A digital coin that doesn’t change in value (up or down) is the missing component that has so far prevented the online world of internet 3.0 transitioning from an entertainment space to a genuine alternative Economy. However, Central Bank Digital Coins and other ‘stable coins’ are coming and this will give a whole new meaning to the term Emerging Markets. The ability to both earn and to spend money within a virtual world – a Metaverse – and crucially to connect those earnings to the real world is, quite simply, the biggest story out there. We admit to our ignorance of this so far, but we are keen to learn and share our thoughts. This is where we start….

It is somewhat ironic that, having returned to Hong Kong In Real Life (IRL), many of the most interesting conversations we are having at the moment are about the dramatic changes occurring in the virtual world of what is now widely referred to as Internet 3.0 and in particular the online world of The Metaverse. This is a term that we see rapidly becoming more popularised, not least as FaceBook has just announced that it is to rebrand itself around this theme next week. We make no claim to expertise here, we are learning as we go along, which is why we are writing about our discoveries, because we feel that this is going to be as important to investors as Internet 1.0 was in 1995 when a young Jeff Bezos was being somewhat ridiculed for his plan to take book-selling online. In fact, even more so, for already it seems obvious to us that, just as books and CDs were the obvious markets to disrupt by using the internet for ordering (and subsequently also delivery), so financial services seems the most likely area of disruption from the MetaVerse.

So to think about the MetaVerse a little, we should perhaps (re)visit the 2018 Stephen Spielberg movie Ready Player 1, itself based on an earlier dystopian novel of the same name, which foresaw many of the developments in Virtual Reality (VR) and Augmented Reality (AR) that we remember getting excited about as investors ten years ago, but which, rather like 3D printing, have been slow to become mainstream. In this metaverse, our protagonists interact mainly as avatars in a virtual world with its own currency that can be exchanged for ‘virtual assets’ and it is the ability of a stable coin to translate that virtual currency back into IRL money and a blockchain ledger to certify ‘ownership’ of the asset, that is the key to the disruptive nature of all of this.

To (Axie) Infinity and Beyond

Fortunately, we already have a real life example of all this, which is a rapidly expanding online game called Axie Infinity, perhaps best thought of as Pokeon on the Blockchain. (It is very helpful to have a lot of smart HKU graduates around as virtual sherpas in this area!)

While it would be easy to dismiss this as simply a game for young people and students, in the same way that most people ignored the original Augmented Reality version of Pokemon that had people wandering around public spaces on a form of virtual Treasure hunt, it is already much more than that. There is a lot of detail here about how it all works, but in our simplified minds, the reality is, that while Pokemon Go founders Niantic made money from in-app purchases (we always said we liked the Tencent model on the basis that the margin on a 10c virtual battle axe was 100%!), the difference with Axie infinity is that the players are not just spending money, but also making money playing the game, on the blockchain. This for us is the key difference between what is essentially a game and what is effectively a whole new economy.

At the moment, the cost of entry to play Axie Infinity is quite high, such that some people are leasing out their characters (you need to ‘own’ three to play), but coming from the world of investments isn’t this just like renting a seat on a Futures exchange? And here comes the existential thought; as a fund manager, people wanting to achieve a return on their capital go via an intermediary and give me virtual coins which I use to play in a virtual universe of security price movements against other money managers. Other managers do similar things with Commodities or currencies. At some point the clients ask for their virtual coins back in exchange for IRL currency to pay their bills. It’s a different skill set, but why only back someone who makes money in cyber space playing the markets? Why not back anyone able to make money in these new ‘economies?’ In essence, what is the difference between betting on futures and slaying imaginary dragons? It’s an uncomfortable question, particularly for ‘Masters of the Universe’ types trading esoteric bond markets, but why not invest in a Filipino teenager playing Axie Infinity, if his knowledge and skillset give him a money making edge? What really is the difference, apart from (at the moment) scale?

Is a player making money playing video games that different from one making money betting on markets?

But this is a huge (and rapidly evolving) subject, so best to start simple, which is with the concept of Tokens, or to be precise, Non Fungible Tokens, known as NFTs and the distributable ledger that is known as the Blockchain. The latter is reasonably well known as a concept and has largely been caught up with discussions about Crypto Currencies that, frankly, tend to lead to eye rolling and drifting off of attention for any but the most dedicated of audiences. It is however, the ledger that guarantees ownership rights and ultimately removes the frictions and expense of both holding and transacting in assets. The concept of NFTs, which give ownership rights over virtual assets is newer and more exciting, for they directly challenge the IRL world of financial assets, which to all intents and purposes are virtual (they are accounting items) but which are cumbersome and expensive to maintain and transact. This of course is a feature not a bug as far as Financial Industry insiders are concerned, but as far as we can see that ship is heading rapidly for the rocks.

Perhaps ironically, it looks likely that the Central Banks, with their ambitions for Central Bank Digital Coins (CBDCs), which for many of them are about ‘control’, may be building the ecosystem through which stable coins can operate and in doing so bypass not only a lot of those control systems but also the whole, traditional, transaction based financial sector. (But that’s for another day. We said it was a huge subject!)

We are not here to criticise Crypto, rather to put it to one side as it is a distraction, focusing as it does on speculative capital gains (in the manner of Gold) rather than focusing on the rapidly developing world alongside it that is about transactions and economic activity on the blockchain, not about speculation. When I go from IRL into the online world, I want a safe and secure unit of exchange in order to transact (at minimum cost) and I want the exchange rate back into IRL money to be the same as when I went in. The idea that because I bought BitCoin or Ethereum to use as an operating system of sorts that I would be also expecting the transaction currency to have gone up in the meantime is ill-founded. I want a stable coin. This is, in our view, going to be the thing that unlocks the whole MetaVerse, remove the frictions and the risk of participation and the volumes will explode and with it not only the opportunities, but also the threats to existing transactional based businesses.

To repeat, we are coming from a very low level of knowledge here, so are not claiming expertise, but what we do knw is it’s going to be a heck of a ride!

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