Hong Kong’s regulatory lead is making it a major crypto hub

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

Hong Kong is a major global economy and serves as a center for investment and trade in the region. A cosmopolitan metropolis with Western and Asian influences, the city is an established data hub for major companies in finance, shipping, trading and retail, with crypto being the latest addition.

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

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

In January, as the crypto industry was reeling from the FTX crisis, Hong Kong finance secretary Paul Chan said local government and regulators look forward to building a crypto and fintech ecosystem by 2023. to build.

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 reportedly gave tacit approval to Hong Kong’s pro-crypto efforts. Local business operators stated that the Chinese government might even be open to using Hong Kong as a testbed for crypto, as long as it doesn’t threaten the country’s financial stability.

In March, more than 80 crypto companies expressed interest in opening an office in Hong Kong.

In April, the Hong Kong Monetary Authority (HKMA) – the region’s central banking institution and regulator – called on banks to provide services to cryptocurrency companies. The HKMA asked banking institutions to be alert to market developments and take a forward-looking approach to the nascent technology sector, including cryptocurrencies.

Global crypto exchanges are watching the Hong Kong market

In May, the president of the FinTech Association of Hong Kong told Cointelegraph that the pro-cryptostate would launch a licensing regime for crypto service providers and exchanges with a deadline of June 1, including retail. Later in the month, the Hong Kong Securities and Futures Commission (SFC) announced that licensed crypto platforms will be allowed to serve retail clients.

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

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

#Huobi HK Huo bi HK 5 月 29 日正式向香港证监会提交了申请通知书, 我们期待能够获得虚拟资产交易所牌照。

The new Huobi HK… pic.twitter.com/qkYSqKbLBH

— 火币Huobi中文频道 (@HuobiGlobalzh) May 29, 2023

Gate.io also announced that it was applying for a virtual asset license as it had been operating as a custodian in Hong Kong since August 2022.

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

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The exchange said: “Compared to other regulators, the SFC has stricter requirements for virtual asset service providers. It has mandatory insurance/compensation schemes to help protect customers. Furthermore, it has a 98% cold wallet storage requirement that licensed companies should meet. We believe that only the best virtual asset service providers would be able to meet 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 best encourage adoption of cryptocurrencies.

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

The exchange welcomed favorable regulations that facilitate innovation and business growth while providing a protective environment for all participants. When asked if the exchange would apply for a virtual asset license, a Bitfinex spokesperson said:

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

The China Factor

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

China’s anti-crypto stance made headlines in 2018 when the country imposed a ban on foreign cryptocurrency exchanges. In the following years, China became a hub for Bitcoin (BTC) mining, but in 2021 imposed a general ban on all crypto activities, including mining, trading or exchange, although Bitcoin ownership is still legal.

Many in the industry believed that China’s crypto policy would affect Hong Kong. However, Hong Kong’s progressive crypto approach could become an escape for crypto users and interested parties in China, with many Hong Kong-based crypto companies taking interest from Chinese banks.

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

As of April 2023, the Hong Kong branch of China’s major state-owned Bank of Communications is partnering with several cryptocurrency companies.

Gate.io’s exchange spokesperson said, “We cannot interpret the implications for mainland China as Hong Kong and mainland China have different regulatory stances and are independent of each other.”

Vivien Khoo, co-founder and president of the crypto industry association, Asia Crypto Alliance, told Cointelegraph that it is important to make a broader distinction between crypto and Web3 when looking at the relationship between Hong Kong and mainland China .

“The Hong Kong government is strongly in favor of Web3 rather than specifically pro-crypto. The digital asset ecosystem is much broader than just crypto; as mainland China banned cryptocurrencies in 2021, it is optimistic about the potential of Web3 and the application of blockchain technologies. It seems that the Web3 and digital finance industries in general continue to grow in greater China,” explained Khoo.

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

On the one hand, Hong Kong will become the “stage for Chinese founders, venture capitalists, institutions and exchanges, where they come together and explore the frontier of the industry”, while on the other hand, “Mainland China will continue its policies under the central guidance of the bank to prevent the prevalence of crypto onshore in capital control consistency more exchanges will leave the mainland markets, free from the mainland ID users and move their staff to Hong Kong, Thailand and Singapore, etc .”

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