It’s clear that the emergence of ‘the internet’ some 30 years ago had a seismic impact on how we communicate. Back in the early 90s, the digitisation of information created significant opportunities in areas such as e-commerce, education, social media and entertainment.
Fast forward to today, and we are now in the midst of a new, second digital revolution; and this time, it is built on the digitisation of assets, where anything of value can be digitised and exchanged.
It’s a concept that can be applied to a broad range of goods – from art and fine wine to real estate – and it has the potential to be transformative in how we conceptualise trade and investment, opening up new ways to access markets, or indeed create new markets that didn’t exist before.
Champions of the digital assets revolution point to the significant benefits it can bring – enabling frictionless trade and commerce, cheaper capital movements, more robust technology-driven transactions and fewer restrictions on access to markets.
Leading the world
It’s a revolution that is happening right now – and in few places it is happening faster than in China, with experts forecasting that the country is going to lead the world in terms of digital asset and currency adoption. Even today, the digital economy represents around 40% of Chinese GDP (Source: MIIT).
This acceleration of digital asset and currency adoption is being driven by the maturation of the underlying digital platforms and tools that are supporting digital change, as technology becomes more and more sophisticated.
The foundation for this is the distributed ledger concept built on blockchain technology. Now in its sixth generation, today blockchain is capable of enabling hundreds of thousands of transactions to be completed every second – compared to around 20 transactions per second when it when it first came into being 20 years ago.
And it can do this in a more secure way and with less cost and friction than traditional payments typically undertaken through banks and clearing houses and the SWIFT system.
It’s a concept that central banks, regulators and policy makers are taking extremely seriously too, with the Hong Kong Monetary Authority as well as regulators such as the SEC, FinMa, MiCA and BaFin all creating clear frameworks for digital assets.
With those regulatory frameworks in place, access to digital currencies and assets is no longer reserved for institutional investors – the retail market has access now too.
To put that in context, the World Economic Forum estimates that the global value of digital assets in circulation will reach $24 trillion by 2027 – or in other words, 10% of total global GDP will be stored on blockchain in the next five years.
It’s a major shift in how economies approach trade and financial transactions and China is way ahead of the game.
It announced its commitment to test and launch its own Digital RMB just over two years ago and this year, an app was launched to enable anyone in 23 pilot cities across China to access and use the digital currency. China’s Central Bank’s digital wallet is one of the fastest-growing apps in China currently with 261 million individual users having set up e-CNY wallets so far and $13.78 billion worth of transactions having been made using the digital currency.
But China is not on its own. Testing and piloting is ramping up across the central bank landscape, and the Digital US Dollar and Digital Euro are also nearly reality.
This has repercussions for international investing and trading, of course, particularly in terms of how different digital currencies and blockchains interact with each other. To that end, we are beginning to see central banks and regulators collaborating to enable cross border digital asset exchange.
So why is this significant for IFCs like Jersey?
Fundamentally, the critical issue at the heart of the future success of global digital asset adoption is going to lie in the ability for digital assets to be exchanged across borders and different blockchain systems.
IFCs like Jersey are experts in enabling capital to be channelled securely and put to work where it is needed most. They have the expertise and experience to understand how cross-border transactions work, and they have the global connectivity to complement and support the major shift to digital platforms.
China specifically has some major cross-border investment initiatives under way where digital assets could play a key role. The Belt and Road project, for example, continues to touch the Middle East, Africa and Europe but has shifted from an infrastructure to a digital – encompassing areas such as payments, logistics and back-office services.
IFCs that can complement and support outbound and inbound digital asset transactions with China in areas like this have the potential to play a key role in the development of digital assets globally.
Second, IFCs like Jersey are specialists in regulation, and regulation is going to be pivotal as the world shifts to a digital assets-first mindset. The keyword here is ‘balance’ – regulation needs to be robust enough to ensure trust can be built to support mass adoption, whilst it also needs to be flexible enough to not stifle innovation.
This is right in the sweet spot for IFCs, which have a huge amount of experience in navigating shifts in international regulation and compliance.
Jersey early on established itself as a crypto-friendly jurisdiction when the islands regulator, the Jersey Financial Services Commission (JFSC), approved the launch of the world’s first regulated Bitcoin investment fund, GABI Plc in 2017. Jersey was also one of the first jurisdictions to adopt a regulatory regime for virtual currencies.
Today, Jersey is recognised as a leading centre in term of governance, substance and oversight, recognised by global authorities for the standard of its regulatory regime. This is reflected in Jersey’s approach to token launches. While some regulators have prohibited them entirely, and others have given carte blanche to almost any token promoter, the JFSC has recognised there is a middle ground; token generating events with proper substance, backed by a credible promoter. It’s a good example of regulatory balance in action.
Third, IFCs are often hotbeds for digital innovation in their own right, offering sandbox environments and incentives to encourage fintech development.
Jersey has world leading network infrastructure, including independently verified fastest broadband speeds in the world and 100% gigabit fibre broadband penetration, and a workforce of more than 13,500 people in financial services and 3,000 people in the digital sector. In 2017, ‘Sandbox Jersey’ was launched in recognition that Jersey’s digital infrastructure, coupled with its access to a well-established finance industry and the support of an independent government and robust regulator, made Jersey an ideal testbed for fintechs. Today, Sandbox Jersey helps develop fintech in a controlled environment and, as a part of the scheme, the JFSC helps to establish the right environment for companies to bring fintech products and services to the market.
Jersey’s digital aspiration is to be “the easiest international finance center to do business with remotely in a digital world”, with ambitions to accelerate growth in its finance industry by being at the forefront of digital technologies. It is delivering this through close collaboration across the finance industry, Digital Jersey, Government and the JFSC to promote the adoption of fintech.
With this in mind, earlier in 2022, Jersey Finance refreshed its fintech strategy to focus on enhancing client experience and delivering efficiencies, by applying tech to bolster compliance and risk, improve productivity, and enhance interaction within financial ecosystems.
These ambitions as an IFC are quite clearly aligned to the needs of the digital assets space as it develops in a cross-border context.
Fourth, IFCs have developed deep expertise in the sustainable finance space, an area that is intertwined with fintech innovation; fintech plays a substantial role in the growth of sustainable finance while sustainable finance is accelerating innovation in fintech. Notably, Jersey Finance launched a long-term strategy and vision in 2021 aimed at setting the Island on a path to being the leading sustainable IFC in the markets it serves by 2030.
Jersey is already harnessing the cross-fertilisation of its digital and financial services sectors to develop innovative solutions in diverse areas such as impact measurement, supply chain traceability and blockchain-secured carbon sequestration.
Digital assets will likely play a central part in China’s endeavours to meet its carbon neutral targets by 2060, an objective that will require significant FDI. A lot of that will be driven by digitisation, including financing through digital currency.
There’s no doubt that Asia is moving rapidly towards a future built on an ability to transact through digital assets and the repercussions of this globally are significant. For a smart IFC like Jersey that is agile, nimble and committed to fintech innovation, coupled with its long-track record supporting clients in Hong Kong SAR and mainland China, there is a real opportunity to add value and support the digital asset revolution in Asia with a European home as it moves into a cross border space.
This article was first published in the Britain in Hong Kong, British Chamber Magazine: The Future of Fintech (September – October 2022, Issue 80).