Cryptocurrency is not in favor with global authorities right now, to put it mildly.
Fallen FTX prodigy Sam Bankman-Fried is under house arrest in California and faces lifetime fraud and corruption charges. Do Kwon, the mastermind behind the collapsed "algorithmic coins" Terra and Luna, was arrested in Montenegro at the request of his native South Korea. Last month, the US Commodity Futures Trading Commission accused Binance, the world's largest crypto exchange, of operating an "illegal" exchange and "mock" compliance.
One financial center is surprisingly heading in the opposite direction: Hong Kong. China's offshore zone shared the mainland's crypto-skeptical stance during the Bitcoin speculative frenzy of 2020-2021, ceding the East Asian crypto realm to rival Singapore. That changed when a new government took over Hong Kong last October, around the time Chinese President Xi Jinping was bulldozing in for an unprecedented third term.
This government unveiled a new regulatory model for cryptofinance in February, including access for retail investors to “large cap” tokens. "This is a comprehensive and exceptionally detailed regime," says Kishore Bhindhi, a Hong Kong-based lawyer with Linklaters' Financial Regulation Group. "It's fair to say that Hong Kong wants to be a market leader."
Finance Secretary Paul Chan has taken de facto ownership of the crypto open, announcing that the government has budgeted HK$50 million ($6.5 million) for the development of an ecosystem "Web3". The Hong Kong Monetary Authority and the Securities and Exchange Commission have scheduled a roundtable on April 28 to "facilitate direct dialogue" and "share practical experiences" with the industry.
Advertising - Scroll to continue
The new regulations require companies to establish a presence in Hong Kong by June 1 and then apply for a license by June 2024. Surviving crypto operators were quick to respond. "It's causing a rush to Hong Kong," says Claire Wilson, partner at industry consultant Holland & Marie. “There is a FOMO [fear of missing out] sentiment among some of the biggest players.
Ok but why? Unlike Singapore, which relies on its huge port and related trade, Hong Kong lives or dies on financial services, Wilson points out. The sector accounts for nearly a quarter of gross domestic product. Authorities cannot afford to exclude the widest range of transactions that cryptocurrencies, and their underlying blockchain technology, could possibly engender: the still protean universe of Web3.
“If we were to look at the long term, Hong Kong is probably more interested in applying crypto to traditional financial services: tokenized bonds, securities, etc.,” Bhindhi says.
Advertising - Scroll to continue
There's no way at this point, however, to foster these fledgling apps without a dynamic brokerage firm if it's struggling. Bitcoin, which has been flat for much of 2022, has surged more than half this year as traditional “fiat currency” banks appear to falter.
So Hong Kong needs to take a risk on retail crypto trading, maybe. “Government pressure for retail investors is an important step,” said Yiwei Wang, spokesperson 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 develop a trustworthy crypto business is not too 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, says Angela Ang, a former Singapore regulator, now a senior policy advisor at blockchain intelligence firm TRM Labs. The collapse of Singapore-based Terra/Luna, which held up to $65 billion for its clients, has dampened local enthusiasm for the sector.
Advertising - Scroll to continue
Hong Kong's proposed regulations are "not much different" from Singapore's, Ang says. Investors could expect a similar elimination of wannabes when the licensing deadline arrives a year from June.
Ang nevertheless remains a crypto-optimist. "It's important to remember the promise of the underlying technology despite the growing pains," she says.
Young industry is nothing if not adjustable, adds Wilson. When Hong Kong expires in 14 months, a critical mass could be ready for its definition of prime time. “Hong Kong sat on the fence and maybe learned from the mistakes of others,” she says.
Integrating crypto with Hong Kong's formidable financial infrastructure and the huge horde of savings held by Chinese retail investors could forge a global capital for an exciting new world. Or everything could ignite again.
The fact that this sophisticated hub thinks it can tame crypto is interesting either way.