Is Hong Kong China’s Crypto Sandbox? – Analysis – Eurasia Review

By Sauradeep Bag*

In a turbulent and uncertain world, the crypto industry has not been immune to the ebb and flow of fortune. Yet, amid the chaos, Hong Kong remains determined to become a hub for digital assets. This ambition stands in stark contrast to mainland China, where Beijing has cracked down on all forms of crypto-related activity.

In June, Hong Kong will implement regulations mandating licensing by the Securities and Futures Commission for crypto trading platforms. The regulator has launched a consultation on its proposal to oversee trading platforms for virtual assets, marking a new chapter in the ever-evolving landscape of digital currencies in China’s Special Administrative Region.

While monitoring this move to bring crypto under closer regulatory scrutiny, the Chinese government is also keeping a close eye on Hong Kong’s forays into the world of cryptocurrency and Web3 at large. Analysts believe Beijing is closely watching how Hong Kong’s crypto regulations will affect the market. Should Hong Kong’s regulatory approach prove successful, it could inform policymaking in other parts of China. In addition to cryptocurrency, China is also monitoring Hong Kong’s crypto-related activities, including the issuance of new crypto-linked products and blockchain-based solutions.

What is Web3?

Web3, also known as the decentralized web, refers to a new generation of the internet that uses blockchain technology to enable decentralized and peer-to-peer interactions between users and applications. Unlike Web 2.0, where large corporations have vast amounts of user data and control over the online experience, Web3 promises to give users more control and ownership of their data and interactions. This is made possible by using decentralized protocols and platforms, such as Ethereum and IPFS, which allow the creation of decentralized applications (dApps) and the exchange of value through cryptocurrency transactions. Web3 can potentially transform a wide range of industries, from finance to social media, creating new opportunities for innovation and collaboration.

Proposal for regulation

Hong Kong’s recent crypto regulations stipulate that centralized virtual currency exchanges operating in the city, or marketing services to the territory’s investors, must obtain licenses from the Securities and Futures Authority. The new regulations include asset security measures, client identification, conflict resolution, cyber security, financial accounting, risk assessment, combating money laundering and the financing of terrorism and the prevention of market abuse. The regulation aims to protect investors while promoting innovation and development in the cryptocurrency industry. It is recognized as a step towards making Hong Kong a more attractive destination for blockchain and crypto-related businesses, eventually serving as a model for other regions in China to adopt more blockchain-friendly policies.

Bring back innovation?

Following China’s crackdown on crypto trading, crypto firms in the country have been forced to shift their focus overseas, with many choosing to set up bases in more welcoming locations. Some of the more innovative firms have established new outposts in places like Singapore and Dubai, while still keeping developers in China. Hong Kong’s more relaxed cryptocurrency regulations may entice some of these exile companies to return home. While Beijing’s move to protect individual investors from the volatility of crypto trading seems wise in light of the recent market turbulence, it cannot ignore the growing interest in Web3, which is slated to be the next big thing that the world is actively pursuing.

Lessons for the world

The regulatory developments in Hong Kong regarding digital asset regulations present an exciting situation not only for China, but also for India and the rest of the world. As one of the world’s largest financial centers, Hong Kong has a significant impact on the global financial landscape. How it incorporates and adapts to digital asset regulations will have far-reaching consequences for the rest of the world, both in terms of global finance and regulatory regulations. Such insights are useful for policymakers around the world, as there is no one-size-fits-all solution to digital asset regulation, but there are key principles that serve as building blocks for policy frameworks. Understanding the interplay between these building blocks will help regulators develop unique solutions for their countries.

The rise of digital assets does not necessarily undermine the current financial system, but presents an alternative to traditional finance. Cryptocurrencies and blockchain-based tokens have the potential to improve the efficiency, accessibility and security of finance. But to remain relevant in the rapidly changing financial landscape, the traditional financial system must adapt to these changes.

Observation and investigation

Amid the upcoming crypto regulations that will take effect in June, Hong Kong has caught the interest of more than 80 foreign and Chinese companies looking to establish a Web3 company in the city. The Hong Kong Monetary Authority is also working on stablecoin regulations, which are expected to be enforced by 2024. Furthermore, the government has allocated HK$50 million (US$6.4 million) to support the growth of the Web3 ecosystem, as noted by Paul Chan, Hong The King’s financial secretary, during his budget speech for 2023-2024 in February.

As a special administrative region of China, Hong Kong has enjoyed a certain degree of autonomy in its economic policies and regulations. This has enabled the company to maintain its reputation as a global financial hub, attracting capital and talent from around the world. Meanwhile, mainland China has taken a cautious approach by implementing strict regulations and restricting access to these new technologies, i.e. blockchain and cryptocurrency.

China’s policymakers are aware of the potential benefits of blockchain, such as increasing transparency, improving efficiency and reducing costs. By observing Hong Kong’s regulatory approach to blockchain and cryptocurrency, China’s policymakers can monitor the impact of these technologies on financial markets, and assess potential risks and benefits. If Hong Kong’s regulations prove successful in promoting innovation and protecting investors, they could serve as a model for China to adopt more Web3 and blockchain-friendly policies.

China’s experiments with digital assets in Hong Kong are an area of ​​interest to the world as it can help make better policies. The question of whether this space should be regulated is complex, and allowing the crypto ecosystem to run free to develop new products is perhaps a potentially risky approach. Success and failure are important aspects of innovation and regulation, and this is yet another opportunity for policymakers to learn from the dynamic interplay between the two.

*About the author: Sauradeep Bag is Associate Fellow at ORF. Sauradeep has worked in several roles in the startup ecosystem and in international development with the United Nations Capital Development Fund. His areas of interest include fintech, economic development and public policy.

Source: This article was published by the Observer Research Foundation