Hong Kong Develops Crypto Institutions Despite China Ban
The Lede: Hong Kong continues to make moves toward becoming a virtual asset hub as it prepares to implement regulations this year that will govern crypto transactions.
What We Know:
- Despite China’s ban on crypto activity, Hong Kong is planning to introduce new rules in June regarding the cryptocurrency market that will require crypto trading platforms to be licensed by the Securities and Futures Commission. The regulator has already launched a consultation on its proposal to regulate virtual asset trading platforms.
- This comes as part of a trend in recent years of legislation regarding crypto in various parts of the world. These include the institutionalization of crypto as financial instruments and the requirement of stablecoins to maintain sufficient reserves to meet redemption requests.
The Background:
China banned financial institutions and payment companies from providing services related to cryptocurrency transactions in 2021. The government warned investors against speculative crypto trading. Under the ban institutions in China cannot offer any service involving cryptocurrency including registration, trading, clearing and settlement. Due to the unique nature of Hong Kong’s special status, the crypto space has been able to operate there aside from China’s ban. Meanwhile, other countries have sought to create legislation to bring crypto into formal institutional frameworks. Cryptocurrencies have suffered massive drops in value in the past year and the recent collapse of crypto-friendly banks and platforms has revealed the instability in the space.
Likely Outcomes:
- Hong Kong goes ahead with its policies on crypto and digital assets. As a digital asset hub, they would serve as a foothold for crypto in the China sphere as a kind of laboratory for enterprises and individuals dealing with the technology. However, other crypto hubs like Dubai and Switzerland may remain better options for doing business in digital assets with their comparative advantage.
- China may impose its rules on cypto in Hong Kong which would effectively neutralize the possibility of making it a digital asset hub. From a political perspective, China may view the contradiction of its ban on crypto as a challenge to governance and crack down on this development.
Quotables:
“If anything, China might be looking at the effect on Hong Kong following those rules, the issuance of new crypto-linked products or blockchain-based solutions, and the pick-up of trading and business activity that might ensue.” - Justin d’Anethan, Institutional Sales Director at Amber Group
“In the future, it may serve as a model for policy formulation in other regions [in China] if it proves successful.” - Deng Chao, CEO of Hashkey Capital
“Hong Kong is going to impose a set of strict regulations on crypto trading platforms. That means it will not be easy for newcomers to casually join in and start business. Regulation is, of course, necessary for healthy growth, but in order to compete with other crypto hubs, there also has to be appealing tax policy for crypto projects.” - Yuya Hasegawa, Market Analyst for Bitbank
Good Reads:
One country, two crypto systems: Hong Kong harbors crypto hub ambitions despite China’s crackdown (CNBC)
China bans financial, payment institutions from cryptocurrency business (CNBC)
