c2c #34: Custody for digital assets, GoTo, SFC, Balaji’s Networked States
I’m the author of Cowries to Crypto about the history of money, and the c2c newsletter is my personal take on innovation in finance and capital. In here you will find:
1. Work from the Week: highlights from my day job covering fintech
2. Talk of the Town: internet hot takes on tech and finance
3. c2c: thoughts on innovation and related topics
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1. Work from the Week: Stories from DigFin, August 29-Sept 3: Custody for digital assets, GoTo, SFC, AI
Custody for digital assets | Swen Werner and Irfan Ahmad | DigFin VOX Ep. 38. I remember a few years ago being told by many people in the crypto community that custody had been “solved”. Which may have been true: you either held the keys yourself, maybe on your Ledger or other device; or you entrusted them to an exchange, and hoped their airgapping skills were up to snuff. The conversation between cold wallets and (online) hot wallets never advanced.
For crypto traders, it was enough. But it won’t work for institutional investors. The major financial institutions are now all heavily involved in digital assets, of which crypto is a subset. I spoke with two of the people at State Street Digital building a custody service, and it’s fascinating to understand the degree to which instos are really along for the ride. The crypto community’s developers call the shots, and everyone else has to adjust. Compare this to the decades-long prep that goes into traditional legacy transitions…
GoTo results boosted by fintech performance: GoTo seems to be the big Southeast Asia platform business that is executing well across many complex processes. It’s nowhere near turning a profit, and in this new environment it will need to convince investors that it’s going to make that happen – if it wants to list on Nasdaq. But its latest results show remarkable uptake in what, I guess, we call synergies. Its payment business, including a new scheme of rewards called GoPay Coins, is both a facilitator of cross-selling and a revenue source in its own right.
SFC sounds warning over digital client onboarding: So the good news is that Hong Kong wealth managers and other distributors of investment products and advice are killing it when it comes to digital. Pretty much all new business is now done remotely.
The SFC is worried, though, that in too many cases, digital engagement amounts to cutting corners.
In my opinion, its suitability and customer-risk profiling rules are too strict and counterproductive, so of course digital businesses have to either dumb down their offerings or they end up as bad actors. Of course, firms should follow the regulations – protections exist for a reason.
But I was struck by one passage in the SFC’s circular, criticizing platforms for letting people tick a box acknowledging they’re making their own choices. This is definitely the business model of players like ZA Bank, which I profiled the previous week. If the SFC decides that it’s illegal to offer zero advice and let people buy what they want, then it needs to revamp its suitability rules, because there isn’t a middle ground for a viable digital business.
Applied A.I. leads tech adoption: McKinsey: A quick tour of the most popular forms of technology being adopted by the financial services industry, and industry more broadly.
DigFin awards open for all submissions! I hope to see your firm step into the arena, whether you work at a financial institution or a tech company. Our awards are independent and pan-Asia.
2. Talk of the Town
My favorite stat of the week, and a real indicator of the incredible energy in VC and entrepreneurialism in Southeast Asia today:
Talk about a flippening!
Meanwhile, VC in China isn't having a good year.
Although there's plenty of work to do in China...
Without having read the Economist article, though, I can imagine most of these were florists or construction or education companies that figured out they could receive a mountain of subsidies and government-guided VC funding if they remade themselves "AI" companies.
But we need more traditional funding models to emulate what (real) VCs do.
And the trend is favorable...
And I want to see THIS shit in the consumer market ASAP! Get money there now!
3. Weekly c2c: Balaji’s Network State
Balaji Srinivasan is one of those figures in his field who is known by just his first name. A venture capitalist and (very briefly) the CTO at Coinbase, he is a big proponent of Bitcoin. He is very smart, he bangs out ideas at machine-gun pace, and he knows a lot of shit, a lot more than you or me. He was a special guest at last year’s Singapore Fintech Festival, rapid-firing Web3isms at Sopnendu Mohanty of the MAS, who you could see was struggling to process it all before he could ask the next question.
This is Srinivasan’s style.
He self-published The Network State, a summation and call to arms of a lot of the ideas he’s been putting out in podcasts, tweets, etc. I have not agreed with some of his arguments, but he’s thought provoking, sometimes he makes a point that sticks in my head, and he’s got over 680,000 followers on Twitter.
So: his book. He gets to the point of what he wants: “A network state is a highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.”
It would be a startup nation: an online community of likeminded people following a visionary founder, who build it into a union with certain aligned goals and an internal economy underpinned by a cryptocurrency (Srinivasan is a Bitcoin maxi). Then the community crowdfunds money to buy real estate here and there, using VR to connect and a cryptographically secure passport for physical entry. The startup hits “milestones” like numbers of members, numbers of physical buildings or plots of land, and the economic transactions within the union.
And then finally these disparate but networked units secure diplomatic recognition from at least one “incumbent” government, and gradually add more recognitions and grow the physical footprint, and voila, you are now a citizen of a network state.
OK.
Srinivasan compares this favorably to the states we have today, which are geographic units of different people who didn’t sign up to be there, but who have to tolerate one another and pay taxes to the central authority.
He says this is desirable in the way that building a new company is desirable: to build something new without historical constraint. And if such an entity achieves critical mass, it could even join the United Nations as a true, self-sovereign state, just as (says Balaji) Bitcoin has become a national currency – in El Salvador.
There’s nothing wrong with imagining alternatives to the system of nation-states that have dominated the world since the Treaties of Westphalia, which in 1648 are credited with the notion that each state has exclusive sovereignty over its territory.
This is the latest in a long line of ideas about people wanting to run their own show – cranks in abandoned offshore oil rigs, but now a bunch of them linked by the Metaverse. Srinivasan isn’t advocating a retreat from society, however. It is more like a stealthy insertion of something else.
It does, however, reflect a view that the existing world is unsalvageable. One problem with the book is that the author doesn’t bother arguing why this is the case. He just takes it as a given. But the big problems of today’s world are global in nature. There’s no opting out of climate change, pandemics, organized crime.
Another problem is that the evidence so far of relying on Bitcoin as legal tender is disastrous. A thugocracy in Central America is needlessly impoverishing its people.
More fundamentally is Srinivasan's approach to history. He spends a lot of time talking about history as a tool of power and abuse (aka “wokeness”). The driving vision of a startup society must be a moral issue – the problem you want to solve – and a solution (the new society) that is “historically informed”.
This informed thing goes back to another of Srinivasan’s obsessions: the “woke” media. He hates the New York Times and other media groups, and has spent a lot of time talking about how blockchain should be used to create a new media based on a golden truth. Accrete facts, make them immutable onchain, and base your New Media from that starting point. Take that, Sulzberger!
But this is a classic case of techbros trying to use blockchain to solve the wrong problem. There has never been any media that reflects just straight-up facts. Gutenberg printed his Bible, which in Europe was the closest thing to truth you were going to get – only it helped spur the rise of vernacular languages and before you knew it, Europe was engulfed in wars of religion (which resulted in the Peace of Westphalia).
I actually crossed swords with Srinivasan on Twitter about this, because the closest thing he is describing already exists. It’s called Wikipedia. It too remains an ever-shifting battlefield of clashing memories. The reason we lack a single source of truth about history isn’t a question of technology and it never will be.
Nonetheless Srinivasan interjects his Networked State with the glib assumption that a new community, built from scratch, accrues its own history via a series of cryptographically ascertained facts, supported by Bitcoin and “crypto oracles”.
Crypto oracles are another of his ideas. Say, for example, there were cryptographically proven facts – traceable and audited and immutable – about Covid-19 that were deposited in the oracle (like a library). Then there wouldn’t have been so many arguments over the disease and its treatment, and certain governments couldn’t have spun the truth this way, and other governments couldn’t have spun it that way…
But this is hokum. There are plenty of reliable facts about vaccines and results. But people still cherry-pick the facts they want – or they ignore the facts altogether. I could have an absolutely immutable, oraclized, Bitcoin-bought fact that mRNA Covid vaccines have a 99% chance of keeping you from being hospitalized by the disease – and there would still be lots of people swearing vaxes are the work of Satan.
At the end of the day, reading The Networked State is like listening to Balaji on a podcast: rapid-fire, absolutely confident factoids and vision that add up to nothing. The premise of the book is silly.
It’s not even that original. Neal Stephenson in his epic novel Snow Crash – the one famous for conjuring up the concept of the Metaverse – portrayed a physical America that had disintegrated into “franchises”. They look a lot like Srinivasan’s networked states, multiple oases nestled here and there belonging to the same corporation or government. Some allowed people to access them for a fee, others were private domains. The most powerful of them belonged to the Mafia.
Or, if that’s too abstract, take Estonia’s digital citizenship. Since 2014, the country lets digital nomads start a company and run it remotely, within the European Union. Part of the appeal is to join a global community. This is a centralized, top-down approach, so not a true substitute for what Srinivasan proposes.
But states are born from insecurity. Digital nomads aside, Estonians these days are more worried about a Russian invasion than onboarding another foreign e-resident. Security is why states exist, why they insist on the integrity of their borders, and why people will continue to define themselves along these lines, for better or worse. Srinivasan thinks he’s solving a problem of state ineffectiveness (or something…he never really bothers to define it), but what he needs to solve is the problem of international security.
Otherwise Network State societies just sound like cults. These have been around long before blockchains or computers. Cults by Discord, powered by Bitcoin. Maybe try it in El Salvador. Good luck!
See you next week
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About Jame
Jame DiBiasio is a book author, financial journalist, media entrepreneur, and a speaker/moderator. In 2015 he launched DigFin, an online media covering digital finance that is part of the digital arm of Hong Kong-based financial group AMTD. Jame is also a member of the board of the Hong Kong Fintech Association.
He is author of “Block Kong” (co-authored with Charles D’Haussy) profiling 21 blockchain entrepreneurs in Hong Kong; and “Cowries to Crypto: The History of Money, Currency and Wealth”. He is currently working on a book about the venture capital industry.
Jame has also written books about Asian history, including “Who Killed the King of Bagan?” and “The Story of Angkor”. He writes thrillers too. You can find all of Jame’s published books on Amazon.