As Hong Kong Prepares For The New Virtual Assets Era, It Must Embrace Innovative Dispute Resolution

All through the course of historical past, the world has seen a variety of extinction occasions. The final of them, the Cretaceous-Paleogene extinction, or Ok-Pg occasion, worn out the dinosaurs and led to the emergence of mammals and finally the homo sapiens because the apex species. Whereas life stays a cosmic oddity that in the interim is confined to the pale blue dot, it has tailored and continued to thrive by the eons. Extinction occasions, whereas disruptive, are drivers of evolution.

Such is the world of fintech, on a a lot shorter and accelerated time-frame, however no much less fierce. It has simply been a bit over a decade since Satoshi Nakamoto first unveiled to the world his imaginative and prescient of a decentralized internet of transactions to be powered by the then-little-known blockchain expertise. That one small step has since impressed the worldwide leap in direction of distributed ledger expertise, DeFi and Net 3.0. The trail to the promised land is nevertheless fraught with peril. Within the house of only a few years, we witnessed the DAO disaster of 2016, the ICO bubble of 2017, and, extra lately, the collapse of Sam Bankman-Fried’s FTX, echoing acquainted tales of yesteryear.

It might, nevertheless, be rash to leap to a wholesale dismissal of the notion of fintech or the underlying expertise as one more South Sea Firm. The South Sea Firm was a punctured bubble that failed, not not like FTX, however the New World was actual.

Whereas many individuals could, fairly understandably, stay skeptical of cryptocurrencies and the exchanges given the incessant disruptions, the expertise is nonetheless having an growing impression on our society. It might be argued that explorers from each private and non-private sectors are nonetheless within the quest of discovering sensible purposes of the expertise, and the manners wherein it’s to be regulated. Some experimental regulatory frameworks have been launched, and new age sheriffs are being recruited to manage the Wild West of the twenty first century.

Hong Kong, which has been bruised in its combat to defend its title as one of many world’s premier monetary facilities, has lately weighed in with an array of initiatives to advance within the fintech area. On the current Hong Kong FinTech Week, Christopher Hui, the town’s Secretary for Monetary Companies and the Treasury, proclaimed three pilot tasks: the primary NFTs to be issued by the federal government, Inexperienced bond tokenization, and the eHKD. These strikes seem like signaling the territory’s embrace of the underlying expertise and the gradual recognition of property created, managed and transacted by way of such expertise, in the end steaming in direction of a extra digitalized economic system. The most recent coverage assertion gives a lot wanted regulatory certainty and a way of basic route to the market.

It stays to be seen how the insurance policies will flip into measurable outcomes. Simply as momentum is being gathered, the calamitous collapse of FTX is a well timed reminder of recent systemic dangers and related authorized points introduced by the expertise that aren’t absolutely understood. And the impression of the current collapse is barely being felt outdoors of the crypto ecosphere. On the time of writing, monetary regulators of the Bahamas have appointed liquidators to run FTX’s unit within the nation, and numerous allegations of mismanagement of the affairs of FTX and its related firm, Alameda Analysis, have emerged. The downfall of Tokyo-based Mt. Gox, a once-dominant bitcoin trade, in 2014 could properly shed some mild on how the newest iteration of trade collapses will unfold, however the present episode will little doubt gestate novel problems with its personal, notably from the restructuring perspective.

If Hong Kong is to propel itself into the route of being a hub of digital property, and particularly if retail buyers are to be given some extent of entry to digital property, it should rapidly evolve to be ready to cope with a raft of novel authorized points when bold ventures fail, which loads of them sadly will. There’s as but a paucity of dialogue on sensible points, such because the mode and regime for creation of secured curiosity in digital or tokenised property, and the interplay with and safety of such rights by way of a bodily courtroom of legislation. Our present court-based dispute decision regime has to this point struggled in linking the web and the offline worlds. It was not way back when service of paperwork by electronic mail was acknowledged as legitimate, and solely in some restricted conditions.

Whereas we tiptoe in direction of the courageous new worlds of decentralized-land and metaverse, the legislation should acknowledge that boundaries between the actual and the digital will turn into more and more and irreversibly blurred, and maybe finally fused. At current, arbitration seems to supply the very best dispute decision mechanism linking each worlds: it has the flexibleness to tailor to the wants of the events, it permits comparatively speedy decision, and permits the events and the proceedings to remain confidential.

Extra importantly, in step with the spirit of decentralization, proceedings may be pursued from cradle to grave fully on-line, and the events are free to decide on an arbitrator to their very own liking, who may very well be an knowledgeable within the area, or just be a trusted peer of their very own, as an alternative of a conventional choose sure by the confines of a selected jurisdiction, and who is maybe extra well-versed within the legislation than the expertise. Awards may be enforced by way of conventional courts and Hong Kong, given its shut ties to mainland China, presents a novel benefit. A few of the foresightful establishments right here have already revealed guidelines and launched platforms tailor made for on-line dispute decision (ODR).

As we proceed to sail by these treacherous uncharted waters, allow us to not lose sight of the brand new continent—which can hopefully convey to humanity our subsequent leap ahead.

Co-authored with Plato Cheung, senior affiliate at Baker & McKenzie Hong Kong; and Beryl Wu, affiliate at Baker & McKenzie Hong Kong.