Why Asia is Becoming the Natural Home of Decentralized Finance

Jason Choi, an executive at Spartan Group, a digital asset fund which recently launched a $50 million DeFi fund, calls Asia the natural home of decentralized finance (DeFi).

Choi thinks that growth is necessarily going to come from the same places that fueled the rise of the continent’s centralized finance sector.

When institutional finance set up shop in Asia, there was a uniform rule that firms needed to establish themselves in Hong Kong or Singapore. Both cities’ common law heritage meant a no-nonsense process for capital formation, and thus they became natural landing spots for foreign investors.

Over the years, a sophisticated financial ecosystem was born, attracting the likes of HSBC and DBS bank. 

But that was the era of centralized finance. In the brave new world of DeFi, with its $42 billion of locked in capital and growing, the incumbents are facing a new series of challengers. Thailand’s Siam Bank, not HSBC, is one of the “more forward-thinking banks in Asia”, according to Choi, with its new $50 million DeFi focused VC fund.

“I think they do set the example for what other banks would probably look to, especially because many of the offerings in DeFi are fundamentally disruptive for what retail banks are trying to offer,” he said. 

Hong Kong lacks a start up culture

Hong Kong isn’t sitting on the sidelines of DeFi, but it’s not fully embracing the technology either.  It’s notable that a Thai bank is making serious inroads into the sector. 

“The Hong Kong crypto scene is still relatively Bitcoin focused. So there’s a very heavy kind of Bitcoin presence here. But in terms of DeFi, there’s pockets of interest from retail investors,” Choi said.

Choi believes that the lack of an established DeFi industry in the City is because of a lack of a robust startup culture.  Educational institutions are focused on finance, and there’s not really an established tech industry to feed into. In contrast, tech hubs like San Francisco have well established pipelines that make it easy for grads to find well compensated roles in high flying technology companies. 

“A lot of the tech firms do have a presence in Hong Kong, but a lot of the presence is probably in the sales team,” he said. 

The startup culture exists up in mainland China, with its large addressable market and deep pocketed startup focused VCs (many of which count Hong Kong LPs in their ranks).

“Hong Kong, as a separate market with a different language and much smaller total addressable market of just about 8 million people is not really set up to be the place where you can just grow a startup natively and expect to achieve massive scale,” he said.

Hong Kong’s talent, he said, works remotely with decentralized teams that aren’t clustered in the city. Choi thinks that the future of finance isn’t working in an office tower in Admiralty, but with a distributed team on a decentralized pseudo anonymous protocol.

It came from Kuala Lampur

Hong Kongers hoping to work in DeFi have a new source of competition for spots on teams: Malaysians. 

Malaysia isn’t known as a technology or blockchain hub, but things are changing in the country fast. 2020 has seen the rise of ride hailing and digital bank giant Grab, thought of as southeast Asia’s answer to Uber, and CoinGecko, which is quickly becoming a challenger to CoinMarketCap’s dominance.

“Surprisingly, on the hiring side, I’d say maybe 10 to 20 percent of our applicants for jobs at Spartan Group are coming from Malaysia,” said Choi. 

Choi chalks it up to an increasingly educated and wealthier population that is eager to get involved in finance. However, this group needs to look beyond the country’s borders to invest in digital assets due to immature and unsophisticated local capital markets.

Taxes add a layer of complications

Yield farming — the “rocket fuel of crypto” — and its saving bond counterpart, staking, are innovative tools that power the DeFi revolution. But from a taxation perspective, they are incredibly complicated to deal with. More specifically, the way capital gains tax is structured in some jurisdictions makes dabbling in these parts of DeFi punitive. 

Questions about what constitutes a taxable event, especially when a DeFi protocol is composed of many other layered protocols, and a lack of robust accounting software to track all of this can be a major headache for traders, investors, and even venture capital LPs. 

But what if there was no capital gains tax at all? 

“There’s often no capital gains tax in places like Hong Kong, Singapore, Taiwan, and Malaysia, which makes it a lot easier to play with things like yield farming and staking without having to worry about things like, ‘does this transaction incur taxes at each swap? How many taxable events will we incur?’” Choi said, pointing to this as the reason why most DeFi users are in Asia. 

“It definitely has made it a lot easier for us to experiment with new protocols without kind of having to keep track of everything on like 30 different spreadsheets.” 

Degen to the core

Despite all the potential, DeFi has its challenges in the region. Hong Kong’s Securities and Futures Commission has proposed legislation circulating that would propose all digital asset exchanges operating in the city to register for its virtual assets service providers license and serve “[accredited] investors only.”

Although this legislation, if passed, could encourage similar regulations throughout the region and cast a chill over the industry, Choi doesn’t think this will derail the train. 

Why? Because deep down inside there’s an inherent fixation with one of the key characteristics of DeFi — the risk. The desire to make big, risky bets for an immense upside. A characteristic known as “Degen”, short for degenerate. Perhaps a scurrility to some, but a badge of honor to others. 

“In China and Korea there are heavier gambling cultures, especially because in most of Asia gambling is outlawed,” Choi said. “There’s a stronger speculative culture, which drives people to these kinds of markets.”

“A lot of the speculators, who maybe first were pulled in by the price appreciation, eventually do turn to the technology after interacting with some of these protocols,” he continued. 

“And that’s how their journey to DeFi starts.”