First Digital Says HK, Singapore Can Team Up On Crypto

Hong Kong-based consultancy First Digital was on the KPMG and HSBC list of Emerging Giants in Asia Pacific for 2022. It provides crypto depository and escrow services for institutions and raised around USD 20 million in a pre-seed round in September 2021 at a US valuation of $100 million.

The Q&A with CEO Vincent Chok has been edited for language and brevity.

Pradipta Mukherjee: Elizabeth Wong of Hong Kong’s Securities and Futures Commission this week referred to the “one country, two systems” model, saying the city has a different cryptocurrency policy than mainland China, which has banned trading in such digital assets. What does it mean and how should it work?

Vincent Chok: I think she is referring to the basic rule of law implemented after the 1997 handover to China. Therefore, one country two systems. And I think China largely left Hong Kong to govern itself, knowing that Hong Kong is a central financial center, not just for the Asia-Pacific region, but globally. So I think it’s pretty much her attitude to follow that particular policy.

Mukherjee: But is it possible because of China’s influence on Hong Kong?

Shock: There is really no official position that says it is “one country, one system.” I mean, there are no capital controls, no currency controls in Hong Kong – so it’s still a very safe financial hub. If it was one country, one system, it would affect everything, not just crypto.

Mukherjee: Why is Hong Kong taking this stance on crypto now? Is it losing out to rival Singapore and becoming less relevant as a financial centre?

Shock: We have seen a lot of money move out of Hong Kong during the protests and during the pandemic. But I don’t think Hong Kong will lose its position. I think Hong Kong just takes a little more time to review issues. In March 2023, they are scheduled to release Virtual Asset Service Providers, or VASP, licensing in Hong Kong. We see that regulators in Hong Kong are constantly looking at the digital resource space, and there have been licenses that have been approved here. But the speed of it, I think it’s just a lot more conservative than most other governments and regulators when it comes to issuing licenses. It just wants to get it right, I think.

Mukherjee: How will the licensing next year help to structure the industry in Hong Kong?

Shock: Well, I think regulation is always good. It only separates the good and the bad actors in the industry and gives it credibility. It will focus on how to help retail consumers because right now it’s basically focusing more on the institutional. But if we’re going to adopt this for retail consumers, licensing really needs to be in place. We sometimes see people investing heavily in crypto because of the great returns they see. However, there is a lack of regulation and when people lose their money, who do they run to? They have to run to the regulators. So that’s really why it needs to be addressed. So the VASP license is to really look at anyone who handles digital assets that needs to be licensed under the Securities and Futures Commission.

Cryptos, to me, are another form of financial asset or another asset class. It just needs to be integrated into the existing infrastructure that Hong Kong has built and that infrastructure is very strong. All the big banks are located here. It has a very strong technology center. So I think this is just a phase it’s going through, but it will definitely pick up. Hong Kong will be another driving force in the digital asset space.

Mukherjee: And when do you think that will happen?

Shock: Well, I think we need to clear up something called the pandemic first. I mean, we’re on the right track. Hong Kong recently announced a zero plus three quarantine policy for incoming travelers. And we hear that “plus three” may be gone by the end of November. So we see more activities, more fairs coming back. We have Hong Kong FinTech Week coming up at the end of this month. So there are bigger activities coming back to Hong Kong. So probably give it another 12 to 16 months. You know, by that time the VASP license will also be issued. People can start searching. There will be more clarity on exactly which regulation and which direction the regulators are going. So probably around 12 to 16 months.

Mukherjee: Every regulator is talking about cryptocurrencies and strengthening oversight. But the regulations have been rather slow. When can we see something concrete?

Shock: Singapore is heading in the right direction, at least in the Asia-Pacific region. They have been very bullish. They have given licenses to big companies like Coinbase. And I think other regulators can look to Singapore as a jurisdiction to follow and look at how they can introduce these guidelines in their own jurisdictions in terms of regulating crypto. But again, different jurisdictions treat cryptocurrency differently. Some are securities, some are currencies, some are real estate. So different treatment also creates different taxation, different reporting. So all these things need to be standardized.

I think Hong Kong needs to be re-energized. And we don’t just want to see competition between Hong Kong and Singapore. I think cooperation between Hong Kong and Singapore can be great for the crypto industry because we can complement each other as we have a different style of doing things. We need to think about ways to collaborate and open up to the world when it comes to digital assets. Singapore is very strong in what they do (in regulation of digital assets) and Hong Kong with its strong financial experience and infrastructure could make a great partnership if the two countries work together to create a really strong jurisdiction for crypto companies.

Mukherjee: We also have Dubai emerging as a crypto-friendly destination, which grants licenses to several exchanges. Do you see Dubai or the Middle East emerging as the next crypto hub?

Shock: I do. I think every continent will have a country that will emerge as a crypto hub. The US is a strong crypto hub, we see Singapore moving forward in Asia and in the Middle East we now see Dubai. So in Africa, South America we haven’t really seen a country step up yet, but I think it’s going to be a crypto hub on every continent.

Mukherjee: According to Chainanalysis, October is the “biggest month in the biggest year ever” for cryptocurrency hackers, with $718 million stolen from decentralized finance websites across 11 different hacks. What kind of oversight is needed in Asia and globally to combat this?

Shock: The oversight that is really needed is that many of these exchanges and crypto companies need separation of powers. Many of them still practice self-storage. So what are the security protocols in place?

For us as a crypto custodian company, we have many protocols in place to address potential hacks. You must have proper sign-offs in approval processes. So do the hacked companies lack (security) protocols? Is there one person holding the key? Is there one person who performs the approvals? Many hacks are also internal.

Mukherjee: Singapore has banned public advertising of crypto, while India has established a punitive tax regime. Is this the way to regulate?

Shock: They follow traditional finance. If you think about advertising crypto, it’s like promoting a sale of a security. You know, these companies have to be properly licensed. You just can’t post investment ads all over town. You must have the correct license.

As for India, I think the government’s 1% TDS (tax deducted at source) and the flat tax of 30% on all crypto income is hurting traders and India’s (crypto) trading volume has fallen by over 70%. So traders are going to look elsewhere, which in turn will hurt the government in the long run when it comes to seeking tax revenue from crypto.

Personally, I think what they (India) are doing is discouraging people from trading crypto, but India has always been like that when it comes to taxes. They have taxed other asset classes heavily in the past as well.

Despite so many crypto restrictions in different countries, we have seen an increase in the number of investors. Why does it happen?

People are looking for ways to get good returns. Over the past two years we have seen government bonds at zero. The stock market has been hit so hard. So people are just looking for an alternative way to generate good returns. And with crypto, it’s the only thing they see that generates really high returns. Because the standard of living in most countries in Asia is quite high and wages in Asia are quite low. So there will always be people looking for secondary income.