Hong Kong’s Regulatory Lead Establishes It as Major Crypto Hub

Hong Kong – officially the Hong Kong Special Administrative Region of the People’s Republic of China – is a city of over seven million inhabitants on the eastern Pearl River Delta in southern China. The city is known for being pro-innovation and technology, and in the past year, it has introduced legislation to promote and adopt cryptocurrencies.

Hong Kong is a major world economy, serving as a center for investment and trade in the region. The city is a cosmopolitan metropolis with Western and Asian influences, and is a well-established data hub for major businesses in finance, shipping, trade and retail, with crypto becoming the latest addition.

While China has maintained a tough anti-crypto stance for nearly half a decade, last year, Hong Kong introduced its own crypto law allowing retail investors to invest directly in crypto assets.

In 2023, as most countries in the West are still cautious about cryptocurrencies, Hong Kong has decidedly taken a pro-crypto stance.

In January, as the crypto industry grappled with the FTX crisis, Hong Kong’s Financial Secretary Paul Chan said that the local government and regulators are looking forward to building a crypto and fintech ecosystem in 2023.

On January 13, just days after Chan’s statement, Korean tech giant Samsung announced the launch of a Bitcoin Futures Active ETF, or exchange-traded fund, on the Hong Kong Stock Exchange.

In mid-February, sources claimed that some Chinese officials were allegedly giving tacit approval to Hong Kong’s pro-crypto efforts. Local business operators said the Chinese government may be open to using Hong Kong as a test bed for crypto as long as it does not threaten the country’s financial stability.

As of March, over 80 crypto firms expressed interest in opening an office in Hong Kong.

In April, the Hong Kong Monetary Authority (HKMA) – the territory’s central banking body and regulator – called on banks to provide services to cryptocurrency firms. The HKMA called on banking institutions to be attentive to market developments and take a forward-looking approach to the nascent tech sector, including cryptocurrencies.

Global crypto exchanges eye Hong Kong market

In May, the president of the Fintech Association of Hong Kong told Cointelegraph that Pro-Crypto would introduce a licensing regime for state crypto service providers and exchanges, including retail, with a June 1 deadline. Later in the month, the Hong Kong Securities and Futures Commission (SFC) announced that licensed crypto platforms would be allowed to serve retail customers.

At the time of writing, crypto exchanges Huobi and Get.io have applied for virtual asset licenses, with Huobi becoming the first member of the Hong Kong Virtual Assets Consortium on 31 May.

On May 29, Huobi opened its retail trading services as the firm submitted its license request to the SFC. A spokesperson for the firm told Cointelegraph that “Hong Kong regulations allow existing virtual asset platforms to operate without a license for an additional year.”

#huobi HK , Huobi HK 已于 5 月 September 29 the best photos.

Recently, Huobi HK… pic.twitter.com/qkYSqKbLBH

— 火通 Huobi Chinese Channel (@HuobiGlobalzh) May 29, 2023

Gate.io also announced that it is applying for a license for virtual assets as it operates as a custodian in Hong Kong from August 2022.

A spokesperson for the exchange told Cointelegraph that Gate.HK will officially file a license application in the second half of 2023.

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“Compared to other regulators, the SFC has stricter requirements for virtual asset service providers. It has mandatory insurance/indemnity regime requirements to help protect customers. In addition, it requires 98% cold wallet storage,” the exchange said. There are requirements that licensed corporations will need to comply with. We are confident that only the best virtual asset service providers will be able to comply with the financial and operational requirements.”

Binance, the largest global crypto exchange with a significant presence in the Asian market, is currently monitoring developments in Hong Kong. A Binance representative told Cointelegraph that it was “actively involved during the public consultation period and contributed to the policy-making process of virtual asset platform regulation in Hong Kong.”

The crypto exchange said it welcomes more regulatory clarity for the industry and is currently considering its options to encourage cryptocurrency adoption.

Bitfinex, another major global crypto exchange, told Cointelegraph that developments in Hong Kong’s crypto landscape clearly reflect the ever-evolving nature of the digital asset space.

The exchange welcomed favorable regulations allowing innovation and business growth, while providing a protective environment for all participants. When asked whether the exchange is looking to apply for a virtual asset license, a Bitfinex spokesperson said:

“Allowing retail participation further democratizes access to the crypto market. Accessibility for all is one of the reasons the cryptocurrency industry was born in the first place, and we welcome the progressive approach Hong Kong has taken.

china factor

While Hong Kong enjoys some degree of autonomy, it is still part of China, which – as exemplified by the 2019-2020 anti-extradition law protests – can exert significant influence over the region.

China’s anti-crypto stance made headlines in 2018 when the country banned foreign cryptocurrency exchanges. In the following years, China became the center of bitcoin (BTC) mining, but in 2021 imposed a comprehensive ban on all crypto activities, including mining, trading or exchange, although bitcoin possession is still legal.

Many in the industry believe that China’s crypto policy will affect Hong Kong. However, Hong Kong’s progressive crypto approach could become an escape for crypto users and interested parties in China, with several Hong Kong-based crypto firms receiving interest from Chinese banks.

Firms such as Shanghai Pudong Development Bank, Bank of Communications and Bank of China have either started providing banking services to cryptocurrency ventures in Hong Kong, or have approached such organizations directly to offer services.

As of April 2023, the Hong Kong branch of the major Chinese state-owned Bank of Communications is collaborating with several cryptocurrency businesses.

“We cannot explain the impact on mainland China, as Hong Kong and mainland China have different regulatory stances, and are independent of each other,” said a Gate.io exchange spokesperson.

Vivian Khoo, co-founder and president of Asia Crypto Alliance, a crypto industry association, told Cointelegraph that it is important to differentiate between crypto and Web3 given the relationship between Hong Kong and mainland China.

“The Hong Kong government in particular is a big supporter of Web3, rather than pro-crypto. The digital asset ecosystem is much broader than crypto alone; while mainland China bans cryptocurrencies in 2021, it will be a great opportunity to see Web3’s potential and is optimistic on the application of blockchain technologies. Web3 and the digital finance industry overall in China are poised to continue to grow,” explained Khoo.

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Yuanjie Zhang, co-founder of Conflux Network, told Cointelegraph that developments in Hong Kong will unfold within a “one country, two systems” framework.

On the one hand, Hong Kong will “become the platform for Chinese founders, venture capitalists, institutions and exchanges, where they cluster together and explore the frontier of the industry,” while on the other, “under China’s mainland centralization policy will continue with its policy. Bank’s guidance on preventing the spread of crypto onshore in continuation of capital controls. More exchanges will pull out of mainland markets, weed out mainland ID users, and relocate their staff to Hong Kong, Thailand, and Singapore, etc.”

Binance CEO Changpeng Zhao has said that developments in Hong Kong, especially the onboarding of retail traders, could very well become a driving force for the next bull run.