Hong Kong, China – Cryptocurrencies have had a rough ride in recent years, with prices spiralling through periods of boom and bust and the industry threatened by stunning downfalls as well as uncertain regulatory regimes.
But even as these troubles have led some jurisdictions to crack down on the sector, Hong Kong is embracing virtual assets, betting that a new regulatory framework will help the city avoid the stumbles seen elsewhere.
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Hong Kong officials have acknowledged that cryptocurrencies are here to stay and that the semi-autonomous Chinese territory must welcome the industry to keep its status as a global financial hub, which has been tarnished by years of tough COVID restrictions and a sweeping crackdown on dissent.
Earlier this month, authorities issued licences granting two cryptocurrency exchanges approval to engage in retail trading of digital assets for the first time.
HashKey Exchange and OSL secured regulatory approval after Hong Kong’s Securities and Futures Commission (SFC) opened applications for licensing mom-and-pop investing in June.
“We are not aiming to be a crypto trading hub but we recognise crypto trading as an important part of the virtual asset ecosystem,” Julia Leung, SFC chief executive officer, said in a speech in June.
Leung emphasised that a well-balanced regulatory system was crucial to building trust in the industry.
“Up to now, many jurisdictions have adopted a light-touch approach to regulating crypto asset service providers,” she said, adding that “the ‘crypto winter’ has strengthened the resolve of global financial regulators”.
The new guidelines for retail trading in crypto have been broadly welcomed across the industry.
“Hong Kong has taken a proactive approach towards managing the risks associated with digital assets,” Dave Chapman, co-founder of OSL, which has offices in Hong Kong and Singapore, told Al Jazeera.
Chapman said the SFC’s new regulatory framework “reflects a thorough understanding of the sector, ensuring both a healthy market environment and robust protection for investors.”
The new regulations come as mainland China continues to ban cryptocurrencies, raising the question of why Beijing is allowing Hong Kong to embrace virtual assets at a time when the ruling Communist Party is tightening control over the city.
‘One country, two systems’
Neil Tan, the chairman of the FinTech Association of Hong Kong, said the move underscores the city’s freedom to establish its own policies and regulations in the financial arena under the “one country, two systems” arrangement, which is supposed to guarantee the city’s autonomy and freedoms until at least 2047.
With Hong Kong becoming a hub for virtual assets and Web3 – an envisioned online ecosystem based on decentralised blockchains – it gives Beijing “exposure and oversight over the cryptocurrency industry,” Tan, who also is managing partner at Tsunami Advisors, told Al Jazeera.
Tan said “this will allow China the ability to influence the industry in an indirect way” and “help Hong Kong maintain its standing as an international financial centre”.
“It’s another asset class to attract foreign direct investment and also another means to promote the internationalisation of the renminbi,” he said.
Tan cautioned, however, that “these are purely speculative reasons and the actual motivations may be influenced by a combination of economic, social, political and strategic factors”.
The developments in Hong Kong come as the global cryptocurrency industry has been rocked by upheaval, including the collapse last year of crypto firms FTX and Three Arrows Capital.
Meanwhile, Binance and Coinbase are entangled in lawsuits brought on by United States regulatory agencies, including the Securities and Exchange Commission (SEC), which has ramped up its oversight of the industry.
On a podcast in April, Chamath Palihapitiya, the CEO and founder of technology investment firm Social Capital, declared that “crypto’s dead in America”, noting that the SEC chairman, Gary Gensler, blamed digital currencies for the US banking crisis earlier this year.
Even so, regulatory clarity now appears to be emerging in Washington, DC.
A US congressional committee in late July passed legislation that would establish a regulatory framework for digital assets. That move, and a recent favourable US court ruling for crypto company Ripple, has led to a rally in cryptocurrencies.
Bitcoin, for example, is up by more than 50 percent since the beginning of the year.
Some experts argue the crypto boom has already peaked and Hong Kong is only playing catchup with other regions.
“I think Hong Kong’s attitude toward cryptocurrency is correct but late, which is that the trend of cryptocurrency has already passed,” Lu Fangzhou, an assistant professor of finance at the University of Hong Kong, told Al Jazeera.
“Hong Kong could have been a global leader in cryptocurrency,” he said.
Chapman of OSL expressed a more upbeat view.
“The potential of blockchain technology is transformative and we’re still in the early stages of realising its full impact,” he said, adding that Hong Kong’s “full-scale regulation and integration of this market into its financial system underscores its adaptability and forward-thinking approach, reinforcing its position as a global financial hub”.
“Hong Kong can lead the way in ensuring good practices in the digital asset industry,” Chapman said, so long as the territory combines strong regulation with investor education and continuous review of governance.
Indeed, Hong Kong is not a total newcomer to cryptocurrencies.
In December 2020, the SFC granted the first licence to a virtual asset trading platform in the city for institutional investors. And before that, both Hong Kong and mainland China were hubs for cryptocurrency firms.
“A significant number of the people, projects and platforms came from here,” said Tan of the FinTech Association of Hong Kong.
“This allowed Hong Kong to continue attracting crypto firms through the migration offshore and becoming a centre for cryptocurrency activities in the region,” Tan said. He added that while Beijing is negative towards digital currencies, it understands the importance of blockchain technology.
“The favourable regulatory landscape and the unique advantages of Hong Kong have now made it seem like a kind of homecoming for many of these firms now,” he said.