Hong Kong’s new crypto regulation could lure Web3 firms back, experts say
Forthcoming regulatory changes in Hong Kong for cryptocurrency-related service providers could attract businesses and talent back to the city as it seeks to regain its international position as a crypto hub, industry experts said Discard.
The Hong Kong Securities and Futures Commission (SFC) on Monday published draft rules for virtual asset trading platforms and sought public feedback. As part of the new licensing regime set to take effect in June, the SFC plans to require cryptocurrency exchanges to apply for licenses that will allow retail investors to trade certain large-cap tokens.
Just last month, the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, said in a consultation document that it plans to introduce a mandatory licensing regime for stablecoin issuers as early as this year, and will not allow algorithmic stablecoins.
China banned cryptocurrency transactions in 2021, but Hong Kong has set up a new licensing regime that may eventually extend to cryptocurrency trading. Current regulations in Hong Kong, a special administrative region, only allow institutions and professional investors with portfolios of USD 1 million or more to trade digital assets.
“Like many of its global counterparts, including Singapore, the SFC is trying to thread the needle between digital asset innovation and investor protection in a post-FTX world,” said Angela Ang, senior policy advisor at California-based blockchain intelligence firm TRM Labs and a former regulator at the Monetary Authority of Singapore.
To drive the development of the city’s Web 3.0 industry, Hong Kong Finance Minister Paul Chan said on Wednesday that the government is setting aside HK$50 million (US$6.37 million) to develop the Web3 sector, which has provided a “golden opportunity” to lead innovative development.
Hong Kong beckons
As Hong Kong continues to take a crypto-friendly regulatory approach after it announced its pro-crypto stance in October, the industry could see more Web3 companies set up in the city, experts said.
Crypto exchange Huobi Global, for example, is applying for a crypto trading license in Hong Kong, Justin Sun, an adviser to the exchange, said in a Monday tweet. Sun also told Nikkei Asia that Huobi wants to move its Asia headquarters from Singapore to Hong Kong.
“I think more crypto exchanges, market makers and hedge funds will likely follow suit and return to Hong Kong,” said Youwei Yang, chief economist at New York-based BIT Mining and an assistant professor who teaches blockchain courses at China’s Xiamen University. Discard.
Adrian Wang, CEO of Hong Kong-headquartered digital asset management platform Metalpha, said the latest SFC consultation document reflects its intention to “welcome retail investors to enter the digital asset space.”
“The proposed policy went into more detail on anti-money laundering and know-your-customer with new requirements such as conflict of interest also included. Overall, this is good for the industry that safeguards the rights of retail investors,” Wang said.
More exchanges are likely to expand operations to Hong Kong if the city continues its crypto-friendly stance. “I’m very bullish on (Hong Kong),” said Henry Liu, CEO of BTSE, a crypto exchange based in the British Virgin Islands with half of its operations in Taiwan. Discard. “If we’re going to be compatible ourselves, we’ll step in, and as a company, if we need to find a local partner and we can support them in any way, we’re happy to do that as well.”
Non-fungible token (NFT) firms have also shown interest in expanding in Hong Kong. ShucangCN, a Chinese NFT platform launched in January 2022 in China that quickly became one of the largest players in the country, told Discard last month that it has set up NFT China in Hong Kong to build NFT platforms in the city.
Stablecoin regime
In the January stablecoin consultation paper, the HKMA clarified its intention to give regulatory priority to stablecoins, global fintech law firm Linklaters wrote in a February research report.
The authority’s move to prioritize stablecoin regulation makes sense, as stablecoins are used as an entry and exit tool to buy or sell native cryptoassets, said Kelvin Low, a law professor at the National University of Singapore. Discard.
Stablecoins are “a good chokepoint to regulate access to the larger crypto markets,” Low said. “They are also important to regulate because they are more easily sold as safe assets when in truth they are not.”
The importance of stablecoins has become increasingly prominent, and “if a regulator is going to master stablecoin regulation, they would largely grasp the development trend of cryptoasset markets,” said Jason Jiang, a senior researcher at OKG Research Institute, a unit of blockchain firm OKG with headquarters in Beijing.
“Hong Kong, which has the world’s largest offshore yuan market and has served as an important offshore yuan business hub, is an ideal testing ground for crypto-asset development,” Jiang added.
While the stablecoin proposal is “a step in the right direction,” technological advances can happen faster than the regulator can keep up with, said Joanna Cheng, assistant general counsel for product and regulation (APAC) at crypto custody firm Fireblocks.
“When the law goes into effect in late 2023 or early 2024, the issues surrounding the stablecoin may have changed, so this remains to be seen,” Cheng said.
No algorithmic stablecoin allowed
Another important part of the HKMA’s January document was that the authority had made it clear that it would not allow algorithmic stablecoins.
“Algorithmic stablecoins just don’t work, so the HKMA is right to exclude them from licensing,” Low said. “The theory of algorithmic stablecoins relies on assumptions that do not hold in the real world, so they are always in danger of collapsing.”
One of the problems with many crypto companies, Low added, is that “they misuse game theory to design tokenomics to constrain human behavior, but if you consult actual game theorists, you will find that their usefulness in this regard is highly controversial.”
Jonathan Cheong, head of legal, risk and compliance at Singapore-based crypto exchange Bybit told Discard that the new regulations will likely be aimed at a long-term issuance of stablecoins – redemption value.
“The proposed regulations will have a heavy focus on par redemption control processes, and to achieve this, stablecoin issuers must have price stabilization and capital adequacy control processes,” Cheong said.
The new regime has also sparked interest from some blockchain firms in Hong Kong that accept stablecoin payments. For example, BSN Spartan Network, a Chinese blockchain that is only available outside of mainland China, may expand its Hong Kong operations into the stablecoin sector, according to Tim Bailey, vice president of global sales at Red Date Technology, the developer of BSN.
“We are actively engaged in monitoring and studying the stablecoin space and, depending on the regime’s rules when they are released, we will consider applying for a license for an official BSN Spartan Stablecoin,” Bailey said. Discard. BSN Spartan currently accepts USDC as one of its payment methods.
“The licensing of payment-related stablecoins will make payments and settlements much more efficient,” Bailey added.
