October 3, 2022

Taquer-Tech

Melts In Your Technology

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Three Arrows Capital collapse sends tremors through crypto industry

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In this issue

  1. Three Arrows: Out of ammo
  2. Polium One: Game time
  3. Chinese NFT rules: DIY spirit

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


1. Parting shot

3AC
Three Arrows’ bets on crypto have proved to be far from bullseyes. Image: Canva

By the numbers: Three Arrows Capital — over 5,000% increase in Google search volume.

Singapore-founded cryptocurrency hedge fund Three Arrows Capital filed for Chapter 15  bankruptcy in the United States last Friday, seeking to protect its U.S. assets from creditors after becoming a particularly hard-hit casualty of the current crypto winter.

  • Three Arrows filed its petition in the U.S. Bankruptcy Court for the Southern District of New York on July 1.
  • At the beginning of last week, a court in the British Virgin Islands, where the company is domiciled, reportedly ordered the liquidation of Three Arrows after it defaulted on a US$670 million loan from digital asset brokerage Voyager Digital. Three days later, the Monetary Authority of Singapore reprimanded Three Arrows, accusing it of disseminating misleading information and ignoring limits on assets under management.
  • Three Arrows’ woes began to surface amid the collapse of Terra in May, after it had purchased US$200 million worth of Terra’s LUNA tokens in the Luna Foundation Guard’s US$1 billion fundraise in February, co-founder Kyle Davies told the Wall Street Journal last month. Since then, Three Arrows has failed to meet multiple margin calls, including from crypto lenders BlockFi and Genesis, according to the Financial Times
  • Founded by Kyle Davies and Su Zhu in 2012, Three Arrows Capital is a major hedge fund in the crypto space, managing as much as US$10 billion of assets as recently as March.
  • The price of Bitcoin reacted quickly to Three Arrows’ bankruptcy petition, falling from a daily high of around US$20,600 to below US$19,200. BTC has since rebounded somewhat to just above US$20,000, according to CoinMarketCap.

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. 


2. Game maneuver

polium
Polium’s logo, left, has been ridiculed for its resemblance to the logo for Nintendo’s two-decade-old GameCube console Image: Polium/Nintendo

By the numbers: Polium One — over 5,000% increase in Google search volume.

Web 3.0 firm Polium has announced that it will launch Polium One, which it describes as a multi-blockchain gaming console, in a public release in 2025. However, the project has been met with skepticism and even ridicule from gaming industry insiders. 

  • Polium One hopes to bridge games from different blockchains and sidechains such as Ethereum, ImmutableX and Solana without requiring users to create multiple wallets and switch chains to access games and trade assets, according to the project’s website.
  • Players will be able to purchase a non-fungible token (NFT) “Polium Pass” to gain early-bird access to the console by the third quarter of next year, according to Polium.
  • The blockchain industry and NFT fans have touted gaming as one of the sectors that stands to benefit most from Web 3.0 technology. But despite smart blockchain money flowing into blockchain gaming, gamers have not reciprocated the love.
  • Blockchain-native games such as Axie Infinity enjoyed a boom last year, but established video game developers have been on the receiving end of a backlash among long-time fans for attempting to incorporate NFTs into their games and characters.
  • Polium’s announcement of its Web 3.0 gaming console was greeted with some scorn from the gaming community, including industry media outlet Kotaku, which declared in a headline: “Hilarious ‘Web 3 Console’ Will Never, Ever Happen.”
  • Gamers have also mocked Polium’s logo, which bears a striking resemblance to Nintendo’s 2001 GameCube home console. 

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. 


3. Writing the rules

image3
Amid a lack of regulatory clarity in China’s digital collectible sector, tech companies involved in it have taken a proactive approach to developing a code of conduct Image: Canva

Chinese tech giants have launched self-regulatory guidelines for non-fungible tokens (NFTs), referred to domestically as “digital collectibles,” in an attempt to address a lack of regulatory clarity in the country despite a steady drumbeat of warnings directed at the sector by state media outlets.

  • A clutch of Chinese tech giants that includes Ant Group, Tencent, Baidu and JD.com have vowed to eliminate secondary NFT trading and incorporate real-name identification into the sector, according to a statement released last week by the China Cultural Industry Association.
  • The companies agreed to act to curb the financialization of digital collectibles and to support only fiat-based trading in the assets.
  • Ant Group, Tencent and JD.com last October had pledged to curb speculation in digital collectibles.
  • Tencent’s WeChat, a megapopular Chinese social media platform, has been dishing out permanent bans on accounts involved in flipping digital collectibles.
  • Last week, NFT marketplace Yucang announced that it would buy back digital collectibles that it had sold.
  • But Chinese tech companies continue experimenting with the technology. On Monday, Tencent introduced NFT profile pictures on its QQ Music social platform. 

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.



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