NFTs metaverse and beyond 101 for lawyers webinar transcript

Speakers:

• Hoi Tak Leung, Ashurst LLP ("HTL")
• Victoria White, MdME Lawyers ("VW")
• Ken Lo, HKbitEX ("KL")

HTL:

Hi everyone.  Welcome to our webinar today on NFTs, metaverse and beyond – 101 for lawyers.  So today, I, Hoi Tak Leung, from Ashurst, a counsel at Ashurst Hong Kong Digital Economy Team, is delighted to welcome Victoria White, a counsel at MdME lawyers, out of Macau; and also Ken Lo, who is the co-founder of HKbitEx, which is one of the leading digital assets companies in Hong Kong.  Ken will be joining us a little bit later today due to an overlapping meeting. 

So I will give a couple of minutes before we start so a few more participants can join.  But before we commence, I have a couple of admin points that I needed to note, particularly for those of you who are looking at this webinar as a way to get some Hong Kong CPD points.  So we've made an application with the Hong Kong Law Society for CPD accreditation.  Please stay on for the whole session if you want to claim whatever CPD points are available. Participate in the polling questions as well, that's one of the requirements from the Hong Kong Law Society.  And finally, complete the evaluation form at the end of the webinar which will pop up on your browser.  That will ensure that you get your point and also it will ensure that we, at the Ashurst Digital Economy Team, are able to provide better content and information for you for our ongoing webinars and other articles going forward.  

So with that in mind, it's 5.04 now, so I think I'll get a start on.  So what we are going to do today is the three of us will each share 10 or so minutes, maybe a little bit longer, on things that we are seeing in the ecosystem.  So my presentation will be a little bit more legal-focused; Victoria's session will be a mix of legal and commercial, focusing on developments in the NFT and metaverse space in China.  And then Ken will be speaking primarily about the NFT ecosystem.

Hi Ken.  I was just speaking about what you're going to be speaking about.  So, Ken, the co-founder of HKbitEX will be speaking about developments in the NFT space and what his company is doing in the space. 

So without further ado, I will begin.  So at the outset I have to say that this presentation usually takes me about 45 to 50 minutes.  So I'm condensing this into 10 minutes, so I'm definitely going to be missing a few details here but I, and I'm sure all the other panellists, welcome all questions from you, whether during this webinar.  And, by the way, after we each do our presentation we'll leave about 25 minutes or so for questions and also a panel discussion between us.  So we welcome all questions.  And so let's kick things off.  

So NFTs, where are we now and what's next?  So from my angle as a Digital Economy lawyer, I'm seeing a whole lot of developments, but at the same time maybe not that many developments at all, and I will kind of talk through that a little bit as we go on.  But I think, at the outset, one of the main points to note about NFTs, and I will focus on NFTs for now in this webinar and in this presentation, and we can talk a little bit more about other things later on in the panel discussion.  But where I'm seeing NFTs are, is that it's in some ways, not in other ways, but overall it's at a very kind of wild, wild west kind of stage.  And what I mean by that is that there's a lot of very reputable companies who are working in this space looking to find more legitimate use cases and of course exploring the legal angles that are required to be compliant with regulations, and also protect themselves and other stakeholders. 

There's also a fair bit of a kind of wild, wild west behaviour.  And for those of you who are familiar with the kind of ICO boom, for example, back in 2017/2018, I'm sure you'll be familiar with that.  And in many ways that's not actually … it's a massive issue in some ways, but also it's a very natural evolution when you look at kind of emerging technologies and the kind of cycle of life they go through.  At the beginning of the cycle of life for emerging technologies there will always be a lot of legal uncertainties.  For many of you guys who are working in technology in the law, I'm sure you know this: technologies are always going to develop at a faster pace than regulations and best market practices.  So that's where we are at in the space but let's talk through that a little bit more.  Next slide, please.

So I just thought I will have a mural of all the NFTs, all the valuable NFTs and more that we are seeing in this space.  Next slide, please.

So I just want to go through these points very quickly, and these are the legal issues that we see.  So number one, the most important thing is what role do you play in the ecosystem, we'll get to that.  Intellectual property and commercial agreements, that's a key issue when it comes to NFTs.  Consumer protection, which is an area that you should be looking at, particularly if you're in the marketplace, [as] a stakeholder.  Financial regulations, many of us who work in the financial services industry will care about that.  Data security and privacy.  And finally, what's next?  So next slide, please. 

So what is an NFT?  I get asked that all the time.  Victoria and Ken, I'm sure, get asked that all the time.  So I won't get into all the technicalities, I will definitely leave Ken to speak on that a little bit more.  But the most important thing you need to know about an NFT or a non-fungible token is that it is non-fungible.  And by that, I mean that it cannot be exchanged or interchanged with something else.  So a Bitcoin, for example, is fungible.  You have one Bitcoin, you have another Bitcoin, you replace them, you still have one Bitcoin.  A one-of-a-kind trading card, for example, is non-fungible.  So you can't get another trading card to swap with that trading card because you'll have a different trading card.  So NFT at its most basic means a unique, non-interchangeable digital asset.  But what does that really mean in practice?  Next slide, please. 

So before we go on with what you need to know about NFTs in terms of legal issues, I think the most important thing … I talk to many companies in this space, clients, contacts and otherwise, the most important thing that you need to figure out is that, are you an issuer of an NFT?  Whether you are a creator of the NFT, whether you are an intellectual property rights creator, like a music artist, for example, or a graphic artist.  Maybe you're a talent agency who represents those who created the original IP.  Whether you're a buyer of the non-fungible token, or whether you're the platform that is facilitating the buying and selling of these NFTs.  So I've put this random-looking Word document on the screen but what it really is, is that in our work over time, we've kind of figured out, whether you're a creator, whether you're a buyer, whether you're a platform, you'll be asking different legal questions in this space about NFTs.  And we’ll issue this update shortly, this is basically just the first page of that update, but the key point here is that, as I go through some of these points, you have to think about different things.  So that's something really to keep in mind.  Next slide, please.

So what do you have to keep in mind?  The first thing is that … so I'm a technology lawyer by trade; I've have been a technology lawyer for the last 15 or so years.  Time flies, right?  So when I look at NFTs, one of the big things that I'm very interested in about it is that it's really emerging technology, crossover intellectual property.  So when you look at the previous kind of cryptocurrency boom and so on, a lot of it was focused on financial regulations, investments and so on.  And we'll get to that a little bit later.  But when I look at NFTs right now, the key point here is really about intellectual property in commercial agreements.  And what does that mean?  So the first thing is, what rights are you getting with the NFT?  So this is a very basic point.  I mean, all of us, when we go out, we buy stuff.  What are we actually getting or what are we selling.  And actually, in the NFT space, it can actually be quite difficult to find out.  

So personal anecdote time.  I, in the interest of research – definitely not to make money – in the interest of research I went out, bought some NFTs using Solana tokens on a couple of platforms.  So the NFTs that I bought, they don't have terms and conditions attached to them, that's number one.  So the issuer didn't put terms and conditions to that project.  And then the platform itself also didn't really have terms and conditions attached to the tokens that they were buying or selling.  So after a lot of research, I'm still not clear as to what I bought.  And by that I mean, for example, these tokens, can I put it on a t-shirt?  Can I sell those t-shirts?  Can I put it on mugs?  Can I sell those mugs?  Can I put it in any kind of videos that I'm going to make?  I actually don't know.  And that's one of the things that if you're going to … whether you issue NFT, you're going to buy NFT, or you are a marketplace, you really have to figure it out.  And that goes to kind of more traditional intellectual propert
y issues around things like what rights do you hold? Do you have an appropriate license?  If you're representing someone else, have you got that agreement in place?  Are you going to implement ongoing royalties?  So if you talk about smart contracts, are future sale of that token, would that grant you royalty payments?  These are all things that you have to figure out. 

And then if you're a buyer, how do you verify these rights?  So you think of getting these rights but how do you actually verify that?  And one of the big things that we're seeing is that we've got these NFTs, this token represents an artwork.  They represent digital artwork but that digital artwork is being stored somewhere else.  So it's being stored in whatever server it is.  What if that server goes down?  Who is responsible for paying that and paying that cost?  What if it's no longer stored here?  What happens?  And that's … all these issues are starting to get fleshed out as the NFT marketplace becomes more mature.  So the key point here is really that no matter if you're an issuer, buyer or platform, get to know the terms and conditions that you are dealing with and make sure that you're getting the rights that you are getting or selling.  Next slide, please. 

So quick one, NFTs and consumer protection.  This one's particularly relevant for the platforms that we work with.  Fraud – are the NFTs authentic?  Are there misrepresentations potentially on your platform?  The data privacy practices.  And kind of other issues that a lot of different platforms over time have seen, like liability, dispute handling, content review, transaction fees.  These are all issues that we're looking at.  Next slide, please.

Quick one on financial regulations.  There's no financial regulations focus on NFTs at present.  And if they are purely an artwork or a collectible, just like in real life there's no kind of financial regulations applicable to an artwork.  There's unlikely to be financial regulations applied to those NFTs.  But what about partial ownership?  What about sale of ongoing royalty rights?  What about marketing of NFTs as an investment for profit?  These are things that are getting fleshed out in Hong Kong and beyond.  Next slide, please.

And finally, NFTs and data security and privacy.  I just put some headlines there.  Hacks of cryptocurrency is a topic beyond this presentation but obviously happening in a lot of different places.  So one of the key concerns for platforms in particular is, and also for NFT holders alike, is how do you protect yourself.  If you're a platform, how do you protect the NFTs and cryptos that you hold?  If you're buying it, how do you protect it?  What I mentioned before, where your NFTs are being stored – these are all issues that we have to look at.  Next slide, please.

So that's my 45 or 50-minute presentation wrapped up into 10 minutes.  But for me, one of the most interesting parts is what's happening next in this space as it matures.  And to talk about that and more, I welcome Victoria, who has been doing a lot of work in this space and she's about to share some knowledge about this area.  Thanks, Victoria.

VW:

Well, that is great.  Well, first off I'd just like to say a great thanks to Hoi and the Ashurst team for inviting me to join their panel of experts today.  As Hoi said, I am Victoria White, special counsel at MdME Lawyers, and I am Head of Digital Transformation and so I focus on the use and regulation of emerging technologies.  So I know that you've probably heard a lot of media buzz around the metaverse and NFTs over the past couple of months but I really hope that in today's session, like Hoi said, we'll really break through that kind of superficial layer, and all the publicity around the metaverse and NFTs, and get to some of the core issues so that you really go away having learned something from today's discussion that will be helpful when advising and implementing your own projects in this space.  So we will go to the next slide, please.

So I'll just start by underlining that for those of us here in the Greater Bay Area – in Hong Kong, in China, and in Macau – we're very conscious of geographical differences in the development of these metaverses in the region.  And depending on where your target customer base or your consumer market fits, you want to be involved in the metaverse ecosystems that your customers can access and interact with.  So in China, a separate range of metaverses are being developed for the China market and it's no surprise that the leading tech companies like Tencent and Alibaba and ByteDance and NetEase and Baidu, they are all investing in development of their own versions of the metaverse.  And the China metaverse ecosystem is evolving very differently from the metaverse platforms that have been created by, say, Hong Kong and European and US developers.  Now one important influence on the development of these metaverses is regulation.  

Now it's pretty clear that the metaverses in China will follow the directive of not supporting cryptocurrencies, not issuing their own in-world token currencies and not permitting speculative trading of digital assets like NFTs and virtual land plots, which we'll go on to talk a little bit more about later.  So in October last year, a Metaverse Industry Committee was set up in China under the China Mobile and Communications Association.  Now the members of the CMCA, they include state-owned enterprises like China Mobile and China Unicom, as well as Tencent and Alibaba and a number of smaller metaverse development companies.  And we can see that the new Metaverse Industry Committee will be a linchpin in directing the development of metaverse platforms in China going forwards.  Now one of the major tasks for the committee will be to strengthen integration within the industry.  And that includes things like 5G communication networks, AR/VR wearable devices, blockchain, cloud computing, edge computing, and so on.  And the committee will also focus on training professional in the metaverse industry and thought leadership related to the metaverse.  And it's very likely that, going forwards, there will be specific Chinese regulation around the development and operation of metaverses that target the China market.  

And I would say, certainly for all of you in the consumer retail and services industries, the metaverse will have a big impact on social commerce and consumption in the China market in future.  Even Chinese cities and regions are now incorporating the metaverse into their five-year development plans, and particularly for the IT industry.  But at the moment, the Chinese metaverse ecosystem is really still in its infancy.  There are signs that China's tech companies are beginning to experiment and to lay the groundwork for future applications, and it's likely that these will first involve AR and VR supported games, and interactive environments.  So not too far away from sort of the online eSports and eGaming environments.  And Baidu was the first to launch a metaverse app in China, and that was just in December last year, and that is called Xirang.  However, as we said, it is likely to be several years before Xirang and other metaverse platforms really reach their full potential and a sophisticated offering.  

And I think one point that's worth noting here is that metaverse environments are centralised and entirely developed by the platform operators themselves in China, so companies like Baidu and Tencent and so on.  So going forward, if brands want to feature or have a virtual store within one of these metaverses, it's very likely that they'll have to go through the platform operator to do this.  Essentially, it's going to be a bit like setting up a mini program that is kind of migrated to the metaverse in the same way for the China market that, currently, there's no point developing your own app for customers to download on the iOS store in order to buy your products and services, instead, you have to have a WeChat or an Alipay mini program.  It's very likely that it's going to be the same case in the Chinese metaverse.  The landscape will be dominated by large tech developers and you will need to launch your presence through their channels in the respective metaverses.  So I think, on that front, we've just got to watch this space.  We'll go to the next slide, please. 

Okay.  So outside of the China market, there are numerous development companies all vying to become the ultimate metaverse.  And we can see on this slide a snapshot of some of the most popular metaverses that exist at the moment.  And the most well-known ones are things like Decentraland, and Sandbox because they are leading in terms of token valuation and media interest at the moment.  And then there are others like Axie Infinity and NFT World, although I have to say many of these are still in development, in the production environment or in beta testing, and they do not yet have a live version available.  

Now as we said earlier, a key influence on the development of these metaverses is regulation.  So when it comes to rules and regulation around construction of metaverses and activities in the metaverses, like Hoi said earlier, it's possible to think that we're in uncharted territory here.  There don't appear to be any specific metaverse laws yet.  So is it a case that developers and participants in the metaverses, that they've got free rein to do whatever they like?  Is it entirely unregulated?  Well, I think it's important to take stock here and to point out that the metaverse is not new.  The first online virtual world was launched back in 2003 and it is called Second Life.  And we'll go to the next slide, please.

So some of you may remember it or even have played it.  It is essentially an online multimedia platform where users can create a virtual representation of themselves and explore the virtual world.  And they can meet other residents, they can socialise, they can participate in individual and group activities, and they can shop and create and trade virtual property and services with one another.  So way back in 2003, the parameters and the basic pillars of the metaverses were already in place.  And we can see from the treatment of Second Life over the past 20 years, that existing eCommerce and consumer protection and data privacy regulations and so on, they were applied to the business activities and operations of the virtual platform.  

Now a key issue here is jurisdiction – so which laws will apply to a particular metaverse?  And from this, we can look at the principles that are used to determine the jurisdictions of laws that apply to activities of apps and websites and social media channels.  It's going to depend on where the metaverse platform operator is located, where the servers and the data is held and processed, where the target users are located, which languages are used in the metaverse and so on.  And from that, we can then deduce the respective laws that will apply.  

And here, like we said earlier, we're talking about sale of goods and services laws, consumer protection laws, personal data and privacy laws and the like.  And just to give an example, if you have a Hong Kong based metaverse developer who sells virtual land plots to, say, a Singapore based customer and the metaverse users are located in, say, Malaysia and in France and in the UK, you can see that there's going to be a number of relevant laws across these jurisdictions that's going to apply to those activities.  So we'll go to the next slide, please.

So one question that frequently comes up is, what is the ownership framework around these virtual land plots in the metaverse?  Most of these plots of land are sold as non-fungible tokens.  And you can buy them on NFT marketplaces, like we see on this slide, such as OpenSea, or we can buy them directly from the metaverse development companies like Sandbox or Decentraland.  And a big question is, so what exactly do you get if you purchase a plot of virtual land in one of these metaverses?  Well, like we said, the plot comes in the form of an NFT and the majority of these are ERC-721 tokens which run on Ethereum blockchain protocol.  And what you get is essentially a data link to where the NFT is stored in the InterPlanetary File System of the metaverse developer.  So essentially, like we said, you're getting a pointer to where the data that is associated with the NFT is being stored in a distributed file system.  But it does not convey the transfer of any IP ownership or property rights or other usage rights unless explicitly stated in the terms of use.  So essentially, it's a very simple contractual sale which is governed by the terms of use, which the purchaser agrees to when they buy the NFT.  And like we said, if the metaverse developer is located in Hong Kong, the terms of use will likely need to comply with the Hong Kong Supply of Services (Implied Terms) Ordinance if the sale is to an individual Hong Kong consumer.  And it's also worth noting that some of the terms of use have limitations on what purchasers can create within the virtual plots of land that are associated with the NFTs.  Some plots of land may have height restrictions on the virtual structures or the buildings that can be built on the land, or they may prohibit the use of the plot for certain activities.  And it's obviously very important that if you're a metaverse developer, that these restrictions are clearly stated in your terms of use prior to selling the virtual plot of land, because otherwise you may fall foul of things like the Trade Descriptions Ordinance.  We'll go the next slide, please.

And so virtual plots of land are obviously not the only use case scenarios for these NFTs or the ERC-721 tokens.  We've all seen NFTs attached to digital art and JPEG images, to audio and video files, and even to real world items like trainers, jewellery and fashion items.  And I think it's worth pointing out that essentially two types of NFTs or digital collectibles have emerged.  The first type has grabbed all the headlines.  These are the NFT digital art pieces that have sold for the equivalent of millions of dollars in cryptocurrency at auctions and they have an inherently high value due to the perceived scarcity and demand of the attaching assets.  And these are usually purchased in cryptocurrency on the main NFT marketplaces or auction sites.  

And the second type are known as digital collectibles, and they have been heavily adopted in the China market.  So again, we're thinking that there are some real geographical differences with the development of NFTs or digital collectibles in this space.  So these digital collectibles are basically sold or given away by brands at minimal prices, sometimes paid for in fiat currency, just one RMB, and they're really used as marketing tools for user engagement.  And many of the large tech companies in China, they've launched digital collectible marketplaces for the China markets.  Just to give you an example, Mid-Autumn Festival last year, Alibaba released digital collectible mooncakes and they were available for just one RMB, and they were built on Alibaba's blockchain platform, which is the AntChain, and they were sold through Taobao.  And once again, regulation and policy factors have heavily influenced the development of digital collectibles for the China market.  Over the past year, the People's Bank of China has restated that cryptocurrencies and all associated activities are prohibited, so payment and valuation of digital collectibles is entirely in RMB currency and, hence, digital collectibles are mostly issued on private blockchains like that of AntChain or Tencent's Zhixin, or the government's own blockchain-based service network, and they do not use public decentralised blockchains.  

Then last week the China Banking Association and the China Internet Finance Association and Securities Association of China, they issued a joint statement about the risks of investing in NFTs. And they said that NFTs should not be considered as assets, like securities and precious metals and other financial products, and that NFT transactions should not be priced or settled in cryptocurrencies, like Ether and Bitcoin and Tether, and investing in NFTs or providing financial support to others to invest in NFTs is entirely prohibited as well as fractionalised ownership of NFTs.  So it's pretty clear that the NFTs in the China market will firmly remain as digital collectibles, basically as a form of marketing and promotional tool with no intrinsic value, so they will not be used as investment products for financial speculation and investments.  And to this end, it's very interesting to note that the major digital collectible marketplaces in China, they've introduced requirements for purchasers to hold the digital collectibles for a minimum of 180 days before transferring or reselling it to another party.  So that's basically to avoid any type of short term trading for profit.  And so the brands in the China market are exploring digital collectibles, basically as a medium for mass market customer engagements, and these, you know, they're are using it for digital collectable giveaways, for treasure hunts and promotions on the main digital collectible marketplaces.  And we'll go to the next slide, please. 

And then outside of the China market, we've also seen NFT ownership used as a tool to increase customer investment in brands and long term customer loyalty.  So brands have started to use NFT ownership communities as new VIP CRM programs, and particularly luxury brands are now starting to establish NFT communities, usually in partnership with a tech or digital marketplace.  And this is basically in order to gain … well, in order to gain access to these exclusive NFT communities, VIP customers have to buy one of the specified NFTs in the series, which also can serve as tiered memberships.  And obviously these NFTs come with a range of benefits like access to exclusive digital and physical apparel drops, and invitations to digital and in-person events.  And we've also seen brands launch hybrid collections which feature digital NFTs and physical products of the same item, and these are authenticated through the use of the NFTs.  And we've also seen this to be particularly popular among the younger fashion consumers.  But once again, the main legal issues revolve around the terms of use, which Hoi mentioned earlier, which the consumers agree to when they purchase the NFTs.  And so the terms need to include accurate and correct descriptions of all the benefits, the rights and the restrictions of the NFTs from a legal perspective.  

So that's kind of my part.  I've just done a brief snapshot of basic development and regulation around metaverse in NFTs that we've encountered so far.  And I'll now pass over to Ken who's going to talk a little bit more about the current market of NFTs.

KL:

Thank you, Victoria and Hoi.  So let me share the screen on my side.  Okay, let me do the full screen.  Okay, great.  So Victoria has shared a very insightful development about how China NFT will be, so I would like to zoom out a bit to talk about what's the NFT outlook and some of the risks, and also concerns that if you hold an NFT that you might need to be aware of as well. 

So basically, you can see [on the slide] some examples that we have seen in [the] NFT spaces. There are so many brands that have done it, either from the fashion brand, either from even Burger King, retailer, from pop star like Jay Chou, from some of the digital artists like Beeple, and also Sandbox.  And you can see it says future can be as high as more than 200 million US dollars as well.  So basically what we have been seeing about NFT is that this name will be quite unique to you since last year.  And as Hoi mentioned about this, it's also a digital representation of something, but what does it really mean?  The definition could vary in Mainland China and the outside.  

So here, I just want to quickly recap about the types of NFT that we've been seeing globally.  So on the top of the slide, we can see it's more about collectibles.  So either it can be [an] artwork, similar to diamond or whiskey, you can collect it.  NFT could be regarded as the artwork in such.

The second part of the collectible would be the intellectual property.  So we have seen some of the cases, like NBA.  NBA issued all their renowned sports stars, the first one they call it the NBA Top Shot, and sold through their own built blockchain called FLOW.  And there are a lot of celebrities also exploring how to use NFT to publish their music, their movie, their video clip. And all these are wrapped into more about the IP stage where I think Hoi, in the first session, also mentioned, [that] there could be a lot of grey area about how IP could really be engaged in the NFT.  And if you are a speculator or investor or outsider, will you have the chance to look at the contract when you invest into NFT?  Might not be.  What are the fine lines under all this intellectual property?  This is something that everyone should be aware, and I think it more particularly is about who is the issuer – does the issuer have the relevant IP and [if] they surrender the IP to the buyer?  So all this simple terms that mass public will understand are very key for people to try to invest in such NFT.  

The third part of the NFT will be related to the gaming.  In Hong Kong there is one really renowned unicorn called Animoca Brands where they also issue a lot of blockchain game and each of the character, their weapon, their toolbox, are basically the NFT.  So people playing [the] game, instead of buying their game weapon alone, they are buying the NFT.  And the beauty for that is if you quit playing the games, you can sell the weapon or sell your whole account quite easily on the blockchain or on some of the secondary marketplaces like OpenSea.  So all this, we can call it as collectible, same as what we are seeing in the traditional world.

On the lower side [of the slide], this would be a bit different – it is more related to your community participation so we call it the utility rights.  [First,] someone creating the NFT relating to the membership, such as what we've seen in a lot of the sports clubs, like Barcelona, Liverpool, Juventus.  A lot of these sports clubs, they are also issuing the NFTs [for fan engagement] – they encourage their fans to buy their NFT which can give them exclusive access to some of the VIP lounge, dinner or lunch with celebrities.  You can think about this as like a traditional membership.  Third, there could be ticketing – [where] some NFT related to the concert ticketing, either in the metaverse or offline physical event.  So all this could be related to the utility rights.  

Right now, a lot of the NFTs I would say is on the upper part of the slide, it's about collectibles.  But right now, we are seeing some of the NFTs start emerging into more the utility rights, and I think there will be more and more of the converging point between collectible and community within the NFT.  

We are seeing a lot of the high value NFT right now – you can see these numbers [on the slide].  Even a GIF, a lot of people are saying 'right click as is', meaning that if you just look at a picture, just like today, I'm just right-clicking the CryptoPunk 4156 here and I put it in the PowerPoint.  But a good thing for the blockchain NFT is if you really want to purchase 4156 CryptoPunk, it is already registered in the blockchain as a unique address.  So Ken, myself, I cannot transfer it to Hoi if he really wants to buy this.  So there's a unique blockchain to validate its authenticity about that.  This angle could empower a lot of artworks, especially for digital native artwork[s], [they] can thrive in a better protection of their ownership transfer, although they may not have the adequate legal contract behind this.  People trust the blockchain – how the blockchain trust versus our physical legal contract to be merged together could be another interesting topic to explore as well.

I just want to highlight to everyone is [that] a simple GIF can be worth so much.  So a lot investors right now, they cannot afford losing the NFT.  And there's a lot of scams, phishing and people lost their MetaMask wallet about this.  So you may [not] have an idea of what is the MetaMask – what is the custodial wallet that we are talking about?  

Right now there are two types of wallets out there in the world.  The left hand side [on the slide] is about the custodial wallet where they are using mostly the cold wallet.  The users, for example yourself, you entrust a third party to protect your digital assets which is the private key.  So with your private key matched, you gain access to your wallet and then you can build, store, transfer, swap your digital assets, including NFT.  

On the left hand side are some of the renowned provider.  Our firm is also doing a similar thing on the custodian side which is to help customers to protect their assets.  However, [in] most cases, it's still quite suitable for professional investors where they want to have a one-stop solution for digital assets, and in a lot of the times it may not be very convenient.  Because if you want to transfer your digital assets in one of these custodial wallets which is stored [in], we call it cold wallet, you have to call the hotline, you have to do your KYC authentication, do all your security checking, and then you can transfer your digital assets from this wallet to another.  So it's not instant.  It's not like as easy as you open an app, boom, you can just transfer it.  

If you want this kind of instant user experience, you can use the non-custodian wallet, meaning that they are on the hot wallet.  The hot wallet means that basically your NFT is on a blockchain 100 per cent.  And that's why there are a lot of cases right now that the NFT or digital assets being stolen from your wallet is [because] it's always online, it's not offline.  If you have clicked any website or any link in your email, either in your office email or personal email, every single day right now there are a lot of news mentioning that phishing is one of the most important things that we need to be cautious about, because phishing email is the most, I would say, vulnerable measure for hacking people: (a) they trust the website, (b) when they click the website, they can go into your Google Chrome or your other internet browser that is connected to your private key, meaning that the thieves or the cybersecurity thieves can [gain] access to your MetaMask or Trust Wallet private key.  If one has your private key, all your digital assets in your wallet can be washed away.  

This is very key: if you think NFT could be worth a million dollars or more than that, will you store in a hot wallet, or you might go into a bit more cumbersome process and move these assets to a cold wallet.  Right now this kind of debate [is] increasingly discussed within the industry about, not only individuals but also professional investors and there are even some hedge funds investing into NFTs, what are the custodial solutions they need to protect themselves?  And more importantly, is there any insurance to insure against such loss?

Globally we can see that, not only the NFT, [but] the broader crypto-asset market size have surged more than 3x in the past and upcoming five years.  But what we are seeing is the insurance coverage is only 0.5 per cent – so very, very few exchangers and custodians have adequate insurance coverage to protect their digital assets.  Having a custodian with insurance protection is very important if you feel your digital asset, including NFT: (a) it's valuable, (b) if you are an investor on behalf of fiduciary duty of third party, for example if you have a fund, you have to find a very good protection solution to protect your NFT.  

So what are the insurance coverage in this space?  Right now there are three elements that the digital assets insurance can cover and that can extend to NFT.  Number one is third party hacks, any fraud or theft of the private keys, including phishing email and all the security and operations by the custodian's side.  The second is, is there any internal thieves?  If the CTO and CIO can have the access, for example, to all the private keys, what are the internal control measures?  Third, physical damage – if there is any typhoon that can hit on the cold wallet, the digital asset etc?  

Today, I just want to give everyone some of the stances about, number one, when NFT value is increasing, you have to think about what are custodial wallet solution you need to be partnered with – is  it hot wallet, [or] is it cold wallet? [Also,] if it suits the custodian provider, do you want to have insurance coverage?  And these elements are the most important things that we are seeing in the industry.  So stopping from here first, and I hand over to Hoi for the next session.

HTL:

Thanks so much, Ken and Victoria for your sharings.  Now before we go on, Hong Kong CPD polling question time.  So we have two questions in order for our CPD participants to get their points, and here are the two questions.  So I will leave the audience to reply to these two questions, please.

I know for question number one, at least on this panel, the NFT purchase percentage rate is 100 per cent, because I'm sure Ken and Victoria … Victoria sounds like she's loading up on land in the metaverse in particular, so Victoria is becoming a real landlord in the metaverse space.

And then for question number two, obviously it will be great to get some views from some of you guys who are working in this space as to what you guys are worried about.  

So most of you have not bought NFTs.  We've got 81 per cent who have not bought NFTs.  So we'll maybe try this webinar again next year and see where we are at with that percentage.  And actually a pretty good split of legal issues that people are concerned about: 17 per cent for IP, 32 per cent for scope of rights, 4 per cent for financial regulation, 32 per cent for fraud.  So that's a very good split.  

Now we have ten minutes left on this webinar and, Victoria and Ken, you both know I have some questions for you guys, but in the interest of time I'll keep the questions limited.  Now, Ken, you did a great presentation, talked a lot about different NFT and digital assets issues, but one thing that I was hoping you could expand a little bit more on is, I know you are a very modest guy, but you and HKbitEX are doing great work.  Tell us a little bit about what you guys have been doing, HKbitEX, [in] the last couple of years.  Because, look, I'm very happy to have been able to support you guys on some of that journey but I know you guys are doing a lot more than what we have been working on.  So just tell us a little bit, and what's happening in the next 12/24 months and so on.

KL:

Sure.  Thanks, Hoi.  So I think HKbitEX, we started off as an exchange, focusing on obtaining the Hong Kong SFC virtual assets trading platform licence, but beyond that we have expanded our business scope and including, number one, providing a custodian which cover crypto, security token, NFT with insurance coverage, as we mentioned here. So most of our clients are family offices, issuers, hedge funds, where they invest into digital assets but they need a higher protection.  And very simply put, it's insurance coverage.  And that is something we are working on as well.  

Third, we also have a technology arm.  We're helping a lot of issuers to do their white label NFT marketplace, wallet solutions, and also security token.  So I think all through all, increasingly in Hong Kong, we are seeing a lot of teams or individuals that are launching their NFTs, and some of them really want to use our services. Number one is, if they raise money or receive money in cryptocurrency and they want to get their US dollar, Hong Kong dollar in a rapid way, they use our OTC service for that, so every money flow can be circuited within the banking frameworks with KYC, AML which is comfortable for most of the issuers.  

Secondly, we store the NFT also in our custodian insurance.  I am very happy to take any comments from you as well.

HTL:

Right.  And, Victoria, I have a similar question for you.  Now for those of you in the audience who don't know, Victoria and me, we worked together [in] 2012 to 2014, and we had an amazing time working together, and still delighted to be able to keep in touch with you, Victoria.  Now, Victoria, obviously you are now headquartered out in Macau, and so your presentation, a lot of it was focused on China metaverse and NFT developments.  And as we all know, China, in terms of the wider technology space, kind of has its own ecosystem.  But you're in a unique position because Macau obviously also has a lot of European influences, so you also work with companies in Europe, both Portugal and beyond.  So now tell me, you work with a lot of Chinese companies and contacts, you work a lot with European contacts as well.  So tell me, NFT [and] metaverse, how has it been adopted in Europe and how does the approaches differ?

VW:

Yeah, well, I think it's very interesting.  I sort of gave a snapshot, just kind of like, as you said, of the metaverse development in China versus that of in Europe and the rest of the world.  And we also had one question pop up in the Q&A here and asking the Chinese metaverse, is that a centralised version sort of thing?  And I think definitely we can see that there are these tendencies, particularly in the digital economy in China, that things are decentralised.  We look at the CBDC, the digital yen, and that is not a decentralised currency, that's very much sort of like a government-established and government-controlled digital currency.  So I think, as well, the flavour of things going forward is very much … the ecosystem in China, the metaverse, it's going to be very much dominated by the big tech companies, although there are smaller metaverse developing companies also emerging, but they're obviously likely to tie up perhaps with the big ones going forward.  

And like you said, in the Greater Bay Area, everyone is very interested in this sort of … the links, as it were, between sort of the rest of world approach, which is very much based on metaverse ecosystems and NTFs and that sort of thing versus the China thing.  But I think it's going to be a little bit like we see in the China marketing environment where if you're a brand and you want to get in front of Chinese consumers, you very much have to be on the right platforms in China.  And I think, again, that's going to dictate and dominate going forwards.  

I think one of the interesting sort of parallels is this division where NFTs and digital collectibles in China, they're very much … they are not securities, they are not assets to invest in.  And last week with the joint statement coming out, it's very clear that they will remain very much just marketing tools, promotional tools, but nothing more.  Whereas obviously in Hong Kong, the US, European markets, these NFTs are going for very large sums and that's something very different.  

I know another question that we had before our webinar, that someone wrote in, was, are NTFs … should they be considered as securities?  And will security regulation kind of touch on them?  And  I think probably the answer is that they are unlikely to be considered as securities because it's not that they are a security in a digital form, they're not that type of asset.  So I don't think that's going to touch on the future.  

But it is a moving space and I think, certainly within the next 12, 24 months, we will see more regulation around it, particularly in sort of the European and the US and these sort of countries.

HTL:

It's really interesting, when you look at China, at the technology ecosystem being centralised and so on, part of it is obviously China's view towards technology generally, that's a general view.  But a lot of the focuses of these announcements that both you have stated, and also in other technology-related spaces, is really around consumer protection and preventing also systematic risk to their financial systems.  So I guess on the one hand we could say, "Oh, look, it is just centralised, right?" [or] "It's centralised", whatever.  But actually, I think for all of us who kind of do a lot of work in this space, both in China and elsewhere, you can see that some of the China unique approaches is partly because of their focuses in what they want to protect – systematic risk and consumer protection.  And for all of what we're saying about kind of non-China ecosystems, I would say that consumer protection, say in the NFT space, let's be straight, I don't think that's particularly high on the priority list for a lot of these platforms. 

But I guess that gets to my final question for all of us to answer is, what do we see in the next 12 months in this space?  And at least for me, I'm seeing and I'm looking forward to seeing a maturation of the players in the space, of the practices in the space.  Right now, for example, I see a lot of what the platforms do.  The NFT platforms, for example, they are kind of very far down on the curb of what people like eBay and all the social media platforms have done, which is dispute handling, allocation of liability, compensation for things that go wrong.  I think all the NFT platforms at the moment basically don't, quite frankly, have that practice and they may never will because cryptocurrency more generally doesn't really have that culture to some extent.  But I think NFTs and the wider regulations will marry.  And [for] consumer protection, the FTC in America has already made statements to this effect so I'm looking forward to seeing some of that.  

But, Victoria and Ken, I'm hoping also to get your quick predictions on what's going to happen in the next 12 months and beyond.

KL:

Sure.  Maybe I start first.  I think for NFT there are a number of categories we should look at.  One is about the infrastructure such as different protocol: Solana, Avalanche,   Binance Smart Chain, Ethereum.  Another layer you can talk about is more about the exchange or the wallet.  So there are a number of developments regarding the infrastructure side.  

Number two pillar would be the project side.  We can see there are a lot of NFT related to PFP which is more profile pic projects.  A lot of people may [be] scratching their head about what is the real value, what is the vibe, how [is] the community building and creating a GIF or a JPEG that is more than a million dollar.  I guess a lot of people out there are still puzzled about that.  And having said that, I think a lot more industries are now foray into NFT, naming their fashion, their entertainment, and I believe more and more IP owners in the traditional world will foray into NFT to explore a new way of manifestation.  

And I think the third pillar that people can look at from NFT is really about the metaverse side.  So how would the real development of the metaverse be?  Is there more actual exhibition, concert or gaming that would be using metaverse as a mixed reality experience or the development is still up for the technological breakthrough because of the VR/AR technology?

So I think for NFT, you can look into the three spaces – infrastructure, project side, metaverse development – to understand the broader landscape before you make your own decision for your own personal investment or speculation as well.

HTL:

Victoria?

VW:

Well, I think we're going to see, going forwards, a bit more of a responsible approach from the industry itself, because over the last 12 months there's been all the publicity about launching of these things, people are very excited, but then breaking through that layer of publicity, there's also lots of incidents and where the interests of consumers perhaps has been threatened and harmed.  And I think major players in the industry have woken up and said, "We've got to get the whole metaverse/NFT industry back on track and we need to have a credible profile because otherwise people will not want to be investing and want to be engaging in these types of scenarios.  So we've got to clean up our act a little bit".  So a lot of it is going to be driven by the industry itself because they won't want to have players in the industry who are not reputable because it damages their own reputation and the reputation of the industry itself.  

I think on the other hand as well, you're going to be see hubs developing.  You'll see pockets and hubs in different areas where the governments perhaps are really going to try and encourage, again sort of helpful, healthy regulation that then builds confidence in these types of platforms and these services and things.  I know a big question that's come up is jurisdiction.  And again it's like where should, for instance … like you were saying earlier, Hoi, where should court cases or where can claims be brought against metaverse developers where things have not gone well?  And it's very difficult if, for instance, the consumer is very far away from the jurisdiction where the actual developer sits, how can these be brought?  But again, in future, it's part of the reputation building that, again, when for instance the first e-commerce platform was launched, it was … they didn't have everything smoothly running but they realised, if they want to get mass traction, they're going to have to put in place these very, very smooth mechanisms that people can make claims easily, so then they will have the confidence to use these platforms more often.  

HTL:

Thank you so much, Ken and Victoria, for your sharing.  It is 6.00 p.m.  So much to talk about, I would love to talk more about it.  And apologies to the questions in the Q&A.  Some of those questions, we'll get to in separate publications and future presentations as well, but we ran out of time.  But great sharing from you, Ken and Victoria.  Thank you so much.  And thank you to the audience as well for joining us for this session.  We'll have more sessions going forward, talking about all these kinds of digital economy topic.  So watch this space and see all of you soon.  Thanks.  

VW:

Thank you so much.  Thank you.

KL:

Thank you very much.  Cheers.

HTL:

Bye guys.