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How Virtual Assets Will Lead Digital Transformation of Global Finance

How Virtual Assets Will Lead Digital Transformation of Global Finance

Virtual assets – digital representations of value that can be traded, transferred, or used for payment or investment – are tipped to transform the world of finance, which will make the industry more transparent, less susceptible to fraud, and potentially cheaper for consumers.

There is much-renewed interest in cryptocurrencies, with the cost of bitcoin – the world’s largest cryptocurrency – rising above the US$50,000 mark in August after the value fell in May, with the value of other coins, including ethereum and dogecoin, also rising.

On Tuesday, the value of bitcoin reached as high as US$64,499 – just below its record of US$64,895.22 on April 14 this year – Reuters reported. It said the rise came after the first United States bitcoin futures-based exchange-traded fund made its debut –a development that market participants say is likely to drive investment in the digital asset.

Interest in technology-led innovations for virtual assets has increased in tandem with rising investment. Direct blockchain spending alone has risen over 50 percent in 2021 compared with last year and is tipped to exceed US$19 billion in 2024, global market intelligence company IDC reported.

Blockchain activity is being driven by cryptocurrencies and crypto-related investments. The number of people around the world now using blockchain wallets – digital wallets which can store and manage cryptocurrencies – exceeded 75 million up to August 15, market data company Statista reported.

Huobi Group, a global digital asset financial service provider founded in mainland China in 2013, wants to serve this huge growth market.
In 2018, the group paid US$77 million to acquire a 72 percent stake in Plantronics Holdings, an electronic manufacturing services provider that went public on the Hong Kong Stock Exchange in 2016 and renamed it Huobi Technology (Huobi Tech) in 2019 as its base in the city.

The group also has operations in the United States, Japan, and South Korea. It also runs a crypto exchange, Huobi Global, which offers its cryptocurrency, Huobi Token.

Huobi Tech says that, after shareholder restructuring last year, the company has become a separate legal entity that operates independently of Huobi Group, the owner of the Huobi Global crypto exchange.

Lily Zhang, the chief financial officer of Huobi Tech, says increased investment in digitization and cryptocurrencies means the global cryptocurrency asset management market offers huge untapped growth potential. The market value, which hit US$670 million in 2020, is tipped to rise to US$9.36 billion by 2030, Allied Market Research analysts reported.

The company is developing its virtual asset ecosystem through blockchain, the technology that records transactions made in bitcoin and other cryptocurrencies.

“We act as a bridge between the traditional financial world and the newer world of virtual assets in the future,” Zhang says.
The use of blockchain allows parties to reach an agreement on the state of a database without the use of an intermediary, which in the finance industry would usually be a bank. The benefits include greater efficiency, lower costs, and less risk of fraud because once a digital ledger of transactions has been established it would be difficult for the “record of truth” to be tampered with.

Although concerns remain about the risks that can arise in a less regulated environment, Huobi Tech hopes to offer a solution by providing services such as trusteeship, capital management, and custody – secure, third-party providers of storage and security services – which are essential for running blockchain financial services.

Huobi Tech obtained approval from Hong Kong’s market watchdog, the Securities and Futures Commission (SFC), to conduct Type 4 (advising on securities) and Type 9 (asset management) regulated activities in August last year, while this year it launched a crypto asset management portfolio via its subsidiary, Huobi Asset Management.

The offerings include bitcoin and ethereum tracker funds and a multi-asset fund, which invests into a combination of different asset classes including equities, fixed income securities, and crypto-assets.

These recently introduced funds backed by virtual assets represent a new area for institutional investors, who contribute to the lion’s share of global investment activity. They are also expected to gradually scale up overall allocation to virtual assets as the industry matures. Seven out of 10 institutional investors plan to buy or invest in these assets in the future, a July research study published by Fidelity Digital Assets found.

These exponential numbers reflect the strong growth in digitalization; companies, including financial organizations, are keen to adopt virtual assets as part of long-term growth opportunities for businesses within the ecosystem – and Huobi Tech is keen to cater to this untapped growth.

Zhang says institutional demand is helping to fuel higher standards for security and compliance in virtual assets. SFC approval in April this year for Huobi Tech and its subsidies to conduct trust and custody services means it can provide a secure way to store large quantities of virtual assets under a specified risk management framework from institutional clients.

“Asia currently lags behind Europe and the US when it comes to institutional participation in virtual assets,” Zhang says. “In the US, many listed companies, especially technology companies, are actively participating in [crypto], but it is less widespread in Asia. So this gap presents a great opportunity for us”.

For Huobi Tech, serving this potential market will mean designing – and constantly improving – its all-in-one platform for clients, including a licensed framework to safeguard their invested assets, which will meet local regulatory compliance standards.

Zhang says the company is well aware of the potential risks the brave new world of virtual assets poses to the financial system. Many cryptocurrencies on exchanges are still subject to hacking, while smart contracts that replace human decision-making may also introduce technology bugs, which, when triggered, could result in losses to transaction parties.

Huobi Tech intends to strengthen the ecosystem by adopting a highly compliant approach, which will enable safe and secure virtual asset transactions. This is important because many traditional institutions have been hesitant about entering the market because of concerns about the performance volatility and regulatory uncertainty of virtual assets, she says.

While regulators need to be aware of the risks posed by virtual assets, accommodative regulatory policies will be important in ensuring that product innovation is not restricted in this emerging field, she says. This highlights the common issue of companies still having to navigate frameworks established by regulators who may be unfamiliar with the full range of uses of blockchain technology.

Regulations on cryptocurrencies are still evolving around the world. In the US, regulatory bodies such as the Securities and Exchange Commission, Commodity Futures Trading Commission, Financial Crimes Enforcement Network, and Office of Foreign Asset Control of the US Treasury Department have still to reach a consensus about the oversight of virtual assets, while in Hong Kong, cryptocurrency exchanges operating in the city must be licensed by the SFC and can serve only professional investors.

Last December, Huobi Tech’s US subsidiary, Huobi Trust US, was licensed by the Nevada Department of Business and Industry’s Financial Institutions Division. This summer, it officially took over the role of primary custodian of its HUSD, a US-dollar-backed stable coin tradeable on Defi (decentralized finance) platforms.

DeFi is a system where financial products are offered on a public blockchain network that is open for anyone to use, rather than having to go through intermediaries such as banks or brokerages. Stablecoins, which are usually pegged to hard currencies such as the US dollar, are less exposed to price fluctuations.

HUSD is issued as tokens on the ethereum blockchain, the world’s second-largest cryptocurrency network by market capitalization. Custody means that the company will need to regulate and hold minimum collateral of the stablecoin to ensure stability on the blockchain.
Zhang says she hopes Huobi Tech’s virtual assets experience and technological expertise will help similar developments to take place in Hong Kong.

“Through these channels, we allow more people to enter the crypto world,” she says. “We see something like this as a way for the industry to progress.”

She believes the expanding crypto world offers limitless possibilities. “A few years ago, the market was really, really small, but it is now worth US$2 trillion,” she says. But compared with the stock market, it remains relatively small. I am envisioning rapid growth in the future”.