Three Arrows Capital collapse sends tremors through crypto industry

From the Editor’s Desk

Dear Reader,

If 2022 is distinguishing itself for all the wrong reasons in the digital asset space amid the ongoing chill of the crypto winter, then the collapse of cryptocurrency hedge fund Three Arrows Capital surely represents a particularly cold snap in this bleak season.

Crypto skeptics have long predicted that the industry — specifically the cryptocurrency segment of it — would eventually buckle and implode under the strain of its own hubris, but, to pilfer a phrase from American literary giant Mark Twain, reports of its death are greatly exaggerated.

It’s an apposite moment to bear in mind that after every winter comes spring. And as grim as the Three Arrows saga may be, the digital asset industry has shown encouraging signs of progress — not least in the regulatory sphere, where after being frozen out by authorities to varying degrees in certain jurisdictions, it is well on the way to gaining the recognition, and regulation, that Forkast has long argued that it deserves.

The European Union has reached a provisional agreement on its much-anticipated Markets in Crypto-Assets directive, which ends the fog of uncertainty over crypto regulation and paves the way for regulation of the industry on a scale and swathe of jurisdictions previously unseen.

And in the United States, the Responsible Financial Innovation Act is rapidly taking shape, legislation that has the potential to provide similar clarity for regulators, firms in the industry and their customers.

Among these strides forward, the Johnny out of step is China, where only two seasons seem to exist when it comes to digital assets: winter and deep winter.

In the non-fungible token (NFT) space, Chinese tech giants including Ant Group, Tencent and Baidu appear to have grown sufficiently impatient with a lack of rules specifically for the trade that they’ve banded together to draft their own for the sector.

Doubtless taking the greatest care to judge the prevailing regulatory winds from Beijing, they are hoping that by seizing the initiative — with the utmost possible respect for Communist Party prerogative, of course — the sector might avoid the icy blast of official disapproval that has blighted the country’s cryptocurrency sector.

A digital asset spring may be around the corner in more enlightened jurisdictions, but in increasingly inward-looking China, despite tech companies’ latest gamely maneuver, chilly conditions seem set to persist.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast

Forkast.Insights | What does it mean?

According to Newton’s third law of motion, every action causes an equal and opposite reaction. Although Newtonian physics will provide little comfort to investors licking their wounds after the collapse of Three Arrows, future investors will thank them for their overexuberance. 

Crypto’s eye-watering rise — and subsequent fall — is prompting regulators to take more notice of the industry. Historically, authorities were happy to label the industry “high risk” as a way of warning investors from the world of traditional finance that entering it would come at their own risk. That attitude is changing. Regulators are moving with renewed vigor to regulate crypto to create better protections for investors, and, more importantly, prevent further busts from spilling over into broader asset markets. 

The European Union has reached a landmark deal that will provide regulation across the 27-member bloc, including a new legal framework for crypto asset sales and better oversight of crypto markets. The U.S. isn’t far behind with a similar ruling, and smaller markets are also looking to create improved safeguards to prevent more implosions. 

Regulation may have been sneered at on the more libertarian fringes of the crypto community, but for many, it’s the only thing that will ensure the industry has a future beyond its present harsh winter. 

Forkast.Insights | What does it mean?

The digital asset industry’s forays into gaming have been steadily increasing in scope and ambition. Although Polium’s attempts to build gaming hardware have been widely derided, its ambition to disrupt gaming should be taken seriously. 

Gaming revenues have been swelling over the past few years, and more growth is expected in the future. Last year, the trade was valued at US$198 billion, and it is forecast to double in size by 2027. 

But with that growth has come a chorus of complaints over issues including reportedly exploitative working practices, a concentration of power in fewer hands, and monopolistic tendencies. That’s caused an exodus to Web 3.0 among gaming executives, who are now looking to disrupt the companies they helped build. 

The trend follows a familiar trajectory seen in the early days of console gaming. PC games were bigger and better funded, and no one believed a dedicated gaming console would endure in a rapidly consolidating marketplace. How wrong they were.  

It’s been only five years since the emergence of CryptoKitties, arguably the first true blockchain game. Dapper Labs, its creator, is now worth close to US$8 billion. Activision Blizzard, in its original incarnation as a maker of video games for the Atari system in the 1980s, took decades to reach a similar valuation. 

Polium’s vision may never come to fruition, but the digital asset industry is coming for gaming, whether the incumbents like it or not. 

Forkast.Insights | What does it mean?

The attempt by Chinese tech firms to come up with self-regulation for the NFT market shows that they have compliance in mind, but it remains unclear how effective their self-imposed rules will be.

At least two lawyers based in Beijing reminded Forkast that such agreements don’t have the force of law. Liu Yang, a partner and attorney at Chinese law firm DeHeng, said there were no clear punitive measures associated with breaches of the guidelines, and that NFT platforms could still be exposed to criminal law when it came to illegal business conduct and fundraising.

Real-name identification for users is also key for Chinese NFT platforms, and most platforms already have measures to ensure users comply in place, as “no one dares to challenge the regulatory red line on anti-money laundering,” Liu wrote in a research note. 

Inevitably, this raises issues of personal information protection. Chinese companies have been notorious for taking advantage of user data and personal information for their own interests — so much so that in November 2021, China enacted a personal information protection law to ensure data privacy.

As the industry matures, the emergence of self-regulation shows that the country’s tech titans are serious about the new business. But they’ll have to come up with a better business model if secondary trading is flat-out not allowed.