Hong Kong Wants to Reclaim the Name of a Crypto Hub

In November 2022, the Financial Secretary of Hong Kong, Hon Paul Chan expressed the desire for the city to become a virtual assets hub. Prior to that, in October there was also a policy statement with a similar sentiment from the government; the city’s officials want to promote innovation in the financial sector while prioritizing appropriate risk management. However, the megalopolis already has quite an interesting history with crypto.

In this article, we are going to look at the past and present of Hong Kong’s regulation in the crypto sphere.

The crypto history of Hong Kong

The technologically advanced city was destined to become one of the centers of early crypto adoption. Some prominent companies were founded or had regional headquarters there, but they had to later leave Hong Kong. For example, this happened to Huobi and Tron.

The reasons for that were rooted in both the political situation in China as well as the city’s own policies.

As for the first reason, China’s attitude towards crypto has been negative. In September 2021, cryptocurrency transactions were effectively banned in the country by the People’s Bank of China. According to the entity, such financial operations facilitate crime and pose a serious risk to the financial system. Even though the ban was never intended for Hong Kong because of the “one country two systems” principle which allows the city to have its own economic regulations, the Chinese government has shown that the principle can be violated. 

As for the city’s own policies, the tightening of the regime started in 2017, when the Securities and Futures Commission (SFC), which is the city’s financial regulator, announced that the companies that deal with security tokens are required to have a license from the SFC. What is more, the commission banned transactions connected to virtual-asset-based funds for everyone but professional investors. To qualify, investors had to have portfolios of over 8 million Hong Kong dollars (approximately $1 million) disregarding cryptocurrencies.

The regulatory framework’s rules were being applied in full force only to the platforms that were trading at least one security token, the rest of the networks could choose whether to get a license or not. 

The requirements for getting a license were so strict that only two companies got it, BC Group and HashKey Group. At the same time, many people in Hong Kong used services from unlicensed platforms.

This made the situation very uncertain for the exchanges because they started to worry that the tokens they list could be securities within the jurisdiction. They would have to get a legal opinion on each new token, which was expensive. That is why some of the companies started to leave.

This, together with the harsh rules that applied in the city due to COVID-19 led to it losing in the tough competition with Singapore for the status of the crypto hub in the region.

What are the new rules of crypto regulation in Hong Kong?

The new licensing regime will come into force in March of 2023, and it will have a grace period of 9 months. The main difference is that now all exchanges have to get a license, which is intended to provide clarity for all participants in the market and make sure companies do not violate laws.

The exact rules of the new regulatory framework are still in the process of changing, Hong Kong officials admit that the standards might relax a bit. However, the high volatility of the market as well as some negative events of 2022 make the government believe that strictness is a virtue in this case.

They want centralized crypto exchanges to be held to the same level of accountability as stock exchanges and broker-dealers.

We can already see that the crypto firms got the signal of the upcoming loosening of the rules: at the beginning of December 2022, large asset management companies started to apply for launching exchange-traded funds tracking cryptocurrency futures. It means that retail investors will be able to trade crypto through the funds.

What are the opinions on the new rules?

There are different opinions in the industry. Those who have a positive attitude say that even though the approach is likely to remain strict, it is intended to be long-term and make the market safer for investors. Also, because there is so much capital in Hong Kong already, the demand will persist no matter the regulation.

They have faith that the city will be able to be successful in terms of competition with Singapore because it plans to toughen the rules. This means that maybe in the future both megapolises will come to the middle ground.

Other people doubt that the new framework will be able to make Hong Kong attractive for crypto firms again. According to them, the operating costs are high, and the requirements will probably include having a high percentage of assets in cold wallets for the security of the funds.

What is more, it is possible that some firms might apply for the license and use the grace period for illegal activities without trying to comply with the rules.

Right now we can only guess what the licensing process will look like in the future and how it will affect crypto in Hong Kong.