Scaling and mainstreaming Web3 in Asia-Pacific

As we approach the end of the year, the Web3 community in Asia-Pacific gears up for a series of significant events, including the various FinTech Weeks, Token 2049, and Solana Breakpoint. These gatherings, held in vibrant financial centers like Hong Kong, Singapore, and Bangkok and in software development hubs such as Taipei and Kuala Lumpur, offer a unique opportunity to reflect on the current state and future of Web3.

The scaling and mainstreaming of Web3 is fascinating to me professionally speaking. I am now working on the "Institutional Crypto" side of centralized finance (CeFi), but for years I have worked on the "VC and Startup Crypto" side of decentralized finance (DeFi) and before that with the financial institutions (FIs) and licensed intermediaries of traditional finance (TradFi). There are uneasy if not existential tensions between these fields as territories are being redrawn. But ultimately, these fields will still have value in the Web3 era financial system. In this regard, I'd like to share my observations on the drivers for growing the Web3 ecosystem in the next 12 months, while taking stock of my fresh lessons from recent events.

1. Here comes Tradfi

The end of the last Crypto Winter and the upcoming market cycle is marked by the entrance of major players from traditional finance (TradFi) with massive capital and other resource commitments to Web3. In the last 12 months, this took the forms of BTC and ETH ETFs, tokenized deposits and funds, custody services, OTC desks, and on/off-ramp facilitation etc.

Major banks are increasingly developing their own blockchain payment systems and safe-yield digital asset investment strategies. Through various partnerships, they are also launching and adopting purpose-built stablecoins and stablecoin adjacent products (e.g., USDe and USTb, with backing by Blackrock's BUIDL fund). These trends are not only driven by the need to stay competitive and meet the growing demand for digital financial services but also the recognition of the value of programmable money.

Visa has launched a platform for banks to issue fiat-backed tokens, and PayPal, in partnership with Paxos, has introduced its PYUSD stablecoin on the Solana blockchain. No doubt, more issuers are emerging from just around the corner. These initiatives are expected to enhance transparency, efficiency, and cost savings in financial transactions. They denote potential disruptive changes to wholesale and merchant payment businesses, for example, the possibilities of slashing clearance and settlement times from T+3 days to 10-20 mins and the obsolescence of the SWIFT network.

2. Interoperability in all its manifestations

Connectivity with traditional banking rails is crucial for the scalability of digital assets, whether in CeFi, DeFi, and TradFi-based Web3 ecosystems. The integration of fiat on/off-ramps and banking partners is essential for institutional adoption of Web3 technologies. This connectivity ensures seamless transitions between traditional and digital financial systems, addressing concerns around identity, traceability, and regulatory compliance.

Interoperability is a defining characteristic of blockchain and token-based technologies. And in Web3, we tend to think about this in terms of application level interoperability (i.e., technical and operational). But for scaling and mainstreaming of Web3, this must be considered much broader in terms of many more dimensions. I saw this helpful diagram when it was presented by Dr. Richard Liu, Huma Finance, at the PayFi Summit in September 2024. Dr. Liu and his team explained further about each layer and their issues in their blog article here.

Each layer warrants extensive analysis and I may return to them in separate writings in the future. But TLDR, we have barely begun to scratch the surface of the issues, and we need robust conversations among experts from legal, compliance, economics, capital markets, and software engineering fields.

3. History rhymes if not repeats

Web3 infrastructure development faces challenges similar to those encountered during the early days of "Open Banking," a global movement that gave birth to neo and virtual banks such as Revolut and thousands of payment services companies. But by and large, Open Banking has failed to live up to expectations and its true potential in all markets, except perhaps the UK and Australia (to a much lesser extent), due to challenges including regulatory hurdles, interoperability issues, and the need for robust security measures. The reliance on similar protocols (RPCs/APIs and other data abstraction layers) means that Web3's growth could be fettered with similar resistance from traditional financial institutions and regulators. A review of the issues have been written up by Blockworks and other platforms.

Most major financial markets will continue to roll out virtual asset service provider (VASP) and stablecoin regulations in the next 12 to 18 months, which will significantly shape the market for digital asset operators. While at first glance, stablecoins do not seem like sexy Web3 products (and are often confused in their values and application with Central Bank Digital Currencies or "CBDCs"), they are one of the purest forms of real-world assets (RWAs). Stablecoins have applications in investments (e.g., trading pairs) and payments (e.g., infrastructure).

Stablecoin laws will have a quiet but huge impact on market development. They will set standards for reserve asset management and payment settlement processes, which are critical for maintaining the stability and trustworthiness of stablecoins. The European Union’s Markets in Crypto Assets (MiCA) legislation, for example, imposes strict limits on transaction volumes and values to safeguard the monetary system. Achieving "T+0" or near T+0 settlement times will be a critical milestone, potentially revolutionizing payment processing by enabling near-instantaneous transactions. Technically, this is easy to do on blockchain networks, even when we apply the appropriate discounted values based on mainnet and other real-world conditions.

But could compliance hurdles be overcome as well to achieve "T+0"? That is the "$16 trillion dollar by 2030" question.

Hopefully, these insights underscore the dynamic and evolving nature of the digital asset landscape, highlighting both the opportunities and challenges that lie ahead. It’s clear that the next 12 months will be pivotal for the growth of Web3. By addressing these challenges and leveraging the opportunities, we can drive the mainstream adoption of digital assets and create a more inclusive and efficient financial ecosystem.