980’s television series “Yes Minister” and “Yes, Prime Minister”.  It turns out that the UK government today works very differently (i.e. watch “Thick of It” for that), but it turns out that Hong Kong government in 2017 works very much like UK government in the 1980’s.

Also, the way these meetings happen with the HK government is that you have one senior official, the official’s assistant, and then two junior people.  The only person that usually talks is the official.  The official’s assistant will often just make minor comments.  The two junior people will say nothing.  It turns out that the people that you want to influence are the two junior people, because if the meeting has any consequences, they will be the people doing the grunt work.  The other thing is that junior people become senior people.  A lot of the things that I want to get done in Hong Kong will take years or decades, and planting seeds in the minds of junior staffers becomes important.

Also before you talk with government officials, you should look at the bureaucratic org chart to see what they do, and what powers they have.  http://www.fstb.gov.hk/en/  FSTB doesn’t have regulatory powers, but it has evolved into a policy think tank for financial services, and also its the mechanism by the government interfaces with the financial services industry in the development of legislation.  One big difference between Hong Kong and the UK, is that the Legislative Council is extremely weak, and so that a lot of the research and policy work that would be done by Parliamentary staffers ends up being done by the civil service.

I’ve been interacting with the HK government enough so that there wasn’t anything surprising, but I did learn a few things listening to what the other fintechs were interested in, but I’ll let them comment on that on their blogs.

The main thing that the Financial Services Treasury Bureau seemed to be interested know out was “what do you want us to do?”.  So part of the context here is that we have a new Chief Executive, and they’ve just now put in a new team.  So the main topic of discussion was FSTB finding out what people wanted, and to actually meet people in the fintech industry.

One other bit of context is that Beijing is pretty clearly going to be more active in Hong Kong affairs over the next few years, but they are trying to figure out what it is that they want to do.  A lot of the stuff that I’m writing is aimed at Beijing.

It turns out that “what do you want us to do?” is a particularly hard question in Hong Kong because of the limited nature of the HK government.  If you were in Singapore or Mainland China, the nature of the conversation would be “I want X, Y, and Z, please give me X, Y, and Z” and then the government would decide whether to give you X, Y, and Z and tell me “We will give you X, half of Y, but Z is out of the question.”  The good and bad thing about the HK government is that because they really don’t have that much power, so it’s often really difficult to figure out what to ask them for.  It’s a lot like going to a restaurant, having a waiter ask you want you would like, and responding with “world peace.”  Much of the meeting consisted of me trying to figure out “what’s on the menu?”

Going into the meeting, I decided to put my main points into a “bureaucrat friendly wish list.”  It turns out that putting something on paper is using because it’s like writing a message in a bottle.  One thing that happened when I was writing my “wish list” was that I know enough about the HK government to know that most of the things that I was asking were outside of the control of either the FSTB or Legco, but part of the purpose in writing it on paper was so that it might go to someone that would find it useful.  Also, a lot of what I was doing was “seed planting.”  Mentioning ideas that may not mature for two to three years.

Much of the reason I wrote the letter was so that I could clarify in my own mind what I wanted from the government.  I started out with a blank piece of paper, wrote down everything that I could think of, and then tried to organize and categorize it into a form that is “bureaucrat friendly.”  At the same time, I didn’t want to go totally crazy, so I left out the parts about starships and galactic colonization.  One reason that I didn’t mention galactic colonization was that this is a ten thousand year project.  One thing that I wanted to do was to fit everything into the political cycle.  Everyone’s jobs will end in five years, so I was thinking about things that could have someone say “great job” in 2023.

There’s was also a large amount of “controlled venting.”  One reason that Occupy exploded three years ago was that everyone was so frustrated that a spark such caused everything to explode. Also, because no one was telling the government how frustrated everyone was, they were caught by surprise.

Writing a letter explaining what frustrated me allowed me to vent some of frustration, even if nothing could be done about it, and it means that FSTB is more aware of what I find annoying even if they can’t do anything about it.

The thing that FSTB seems to be interested in is some high technology project that would create government infrastructure, maybe using blockchain.  They aren’t sure what they want to do, but this is something they are looking for.  The problem is that FSTB doesn’t seem to have budget to do anything, and trying to get government funding for something is really, really difficult even for government officials.  One thing that might be an option is getting money from Mainland China, since they have large pools of cash available for blockchain projects, but that involves a lot of introductions with the Mainland.  Also, everyone among the fintechs seem to think that the grant programs that the HK does for startups are broken, but this seemed to be the job for the Innovation and Technology Bureau to fix.

 

 

 

Letter to HK government on fintech

James H. LAU Jr.
Secretary for Financial Services and the Treasury
Central Government Offices
2 Tim Mei Avenue
Tamar
Hong Kong

The Honourable Charles MOK
Legislative Council Representative – IT Constitutency
Legislative Council Building
Central
Hong Kong

26 September 2017

Greetings:

We deeply appreciate the efforts of the Hong Kong government to solicit views on the development of fintech from a wide variety of sources.

Our company, Bitquant Research Laboratories (Asia) Limited, is a two person financial consultancy which uses advanced technology to promote the development of finance. We are active traders in bitcoin and cryptocurrency and are currently involved in advisory for hedge funds dealing in cryptocurrencies as well as ICO companies. We are also using fintech to promote startup investment in Hong Kong and to facilitate trade with Africa, as part of one belt, one road initiative.

My background consists of astrophysics, finance, and software development. I have a doctorate in computational astrophysics from the University of Texas at Austin, and a bachelors in physics from the Massachusetts Institute of Technology. In addition to several decades of software development experience, I worked at JPMorgan Investment Bank both in New York City and in Hong Kong doing quantitative research and software development, and I left the company three years ago in order to work on revolutionary financial technologies.

I have very recently become eligible for permanent residence in Hong Kong, and I have found that it is only with great and extreme difficulty that I have been able to remain in Hong Kong to run my business, and that I believe that had I not been able to achieve permanent residency this year, and had my children not left home for college, that it would have been impossible for me to continue my business in Hong Kong.

This is especially unfortunate, as I believe that Hong Kong faces a critical movement in its social and economic development. When the Sino-British Joint Declaration was signed in 1984, it was assumed that Hong Kong could function with no basic changes between then and 2047. However, Hong Kong is facing major challenges due to the evolution of the financial system in the aftermath of the global financial crisis and the rise of Mainland China, and it is impossible for freeze Hong Kong as it was in 1984. It it my view that we are in the middle of a massive global transformation as the global financial system transforms from an old obsolete system to a new vibrant out. For Hong Kong to thrive in the new era of finance it must exercise leadership in the development of the capitalist system both in the People’s Republic of China and globally.

Fortunately, we believe that Hong Kong provides an excellent legal and regulatory environment for meeting these challenges, and we do not advocate any major regulatory changes. To the contrary, we believe that the government must avoid creating new regulations and restrictions which would be disadvantageous to small innovative companies such as ours.

In particular, we are strongly opposed to any new regulatory requirements and conditions that would limit the ability of startups to conduct new financial businesses, to move capital and currency into and out of Hong Kong without restriction, and to experiment with new forms of capital raising. We believe that imposing such regulations would be contrary to the spirit and the letter of Basic Law and the detrimental to the capitalist system of Hong Kong within “one country, two systems” policy. We believe that global financial regulatory policy does not adequately consider the impact of those policies on small business in Hong Kong, and urge the Hong Kong government to continue policies which promote the free flow of capital and the development of entrepreneurship in Hong Kong.

However, good regulations are only one factor in creating a vibrant fintech ecosystem. The difficulties that Hong Kong has had in developing a fintech ecosystem arises not from the legal and regulatory environment but from other factors, and we are deeply concerned that without addressing other factors, that Hong Kong will be unable to play a global leadership role in fintech. We have therefore identified four areas which we believe that the Hong Kong government should address.

1. Address the small business bank account crisis by creating alternatives with new financial technology such as new payment systems – The most critical difficulty that small businesses face in Hong Kong is the inability to open bank accounts. We appreciate the efforts of the Hong Kong government to address this issue, but we believe that the government has done as much as it can using current approaches, and so we believe that the focus should not be on helping small businesses open bank accounts, but use fintech to render the opening of bank accounts unnecessary.

We therefore recommend that the Hong Kong government maintain a positive attitude toward the development of technology intended to bypass and replace the need for a small business in Hong Kong to open a bank accounts. This would include promoting the use of stored value facilities for cash management, integrating domestic payment systems with licensed securities brokers, developing settlement tokens pegged to the Hong Kong dollar or offshore Chinese yuan, and working with offshore banks in newly emerging commercial banking centers such as Taiwan to develop balanced AML/KYC policies while encouraging the international use of the Hong Kong dollar and offshore Chinese yuan.

2. Address deficiencies in visa extension and change of status policies which discourage existing visa holders from creating new startup businesses – We have found the process for granting immigration extensions and change of status for persons with existing visas who wish to open fintech businesses to be extremely difficult, and believe that current visa extension and change of status policies very strongly discourage people from leaving jobs in traditional banking to create fintech startups.

We do not believe that any policy changes are necessary in the granting of new visas, but we strongly recommend that the Immigration Department change its policies regarding extension of and change of status for existing visa holders to business investment visa to focus on the applicant rather than the business, and view as favourable factors for granting change of status previous work experience, previous educational attainment, previous income, and large personal savings. We believe the rating system used by the Quality Migrant Admission Scheme can be adapted to determine the length and type of extension available to entrepreneurs who are seeking visa extensions or change of status.

3. Reduce rent using new technology and by integrating fintech with urban planning and infrastructure projects such as the Macau bridge and the high speed rail – The most serious burden to the innovation in Hong Kong is the high level of rent, which limits the amount of capital available for innovation and encourages risk-averse behaviour that ties Hong Kong to “golden handcuff” industries. We believe that the government can address this issue, by promoting the development of financial technology centers in less costly areas of Hong Kong, particularly areas near the border with Mainland China, and facilitate the use of telecommuting and regional commuting in financial services. We also believe that the Hong Kong government can encourage the development of affordable “startup friendly” residencies in government sponsored enterprises such as Cyberport and the proposed Science Park campus near the Shenzhen border.

We note that infrastructure improvements such as the high-speed rail, the Macau bridge as well as infrastructure improvements in Taiwan, make it possible for financial services employees to travel in ways that reduce housing pressures and costs in Hong Kong, and we believe that the Hong Kong government should engage other jurisdictions in the region to make it easier to perform regional commuting.

4. Effectively engage small medium enterprises, angel investors and the youth of Hong Kong in the formation of policy, and serve as a communications bridge with large global banks, the Central Government, and local governments in Mainland China – Effective public policy requires communications with all sectors, and we believe that the Hong Kong government must find mechanisms to include small and medium enterprises, angel investors, newly formed startups, and new graduates and students of universities and vocational schools in the policy making process. This can be accomplished by working with fintech industry groups such as the Bitcoin Association of Hong Kong, the Hong Kong Blockchain Society, and the Fintech Association of Hong Kong as well as reaching out to business and finance associations in tertiary educational institutions and young founders of successful startups.

We have included supplemental information that address the specific policies that we believe the Hong Kong government should take in these key areas.

We believe that we are in the midst of a global transition between an old banking system and a new system. We are extremely optimistic about the future of Hong Kong as the leader of in the new capitalist system, and we are extremely impressed by the development of small and innovative fintech businesses in Hong Kong.

We note that the key characteristic of all of the successful fintech businesses that we have seen is a focus toward finding opportunities in Mainland China, Asia, and globally, and that these companies benefit from the favourable legal and regulatory environment which the Hong Kong government has provided, and we look forward to working with the Hong Kong government in these areas.

Yours faithfully,

Joseph C Wang

Director

Bitquant Research Laboratories (Asia) Limited

Recommendation 1 – Address the small business bank account crisis by creating alternatives with new financial technology such as new payment systems

The most critical difficulty that small businesses face in Hong Kong is the inability to open bank accounts. We appreciate the efforts of the Hong Kong government to address this issue, but we believe that the government has done as much as it can using current approaches.

While we applaud the efforts of the Hong Kong government to encourage banks to open accounts, we are pessimistic that any further progress can be made using current approaches. The banks within Hong Kong face a challenging global regulatory environment, and the major banks within Hong Kong have their headquarters outside of Hong Kong, they are unable to maintain balanced AML/KYC policies which take into account the negative consequences of these policies toward Hong Kong businesses. We have found that the banks which are most friendly toward Hong Kong fintech businesses are banks which are headquartered in either Taiwan or Singapore, which are somewhat insulated from global pressures to overregulate. However, encouraging business that wish to be based in Hong Kong to open accounts with Taiwanese or Singaporean banks sends a confusing message as to the desirability of Hong Kong as a fintech center.

We believe that it is necessary to take an the approach of developing alternative mechanisms to make it unnecessary for Hong Kong businesses to open a bank account, and to have cash management and transmission functions undertaken by institutions which are more sensitive to the impact that their policies have on the Hong Kong fintech community. We therefore recommend the following

1a. facilitate the use of licensed stored value facilities as an alternatives to bank accounts

The stored value facility licensing system is intended to insure that stored value facilities meet strong standards of consumer protection and systemic risk. We believe that stored value facilities can therefore be used by small businesses and fintech companies as a complete replacement for bank accounts, and we believe that the Hong Kong government implement policies that allow SVF’s to undertake all of the cash storage and management policies performed by banks.

We believe that the Hong Kong government can encourage the development of SVF’s by allowing both government payments and disbursements to be conducted via SVF’s, and to develop regulatory standards that would allow licensed SVF’s to perform all of the functions of a bank account. We note that at the current time, the Hong Kong government does not allow payments or disbursements through new payment services.

1b. integrate licensed SVF’s with licensed securities brokers to allow new payment systems to fund securities accounts

One area by which Hong Kong can encourage the use of domestic payment systems is to encourage securities companies to fund or withdraw balances through a licensed SVF. Because licensed SVF’s must undertake AML/KYC standards for domestic transfers, there would be no relaxation in these standards for a securities broker to pay through a SVF domestic account. Allowing this to occur would promote the use of new payment systems, and would allow businesses to undertake cash management and treasury functions through licensed securities brokers.

1c. maintain a positive regulatory attitude toward blockchain cryptocurrencies pegged to the Hong Kong dollar or offshore Chinese Yuan

There have been several projects to create cryptocurrencies that are pegged to various fiat currencies, and we are aware of efforts to create a cryptocurrency that are pegged to US dollar, British pounds, and Japanese yen. We believe that a token that is pegged to Hong Kong dollar and offshore Chinese Yuan would be beneficial to Hong Kong, and would increase cash transparency, and allow the Hong Kong government to implement more balanced AML/KYC policies. The creation of a pegged cryptocurrency can be done as a private initiative in Hong Kong, and it is merely necessary that the Hong Kong government merely maintain a positive regulatory attitude toward these efforts.

1d. engage in dialogue with newly formed financial institutions in non-traditional offshore banking centers to create balanced AML/KYC policies conducive to the needs of Hong Kong businesses

New fintech and blockchain technologies allow for the creation of new banks in non-traditional offshore jurisdictions, as well as allowing for banks in jurisdictions such as Taiwan to take advantage of new technological opportunities. We believe that Hong Kong would benefit by serving as a hub for these new financial institutions. We believe that the Hong Kong government should maintain an active dialogue with these innovative institutions to improve on the settlement of Hong Kong dollar and offshore Chinese yuan, and to maintain balanced AML/KYC standards which are conducive to international trade and the development of Hong Kong businesses.

Recommendation 2 – Address deficiencies in visa extension and change of status policies which discourage existing visa holders from creating new startup businesses

We have found the process for granting immigration extensions and change of status for persons with existing visas who wish to open fintech businesses to be extremely difficult, and believe that current visa extension and change of status policies very strongly discourage people from leaving jobs in traditional banking to create fintech startups.

First we wish to note that our experiences with the Immigration Department staff have been extraordinarily positive and professional, and they have been doing a wonderful job of assisting as as much as possible within the policy directives that they have been given.

Unfortunately, the current process of obtaining change of status and visa extensions to enable existing visa holders to work on fintech and startup businesses is fundamentally flawed. As an employee of an investment bank, an immigration extension was a routine and administrative process taking no time and effort on my part. However, in running my own company, I found the immigration process to be nightmarish.

Each year I have had to spend an two to three months documenting my company, and I have only been able to receive a one year visa subject to business review. This was in sharp contrast to my experiences working at the investment bank where visa renewal was a routine process that took several minutes of work on my part. Because a business review takes two to three months while I was only allowed to submit my application one month before the expiration date, I was forced to spend two months each year in a legal “twilight zone.” It is extremely embarassing to find that you cannot access government services or leave Hong Kong because your residency ID is invalid.

The difficulties that I had with immigration were due in large part to the nature of my company. As a consultant and angel investment firm, my firm does not general a large amount of direct employment but rather the value comes from technology expertise. Moreever, because the business investment visa criteria focuses on the company rather than the applicant, the fact that I have a doctorate in astrophysics, decades of work experience, previous income history, and considerable personal savings were simply not considered in granting me a visa extensions

The Hong Kong government has recognized the the Immigration Department does not have the technical expertise to evaluate business proposals, and has attempted to push this role to government sponsored enterprises. While this may be of use to new businesses seeking to relocate to Hong Kong, this process simply is not suitable for experienced visa holders who wish to leave traditional banking to start new businesses.

We therefore recommend that in the process of obtaining immigration extensions and change of status, that the Immigration Department focus on the applicant and not the business, and that the prior work experience of the applicant, the educational level, and personal savings and previous income levels of the applicant be considered favourable in issuing extensions ard change of status for business investment visas. We note that the Immigration Department already has a point system that is used for the Quality Migrant Admission Scheme, and we recommend that this system be used in determining the length of a visa extension for existing visa holders. We note that these recommendations would affect only persons already admitted in Hong Kong and can be accomplished with policy changes.

Recommendation 3 – Reduce rent using new technology and by integrating fintech with urban planning and infrastructure projects such as the Macau bridge and the high speed rail

The biggest barrier to financial innovation in Hong Kong is the high cost of living within Hong Kong. The high cost of living traps Hong Kong in “golden handcuff” industries, and discourages people from leaving jobs in traditional banking to start fintech companies, and also discourages both young people and experienced workers from taking risks in creating new businesses. However, in this area there are creative and innovative steps that the Hong Kong government can do in integrated fintech and urban planning.

3a. encourage the development of fintech in areas of Hong Kong were rent is less expensive and in areas of new development. This can be done by encouraging co-work spaces to set up in less developed areas, and by encouraging the use of telecommuting and remote technologies. We note that several of the planned new towns and the proposed science park at near the Shenzhen border would be ideal locations for fintech businesses to set up.

3b. encourage the development of affordable housing near government sponsored enterprises such as Cyberport, Science Park, and the proposed Science Park extension near Shenzhen. We note that the rental space at Cyberport is still geared toward high end rental units, and that we have the irony that the staff of most of the startups that work at Cyberport, cannot afford to live at Cyberport. Creating affordable rental units and facilities which are attractive to startup founders would enable them to allocate more of their capital toward developing their business and would be highly useful in creating a dynamic fintech ecosystem.

3c. support “regional commuting” which is possible through the development of the high speed rail system, the Macau bridge, and infrastructure developments in Taiwan. The development of the high speed rail system and the Macau bridge, makes it practical for fintech employees to work in Hong Kong while maintain their primary residence in Mainland China, Taiwan, or Macau where rent is much lower. By facilitating people having a main residence outside of Hong Kong, the government can reduce the cost of rent and education, encourage economic integration within the Greater China region, and promote the infrastructure projects to the Hong Kong public.

Recommendation 4 – Effectively engage small medium enterprises, angel investors and the youth of Hong Kong in the formation of policy, and serve as a communications bridge with large global banks, the Central Government, and local governments in Mainland China

We believe that the future of Hong Kong lies not with the global banks or the large corporations, but with SME’s, angel investors, and the youth of Hong Kong. We believe that Hong Kong financial authorities continue its efforts to not only engage with established financial institutions but also to reach out to SME’s, angel investors, and Hong Kong youth to encourage their input in the development of policy.

We note that both InvestHK and the Hong Kong Trade Development Council have extensive experience with engaging with SME groups, and encourage the Hong Kong government to make use of these resources.

In addition, we believe that it is necessary for the financial sector to engage with the youth of Hong Kong in order to allow them to influence policies which will affect their future and to connect them with economic policy making. We therefore strongly recommend that the HK government actively seek out representatives from the students and new graduates through student business and finance associations in addition through industry trade groups, and to make very strong efforts to insure that young people who are successful at creating startups are quickly pulled into policy formation.

Why cryptocurrencies will take over world trade faster than you think

My very strong belief is that cryptocurrencies will take over world trade a lot faster than people thing, and that bitcoin (or something like it) will displace the US dollar as the world trading currency.

The reasoning is as follows:

  • Governments will not want to run massive trade deficits.  It is likely that the amount of trade between Africa, the Middle East, India, China, Russia, and Southeast Asia will skyrocket.  In order to become the de-facto currency used for this trade, someone will have to run trillions of USD in trade deficits.  The US dollar became the world currency in the 1950’s and 1960’s because of the Marshall Plan which loaned out massive amount of money to Europe after World War II and the willingness of the US government to run a massive trade deficit starting in the 1960’s.  There is no government (including the US) which is willing to run a massive trade deficit in order see that fiat currency is overseas.
  • The fact that bitcoin is highly volatile turns out to be a good thing.  The methodology for trade settlement is to denominate the debt in some fiat currency, but to use bitcoin to settle the trade.  Since you only have the amount in bitcoin for a few minutes before it gets converted to and from fiat, your risk of volatility turns out to be relatively low.  The volatility of bitcoin is an extremely important factor in allowing it to settle world trade.  The value of bitcoin at a particular time can be set by supply and demand, and the price of bitcoin can move up and down wildly depending on trade factors.  The bitcoin exchange rate can move up and down by thousands of percent, and nothing bad happens.  By contrast, if the fiat exchange rate moves up and down by 20%, you have yourself an economic disaster.
  • It turns out that the basic problem is that people use money for different things.  You use money to store value, to transfer value, and as a unit of account.  The trouble with using the same thing for three very different things is that you end up having problems.  Your typical currency crisis happens when people can’t find tokens (i.e. USD) to transfer value, at which point this conflicts with using money to store value or as a unit of account.  Bitcoin is used *only* to transfer value and not as a unit of account or as a mechanism to store value.

So let me tell you a real story.  The coffee distributor in Hong Kong just had a trip to Tanzania where they just bought some goods for delivery.  The distributor has Hong Kong dollar.  The coffee merchant wants Tanzanian shilling.  What is going to happen is that the coffee distributor is going to pay me HKD, I’ll buy bitcoin which gets send to Tanzania, where the merchant will convert to TZS.  Since the amounts are not large, I can provide trade credit, so that I pay the merchant in advance bitcoin so that they have cash flow, and then the coffee distributor can pay me once the goods arrive.

Now this would be totally impossible without bitcoin.  The key thing is that all of this can be done in minutes, and so we can settle everything in a few days.  If we were to do this through conventional means, it would take a week to move the money, and this enormously complicates shipment since you can’t do “delivery versus payment.”  Also I can get bitcoin at some price, and if everyone just wants bitcoin at the same time, the price will go up so that it can handle the volume of trade.  If I try to use the alternative token of US dollars, then I’ll end up with a shortage because the value of the USD is relatively inflexible, and Donald Trump is not interested in issuing vast amounts of USD in order to deal with Africa/HK trade.

I should point out that this sort of thing is really, really hard to see if you are sitting in the United States or you are involved in conventional trade.  If you are shipping goods between US and Europe or US and China, people worked out the payments infrastructure in the 1960’s and 1970’s.  Also trade between US/Europe/China/Japan is not going to increase.  So you have to look at some other trade corridor in order to see this.  The trade corridor between Africa and China is very new, but where you do see massive amounts of bitcoin being moved is between China and Russia, and based on the fact that I’m dealing with people that routinely do transactions in the multi-million dollars, bitcoin is already heavily used to settle payments between China and Russia without going through USD.

%d bloggers like this: