Hong Kong courting crypto. What is behind the switch.
Cryptocurrency is out of favor with global governments right now, to say the least.
Fallen FTX subspecies Sam Bankman-Fried is under house arrest in California, facing a lifetime charge of fraud and bribery. Do Kwon, the mastermind behind collapsed “algorithmic coins” Terra and Luna, was arrested in Montenegro at the request of his native South Korea. The US Commodity Futures Trading Commission last month accused Binance, the world’s largest crypto exchange, of operating an “illegal” exchange and “sham” compliance.
One financial center is surprisingly heading in the opposite direction: Hong Kong. China’s offshore zone shared the mainland’s crypto-skeptic stance during Bitcoin’s speculative frenzy in 2020-2021, ceding the East Asian crypto field to rival Singapore. That changed when a new government took power in Hong Kong last October, when China’s President Xi Jinping swept to a record-breaking third term.
That government unveiled a new regulatory template for cryptofinance in February, including access for retail investors to “large-cap” tokens. “This is an all-encompassing, exceptionally detailed regime,” says Kishore Bhindhi, a Hong Kong-based lawyer in Linklaters’ financial regulation group. “It’s fair to say that Hong Kong wants to be the market leader.”
Finance Minister Paul Chan took de facto ownership of the crypto opening, announcing that the government had budgeted HK$50 million ($6.5 million) towards the development of a “Web3” ecosystem. The Hong Kong Monetary Authority and the Securities and Exchange Commission planned a roundtable on April 28 to “facilitate direct dialogue” and “share practical experiences” with the industry.
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The new rules require firms to establish a presence in Hong Kong by June 1, and then apply for licensing by June 2024. Surviving crypto operators have been quick to react. “This is leading to a rush into Hong Kong,” says Claire Wilson, partner at industry consultancy Holland & Marie. “It’s a FOMO [fear of missing out] feeling among some of the larger players.”
Ok but why? Unlike Singapore, which depends on its huge port and related trade, Hong Kong lives or dies by financial services, Wilson points out. The sector accounts for nearly a quarter of the gross domestic product. Authorities cannot afford to keep out the wider range of transactions that cryptocurrencies, and their underlying blockchain technology, may eventually create: Web3’s yet protean universe.
“If we were to look at the long term, Hong Kong is probably more interested in crypto’s application to traditional financial services: tokenized bonds, securities and so on,” says Bhindhi.
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However, there is no way at this stage to advance the nascent applications without a brokerage that is alive if troubled. Bitcoin, which was flat for much of 2022, has jumped by more than half this year as traditional “fiat currency” banks appear to be faltering.
So Hong Kong has to take a risk on crypto trading, maybe. “The government push for retail investors is a big milestone,” said Yiwei Wang, a spokesman for crypto broker Metalpha Technology Holding (ticker: MATH). “People who were thinking of moving to Singapore have changed their minds.”
Singapore’s experience in trying to nurture a reliable crypto business is not so encouraging. Of the 169 crypto service providers operating in the city-state when the regulatory regime was introduced in January 2020, only 11 have so far met licensing requirements, said Angela Ang, a former Singapore regulator now senior policy adviser at blockchain intelligence firm TRM Labs. The collapse of Singapore-based Terra/Luna, which held up to $65 billion for its clients, dampened local enthusiasm for the sector.
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Hong Kong’s proposed regulations are “not much different” from Singapore’s, says Ang. Investors can expect a similar cull of aspirants when the licensing deadline comes a year from June.
Still, Ang remains a crypto-optimist. “It’s important not to forget the promise of the underlying technology despite the growing pains,” she says.
The young industry is nothing if not adjustable, adds Wilson. By Hong Kong’s deadline 14 months from now, a critical mass may be ready for its definition of prime time. “Hong Kong was sitting on the fence and may have learned from other people’s mistakes,” she says.
Integrating crypto with Hong Kong’s formidable financial infrastructure, and the vast hoards of savings held by Chinese retail investors, could forge a global capital for an exciting new world. Or it could all go up in flames again.
The fact that this sophisticated center thinks it can tame crypto is interesting anyway.
