Chao Deng on Blockchain Development in Asia-Pacific

In this article Chao Deng, the Managing Director of HashKey Capital, outlines how he looks at the development of blockchain technologies in Asia-Pacific and describes how that informs the firm’s investment strategy. HashKey Group is one of Asia’s leading investment firms, focused on the development of digital assets and blockchain solutions. It is a strategic partner of Wanxiang Blockchain. HashKey Capital is the group’s asset management / venture capital arm.

Starting in 2013, I was the managing director of DataYes, a fintech-focused subsidiary of Wanxiang Group. We were interested in the potential applications of blockchain technologies in financial services At this point, the technology was still at an early stage of development. In 2015, after two years of extensive research, I initiated an investment in Ethereum, making Wanxiang the first corporate investor.

At the same time, we started building out an ecosystem of support for blockchain technologies. We created Wanxiang Blockchain Labs, a non-profit focused on the development and application of blockchain technologies, and established HashKey Group to actively invest in and grow high potential blockchain and digital asset opportunities. Through this ecosystem we are able to add value to projects at each stage of growth and development. HashKey Capital, the funding arm of the group, primarily invests in early and growth stage companies.

Our initial investment in Ethereum produced unprecedented returns, as its second generation permissionless chain technology vastly expanded the possibilities and applications of blockchain. Since then we have had other successes, including investments in Polkadot, Blockfi and Terra. Our investments span the full spectrum of blockchain technologies – from the underlying infrastructure to decentralised financial (DeFi) apps.

All our investments are driven by our unique investment strategy, underpinned by a holistic, long-term perspective on the development of blockchain and digital asset technologies. We like the analogy that the digital asset ecosystem of today is like the early internet. The internet underwent three stages of development: the build out of the underlying technology and infrastructure; the creation of innovative business solutions; and ultimately in the 2010s, mass adoption and the development of mature, cash generating business models.

Blockchain today is at the beginning of the second stage. The underlying technologies are reaching maturity as consensus mechanisms are improved and stabilised. Commercial applications, such as J.P. Morgan’s JPM Coin and Alibaba’s AntChain, are already being deployed. That said, blockchain still lacks mass-market applications, although a number of DeFi apps are emerging that should spur user adoption.

In 2000, there were just 360 million internet users; today that number stands at 4.6 billion. As it was for early investors in today’s tech giants, the potential upside is immense. Blockchain technologies will upend existing business models and create new economic opportunities. Gartner, a market research firm, forecasts that the total addressable market will grow from US$21 billion today to US$3.1 trillion by 2030. However, despite this opportunity, there is still significant risk. Only a handful of the 2,000 ICOs that launched in 2017-18 still exist. The vast majority were purely speculative, lacking the technological expertise and robust business models required for long-term success.

At HashKey Capital, we employ a rigorous screening process based on deep knowledge of blockchain and digital asset markets, thematic research and extensive industry tracking. Since November 2018 we have used this approach to evaluate over 1,000 opportunities, and have invested in more than 75 projects.

A key pillar of our investment strategy is to take a bottom-up view of the blockchain ecosystem, identifying pain points and possible solutions at each layer. We aim to balance our investments in the underlying infrastructure and protocols, that will power innovative business solutions, with support for real world blockchain applications and services. These end-user applications include digital wallets, exchanges and other forms of decentralised finance.

One of the most exciting aspects of blockchain is that Asia, and China in particular, is at the forefront of the next wave of blockchain and digital asset innovation. There are a number of factors driving Asia’s leadership – an open policy and regulatory environment, a large market for blockchain technology and DeFi applications, and access to active investor and developer communities. Based in Hong Kong, HashKey Capital is uniquely positioned to support the growth of blockchain projects in the region thanks to the extensive domain knowledge of our leadership team and our expansive network across the region.

A major barrier to investment in digital assets has been the lack of well-defined regulatory frameworks. This has limited the market involvement of institutional investors. However, this is changing, with Asian regulators are leading the way. In 2019, the Hong Kong SFC introduced a new regulatory regime for digital asset exchanges, and last year started consultation on broader regulation of digital assets. Likewise, Singapore introduced new rules and exchange licensing requirements.

There have also been a number of projects by central banks exploring the use of blockchain technologies. In February, the central banks of Hong Kong, Thailand, the UAE and China announced the expansion of a Central Bank Digital Currency pilot using distributed ledger technology to facilitate real-time, cross-border FX payments. The combined effect of these moves, along with China’s strategic promotion of blockchain technologies, all work to create an increasingly positive regulatory and policy environment.

Another factor driving blockchain innovation and adoption in Asia is the large potential market for DeFi applications. In contrast to Western countries with more developed banking systems, many countries in Asia still have large underbanked populations. This creates a huge opportunity DeFi apps. We have invested in a number of projects that address the needs of Asian consumers. An example of this is our investment in Lightnet. Based in Singapore, it aims to revolutionise South-East Asia’s US$150 billion remittance market by replacing the legacy SWIFT system with real-time, low-cost cross-border payments using its smart contracts and distributed ledger technology.

One of Asia’s key strengths is the unique blockchain community that has developed over the past five years. This brings together a growing VC investment community with a large population of engineers and developers. As a key member of the APAC blockchain community, we regularly host and participate in a range of summits and events providing us with deep links and access to unique insights and deal sources.

This is an extremely exciting time in the development of blockchain and digital assets. In the past decade, we have seen these technologies grow from niche unproven ideas, to mature technologies used by some of the biggest players in finance and technology. The next decade will see the development of innovative mass-market products and. Given the focus of talent, investment and markets we expect to see a significant number emerging in Asia.

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