Hong Kong shows desire to be crypto hub with new regulation

As the US government continues to rein in the crypto industry with a slew of regulations, other places are emerging as new hubs for the virtual asset industry. On Monday, Hong Kong proposed rules that would allow retail investors to trade certain “large-cap tokens” on licensed exchanges, a stark contrast to mainland China across the border where crypto-related transactions are outright banned.

The city’s Securities and Futures Commission did not specify which major tokens would be allowed, although a spokesperson for the regulator said they would likely be Bitcoin and Ether, two of the largest digital assets by market capitalization.

Since China’s crackdown on crypto trading, the country’s web3 startups have largely given up on the domestic market and shifted their focus abroad. Some of the more resourceful have chosen to set up new bases in friendlier places like Singapore and Dubai, though they typically continue to keep developers in China to tap into the country’s large pool of affordable tech talent.

With Hong Kong’s introduction of a more relaxed regulatory environment for cryptocurrencies, some of these exiled Chinese-founded web3 companies may return and be closer to home.

China’s crackdown on crypto trading to protect individual investors from speculative activity seems prescient now, given the spate of bankruptcies and layoffs that have ravaged the global crypto industry. But money and talent continue to flow into web3 despite the bursting of the crypto bubble. It’s hard to imagine Beijing sitting idly by while the rest of the world works on the building blocks that some claim will unleash a new wave of innovation as big as today’s internet itself.

Hong Kong, historically a financial hub, could potentially be a laboratory for China’s policymakers to test blockchain’s potential with some buffer for the country’s one billion internet users.

The proposal laid out by Hong Kong stipulates that all 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 requirements “cover key areas such as safekeeping of assets, know-your-client, conflicts of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering/counter-terrorist financing and prevention of market abuse,” the announcement reads.

“In addition to ensuring suitability of client onboarding and token admission, the other key propositions concern token due diligence, governance and disclosure.”

In other words, centralized crypto exchanges must ban IP addresses in Hong Kong until they obtain the relevant permits to operate there.

The regulatory requirements are open for consultation until 31 March and the new licensing regime comes into force on 1 June.

“Hong Kong’s expanded support for virtual assets since October has been further enhanced with the new licensing regime and consultation,” Jupiter Zheng, director of research at HashKey Capital, said in a written comment. Hong Kong previously introduced a voluntary licensing regime that restricted crypto platforms to clients with portfolios of at least HK$8 million, and HashKey is one of the two with the permit.

“This will help more startups and talents set up businesses in Hong Kong, resulting in a more prosperous local virtual asset / web3 ecosystem,” adds Zheng. “This news has not only caused widespread positive reactions in the Asia-Pacific region, but also in the global Web3 community. It can be assumed that the Western market and participants will also pay more attention to the development of the Eastern Web3 market this year.”

Updated with added investor commentary on February 21, 2023.