By Jake Coleman
Hong Kong aspires to establish itself as a prominent global center for cryptocurrency, despite certain jurisdictions, such as the United States, expressing cautious scrutiny towards this industry. In August, initial licenses were issued within a novel regulatory framework designed to oversee cryptocurrency exchanges facilitating the trading of tokens such as Bitcoin and Ether.
The regime’s implementation is a strategic initiative undertaken by Hong Kong to reinvigorate its appeal to capital and talent following a period of diminished standing resulting from stringent Covid-19 restrictions and rigorous suppression of political opposition. The initial response from digital-asset firms was predominantly favorable, albeit with a notable absence of significant new investment commitments. The efforts made by Hong Kong receive tacit support from Beijing, despite mainland China’s continued prohibition of cryptocurrency trading.
What Exactly Are the Rules and Regulations?
The recently implemented regulations enable retail investors to engage in coin trading on exchanges that have obtained licensing from the Securities and Futures Commission of the city. The approach adopted by Hong Kong is characterized by a strong emphasis on consumer protection, underscored by the implementation of stringent criteria governing the purchase and sale of virtual assets. When determining the tokens to offer, platforms must consider several factors, including the duration of a coin’s circulation, market capitalization, and average daily trading volume.
Including the tokens in at least two cryptocurrency indexes, including one associated with a reputable institution rooted in traditional finance, is imperative. Furthermore, it is essential to note that the Securities and Futures Commission (SFC) has established specific requirements for cryptocurrency firms.
These entities are obligated to implement additional protective measures before accepting customers. These measures include evaluating whether users possess a fundamental understanding of digital assets before engaging in investments and establishing trading or position limits commensurate with the client’s financial circumstances.
Why Is Hong Kong Getting Behind Cryptocurrency?
The policy shift observed in Hong Kong indicates a broader endeavor to reinstate the city’s stature as a leading-edge financial center. The region’s reputation was jeopardized due to prolonged adherence to stringent Covid-19 measures and prevailing political turmoil, resulting in a deceleration of economic growth and an exodus of skilled individuals.
The Financial Secretary, Paul Chan, expressed his views on cryptocurrencies and virtual assets during a gathering arranged by the Hong Kong Association of Banks in November of the previous year.
He referred to these emerging financial technologies as “unstoppable new financial innovations” and emphasized embracing them. The government has recently authorized the inclusion of exchange-traded funds that invest in CME Group Bitcoin and Ether futures. Additionally, it has successfully issued its inaugural digital green bonds, leveraging digital ledgers to enhance the efficiency of the settlement and coupon payment procedures.
Is This Hong Kong’s First Attempt to Enter the Cryptocurrency Market?
In previous years, Hong Kong had established itself as a prominent hub for digital assets. However, it has since adopted a more cautious and skeptical approach towards this industry. Exchanges such as FTX and Crypto.com (formerly known as Monaco) were established within the city. Preceding the implementation of the current regulatory framework, the Securities and Futures Commission (SFC) had in place a discretionary licensing initiative.
Only two exchanges, namely OSL and HashKey, voluntarily adhered to the legacy above framework, which granted them the privilege to exclusively cater to professional investors possessing portfolios valued at a minimum of HK$8 million ($1 million). The entities above were the initial ones to obtain licensing under the recently implemented system, as they aimed to capitalize on what the Chief Executive Officer of OSL, Hugh Madden, referred to as a “first-mover advantage.”
The regulations were implemented after the directive issued by mainland China, wherein platforms were instructed to cease trading activities involving cryptocurrencies and the prohibition of initial coin offerings (ICOs) in 2017. In September 2021, the mainland implemented restrictions on cryptocurrency transactions and expressed a commitment to eradicate the practice of digital asset mining.
How Important Is It That Cryptocurrency Trading Is Banned in Mainland China?
One potential concern pertains to the possible spillover effect of China’s ban on the semi-autonomous region of Hong Kong. Nevertheless, it is worth noting that Hong Kong regulators have opposed this notion, invoking the principle of “one country, two systems,” which grants the former British colony the autonomy to maintain its distinct economic and political framework. Indications suggest that the approach adopted by Hong Kong may possess implicit endorsement from Beijing.
Officials from the Liaison Office of China and other esteemed representatives have been observed attending various cryptocurrency gatherings within the city, as per sources knowledgeable about the subject matter.
These encounters have been characterized as pleasant. The subtle indication of support may suggest that China is inclined to utilize Hong Kong as an experimental platform for digital assets. Nevertheless, it is essential to note that Beijing has yet to demonstrate any inclination toward relaxing its stringent control over the sector within its jurisdiction.
This stance is primarily driven by concerns surrounding consumer protection, the potential exploitation of cryptocurrencies to evade capital controls, and the adverse environmental consequences associated with energy-intensive Bitcoin mining activities.
Which Challenges Are Still to Come?
Regulatory ambiguity poses a significant challenge for cryptocurrency firms. Several areas still need to be addressed explicitly by the SFC. The categories above encompass decentralized finance, derivatives, and staking as they pertain to digital assets.
Non-fungible tokens (NFTs) and utility tokens, particularly those employed in play-to-earn gaming, reside beyond the purview of activities subject to straightforward regulatory oversight. Firms engaged in the operation of virtual assets within these domains must ascertain the classification of their business offerings as securities and, if deemed as such, necessitate the acquisition of a license.
The SFC has acknowledged the complexity of the task, and it has been communicated that decisions will be rendered individually. Additional challenges arise in banking accessibility as cryptocurrency enterprises encounter rigorous protocols for customer identification and preventing illicit financial activities. The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority have issued a joint appeal to financial institutions, urging them to extend their support to the cryptocurrency sector.
In pursuit of this objective, the SFC and the Hong Kong Monetary Authority have convened meetings in April and June to encourage financial institutions to facilitate opening accounts for regulated cryptocurrency companies. The acquisition of talent poses an additional challenge.
There need to be more responsible officers who bear the foremost accountability for ensuring compliance within a licensed corporation. The scarcity of institutional-level crypto traders and developers is often highlighted.
What’s the Reaction to Hong Kong’s Crypto Pivot?
The crypto pivot undertaken by Hong Kong has garnered significant attention from both domestic and international entities, owing to the city’s potential to serve as a conduit for Chinese wealth, provided that the mainland eventually relaxes its restrictions on digital assets.
Several companies, including Huobi, OKX, and Amber Group, intend to pursue licenses under the new regulatory framework. However, significant investment commitments have yet to be made immediately following the implementation of the new regime.
The level of attractiveness of the regulations in question remains to be determined regarding their ability to incentivize firms to make substantial investments sufficiently. The potential impact on profitability may arise from the emphasis placed on safeguarding retail investors, particularly if certain areas such as margin trading, staking, and derivatives remain restricted. Furthermore, it is noteworthy that the global cryptocurrency market has yet to completely restore from the significant decline of $1.5 trillion experienced in the previous year.
