Why Hong Kong Wants to Be a Hub for the Crypto Sector

1. What are the rules?

The brand new guidelines imply that retail buyers can commerce cash on exchanges licensed by the town’s Securities and Futures Fee. Hong Kong says its strategy is excessive on client safety, with strict standards on which digital property will be purchased and bought. Among the components that platforms should take into account when deciding on tokens to supply embody how lengthy a coin has been in circulation, its market capitalization and common day by day buying and selling quantity. The tokens should even be included in at the least two cryptocurrency indexes from outstanding establishments, one with a background in conventional finance. As well as, the SFC mandates that crypto companies should put different safeguards in place earlier than accepting prospects, like assessing if customers have important information of digital property earlier than investing, and setting buying and selling or place limits “as regards to the shopper’s monetary state of affairs.” 

2. Why is Hong Kong embracing crypto?

Hong Kong’s coverage pivot is a part of a wider effort to revive the town’s credentials as a cutting-edge monetary hub. It’s a repute that was put in danger by years of strict Covid-19 restrictions and political unrest, which induced the economic system to gradual and expertise to go away. Monetary Secretary Paul Chan known as cryptocurrencies and different digital property “unstoppable new monetary improvements” at an occasion organized by the Hong Kong Affiliation of Banks in November final 12 months, and stated there’s a “must embrace them.” The federal government has allowed exchange-traded funds investing in CME Group Bitcoin and Ether futures, and bought its inaugural digital inexperienced bonds, which use digital ledgers to make the settlement and coupon cost course of sooner. 

3. Is that this Hong Kong’s first foray into crypto? 

Hong Kong was a digital-asset heart in earlier years earlier than taking a extra skeptical stance. Exchanges together with FTX and Crypto.com (beforehand referred to as Monaco) had been based within the metropolis. Previous to the brand new regulatory regime, the SFC had a voluntary licensing program. Solely two exchanges — OSL and HashKey — opted into that legacy framework, which permitted them to offer providers solely to skilled buyers with portfolios of at the least HK$8 million ($1 million). These two additionally had been the primary to be licensed underneath the brand new regime, in search of what OSL Chief Government Officer Hugh Madden known as a “first-mover benefit.” The principles got here after mainland China instructed platforms to cease buying and selling in cryptocurrencies and banned preliminary coin choices, or ICOs, in 2017. The mainland barred crypto transactions and pledged to root out mining of digital property in September 2021.

4. How vital is mainland China’s prohibition on crypto buying and selling?

One attainable danger is that China’s ban might spill over to semi-autonomous Hong Kong. Nevertheless, Hong Kong regulators have pushed again towards this concept, citing the “one nation, two programs” precept that allows the previous British colony to have its personal financial and political system. There are additionally indicators that Hong Kong’s strategy might have tacit approval from Beijing. Representatives from China’s Liaison Workplace and different officers have been noticed at crypto gatherings within the metropolis, in keeping with individuals conversant in the matter, who additionally described the encounters as pleasant. The low-key help might sign China is eager to make use of Hong Kong as a testing floor for digital property. Nevertheless, Beijing has not indicated any softening of its tight rein on the sector regionally amid concern about client safety, the potential use of crypto to evade capital controls, and the environmental affect of power-hungry Bitcoin mining. 

5. What hurdles stay? 

A key concern for crypto companies is regulatory ambiguity. The SFC’s code for digital-asset exchanges says they shouldn’t provide futures or associated derivatives, however officers have additionally indicated they are going to overview their strategy to such merchandise. One other problem is that for the reason that code emerged, the trade has interpreted it as outlawing staking — a well-liked approach of earnings rewards by pledging tokens to assist function a blockchain. In the meantime, NFTs and utility tokens equivalent to these used for play-to-earn gaming additionally fall exterior the scope of plainly regulated actions. Digital asset companies working in these areas want to find out whether or not their enterprise choices represent securities and, in that case, require a license. The duty is advanced and the SFC has indicated selections will likely be made on a case-by-case foundation. Different obstacles embody banking entry, as crypto companies face stringent know-your-customer and anti-money laundering guidelines. The SFC and Hong Kong Financial Authority have urged lenders to help the sector, and held conferences in April and June to encourage lenders to open accounts for regulated crypto firms. Expertise recruitment is one other problem. Accountable officers — who bear the first duty for compliance at a licensed company — have been in brief provide. Institutional-level crypto merchants and builders are additionally cited as tough to search out.

6. What has been the reception to Hong Kong’s crypto pivot from others?

Hong Kong’s crypto pivot sparked curiosity from native and overseas companies given the potential for the town to behave as conduit for Chinese language wealth — if ever the mainland loosens its digital-asset curbs. Firms equivalent to Huobi, OKX and Amber Group stated they meant to pursue licenses however no huge funding pledges instantly adopted the roll out of the brand new regime. It’s unclear if the rules are engaging sufficient to entice companies to speculate closely. The give attention to retail-investor safety might dent profitability if areas like margin buying and selling, staking and derivatives stay off-limits. As well as, the crypto market globally is but to completely recuperate from its $1.5 trillion rout final 12 months.  

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