I. Digital Asset Market Outlook: What to Watch in 2023?

By Michel Lee, Executive President of HashKey Group
January 4 2023

In my thirty years in the investment world, I’ve seen and experienced several market cycles, but among the booms and busts, true watershed moments –  intervals that go far beyond bullish or bearish trends, come few and far between. And I think the year 2023 will be among those significant moments.

The digital asset world is experiencing a real sea change. Digital assets will no longer be on the fringe of the financial system. The failures and collapses of industry players have set the stage for regulators to establish regulatory clarity for all parties involved in blockchain and cryptocurrency. Beyond market ups and downs, these are the real big things that I would set my sights on: the trends that are reshaping the digital asset regulatory landscape and the great progress of blockchain technology in 2023.

Digital Asset Regulation: Be Prepared
The troubles and subsequent industry-wide contagions from the collapses of FTX, Three Arrows Capital and the Terra ecosystem were painful for everyone in the market. But, 2022 was just as much a year of agony as it was a year for fortifying new groundwork. The downfalls of these prominent industry players prompted  regulators in numerous jurisdictions, Hong Kong for one, to come up with and construct clearer regulatory framework and blueprint of digital assets.

The United States, home to the largest number of exchanges, trading platforms and investment funds, would likely continue to play an important role in digital asset regulation. I expect more clarity on the regulatory differences, confusion about definitions and jurisdictions between U.S. regulators and agencies.

Also, investigations into the collapse of FTX and other digital asset companies will force some regulators to step up on their understanding of blockchain technology and the inherent nature of virtual assets in order to examine and modify their existing regulatory models of the centralised financial system into ones that apply to digital assets.. Crisis prevention and customer protection are undoubtedly at the forefront of every regulator’s mind, now more than ever. Regulation is poised to play a critical role in the path of crypto investments in 2023, and the industry should be prepared for a stricter laws and regulatory oversight.  

Digital Asset Adoption: Institutions Incoming
As regulations of digital assets are becoming more defined, international accounting lawmakers have also taken critical steps toward digital asset accounting. This opens the door to more institutional investors and corporate treasuries to access Bitcoin and other digital assets as part of their asset allocation exercise.

Over the years, market players have continuously made great improvements to the digital asset infrastructure make it easier for institutions to interact with DeFi applications in a regulatory-compliant way. In 2022, we already saw a growing number of traditional finance corporations starting to apply the technology into existing traditional finance infrastructure as well test the grounds in DeFi. Institutions including J.P. Morgan, Société Générale, DBS and the Monetary Authority of Singapore launched pilots projects on DeFi applications for traditional financial use cases. From on-chain data and through my interaction with partners and clients, DeFi is not going anywhere and so is the institutional interest in it. And we will see greater digital asset adoption in mainstream finance in 2023.

Web3: Giant Leap in User Experience
In 2022, Web3 edged closer to becoming a tangible reality rather than an aspirational vision, as the general public gained better awareness on Web3 and digital wallets, partly (and ironically) thanks to Web2-model platforms like Instagram and Twitter. Traditional brands, companies and professionals from different industries are now eager to cross the chasm into the world of Web3.

The new wave of Web3 experts and developers are dedicating their efforts to creating much efficient and seamless user experiences without sacrificing the core fundamentals of blockchain The passionate and innovative developer communities in Web3 are something that I have never seen in any other industry. I expect this will be the final step to unlocking Web3 mainstream adoption.  I have personally witnessed how far we have come in the past 5 years even in wallet technology and the useability but acknowledge that there is much room for improvement.  In any case, Web3 needs to be practical for the average user regardless of age and background while not compromising on security.

Decentralised Technology: Immerse in Life

Non-institutional investors ranging from high net-worth individuals, entrepreneurs to retail investors play a key role in global digital asset adoption. They are waiting for a favourable macro market environment to get involved in the DeFi and decentralised technology space. 

Meanwhile, blockchain networks continue their efforts to enhance scalability and efficiency, which bolster the value around decentralised use cases. I’m particularly thrilled for the innovations of decentralised identifiers (DID), Soulbound Tokens and decentralised custody. I can’t wait to see how they will boost retail adoption of decentralised technology in 2023 and onwards. Digital asset and blockchain technology will continue to enter the mainstream and become relevant to everyone around us.

Asia: Increasing Relevance
Digital assets are transforming into an emerging investment asset class with participation from a wide range of players. In response to sustained interest in digital assets, governments of the major Asian hubs and markets like Hong Kong and Singapore have made great strides in allowing the digital asset industry to sustainably thrive. This is a major positive driver for the industry.

We have every confidence in Hong Kong’s regulators and communities in turning the city into a global digital asset center. Hong Kong already has a group of tight-knit digital assets and blockchain enthusiasts who are exploring further potentials in the innovations of NFT, metaverse-concept technology and asset tokenisation. A vibrant and well-built digital asset ecosystem will definitely further cement Hong Kong’s undisputed status as an international financial center.

HashKey is one of the earliest investors in the blockchain and digital asset ecosystem from Asia. Our vision has always been about building the technology and infrastructure for the future, and we are seeing promising signs on the regulation and market adoption fronts despite the short-term market turmoil.

Increased regulatory clarity and industry adoption in the digital asset space will set the stage for us to collectively create something that goes beyond marginal improvements on everything digital but also all things non-digital. 2023 would be the year when digital assets and blockchain truly came into its own.

II. The Latest Scoop at HashKey
In other news, HashKey Group's Head of Legal, Anna Liu, recently spoke to 21st Century Business Herald, where she shared her thoughts on the future of Hong Kong's blockchain and FinTech landscape on the backdrop of the HKSAR government's reinvigorated stance on virtual asset development in the city. 

Dr. Xiao Feng, Chairman of HashKey Group, penned the preface for the book Metaverse Economics. In his write-up, he shared 10 essential rules of Metaverse economics, which he emphasised are vastly different from those of the Internet.    

HashKey Capital, HashKey Group's venture capital and asset management arm, published their Year-End Review of 2022, in what was their 7th year dedicated to blockchain investments.

Some of the highlights included:
• 10: Made the lists on CB Insights' "Top 10 Crypto Funds in the World for Q3 2022", and FinTech News Hong Kong's "Top 10 Investment Institutions in Hong Kong FinTech Industry of 2022".
• 60: Over 60% of Capital's investments this year were first round
• 90: Portfolio value creation — Over 90 of Capital's portfolio companies received follow-on financing
• 100: HashKey Capital Limited (Hong Kong) was granted the Type 9 uplifting licence by the SFC of Hong Kong, allowing it to manage a portfolio of 100% crypto assets.



III. Crypto Stories of the Week
Indonesia plans national crypto exchange in 2023
Indonesia plans to set up a crypto exchange this year. Also, the country’s Commodity Futures Trading Regulatory Agency, has been overseeing crypto trading to date. And now, the Financial Services Authority is assuming the supervision of crypto assets in the next two years. The country also has plans to roll out a digital rupiah. 

Coinbase reaches settlement with New York regulators
Coinbase has agreed a settlement with the New York regulators who allege the crypto exchange violated regulations related to transaction monitoring. The cryptocurrency exchange will pay the New York State Department of Financial Services (DFS) a $50 million fine and invest $50 million to address the issues flagged by the regulator.

Final Fantasy’s parent Square Enix bullish on blockchain gaming
Japanese gaming company Square Enix, known for its Final Fantasy franchises, will make blockchain gaming a major focus in 2023. In a new year’s letter, Square Enix president Yosuke Matsuda announced it has multiple blockchain games under development based on original IP. Square Enix is also considering investment opportunities around blockchain.

Standard Chartered's digital asset venture hires Bitstamp’s ex-CEO
London-based crypto custodian Zodia Custody has appointed Julian Sawyer as its CEO. Previously, Sawyer was CEO of crypto exchange Bitstamp. He also co-founded U.K. lender Starling Bank in 2015. Zodia Custody is a joint venture between Standard Chartered and Northern Trust and is also registered with the U.K. Financial Conduct Authority. 

The Block’s 2023 Predictions: ‘Flippening’ will not occur, OpenSea will lose monopoly
The Block's Research team has made their predictions about what might happen in 2023: the gap between the market caps of Bitcoin and Ethereum will continue to shrink, but the “flippening” (i.e. the moment when ETH overtakes BTC as the top coin by market cap) will not occur this year. DEXes will post the strongest fundamental growth metrics relative to other DeFi use cases, and OpenSea will lose its monopoly status and its approach to enforcing royalties will fail. 



IV. Key Weekly Data
Market Data (as of 5 January 2023)
• Total market value: US$820.4 billion (Source: CoinMarketCap)
• Daily exchange volume (7DMA): US$8.69 billion (Source: The Block Research)
• Total exchange volume of Bitcoin and Ethereum (7DMA): Bitcoin - US$4.69 billion; Ether - US$981.4 million (Source: The Block Research)
• DEX 7-day growth: US$5 billion (-3% compared to last week) (Source: Dune Analytics)


Contact:
Jason Li
Marketing and Client Strategy Manager
jason.li@hashkey.com