Hong Kong – officially the Hong Kong Special Administrative Region of the People’s Republic of China – is a city of over seven million people located in the east of the Pearl River Delta in southern China. The city is known for being a supporter of innovation and technology, and over the past year has introduced legislation to promote and adopt cryptocurrencies.
Hong Kong is a major global economy, and serves as the region’s investment and trade hub. The city is a cosmopolitan metropolis with Western and Asian influences, and is a well-established data center for major companies in finance, shipping, trade and retail, where encryption is the latest addition.
While China has maintained a hard line against cryptocurrencies for nearly half a decade, Hong Kong last year introduced its own cryptocurrency legislation allowing retail investors to invest directly in crypto assets.
In 2023, as most countries in the West are still cautious about cryptocurrency, Hong Kong has taken a pro-crypto stance.
In January, as the cryptocurrency industry was reeling from the FTX crisis, Hong Kong’s Finance Minister Paul Chan said the local government and regulators were looking forward to building a crypto and fintech ecosystem in 2023.
On January 13, just days after Chan’s statement, 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 alleged that some Chinese officials were giving tacit approval to Hong Kong’s pro-cryptocurrency efforts. Local business operators have stated that the Chinese government may be open to using Hong Kong as a testing ground for cryptocurrency as long as it does not threaten the country’s financial stability.
By March, more than 80 crypto companies had expressed interest in opening an office in Hong Kong.
In April, the Hong Kong Monetary Authority (HKMA) — the central banking institution and regulator in the region — called on banks to offer services to cryptocurrency firms. HKMA asked banking institutions to pay attention to market developments and take a forward-looking approach to the emerging technology sector, including cryptocurrencies.
Global cryptocurrency exchanges are interested in the Hong Kong market
In May, the head of the Hong Kong FinTech Association told Cointelegraph that the pro-cryptocurrency country will launch a licensing regime for crypto service providers and exchanges with a June 1 deadline, including retail. Later in the month, the Hong Kong Securities and Futures Commission (SFC) announced that licensed crypto platforms would be allowed to serve retail clients.
At the time of writing, crypto exchanges Huobi and Gate.io have applied for virtual asset licenses, with Huobi becoming the first member of the Hong Kong Virtual Assets Association on May 31.
On May 29, Huobi opened its retail business services as 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 for an additional year without a license.”
# Hobby Hong Kong now provides instant and managed services to both professional and retail clients. As a leading virtual asset trading platform in Hong Kong, Huobi HK officially submitted an application notice to the Hong Kong Securities Regulatory Commission on May 29, and we are looking forward to obtaining a virtual asset exchange license.
In the next six months, Huobi HK… pic.twitter.com/qkYSqKbLBH
– China’s Huobi Channel (HuobiGlobalzh) May 29, 2023
Gate.io also announced that it is applying for a virtual asset license, having already been acting as a custodian in Hong Kong since August 2022.
A spokesperson for the exchange told Cointelegraph that Gate.HK will formally submit its license application in the second half of 2023.
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The exchange said, “Compared to other regulators, the SFC has more stringent requirements for virtual asset service providers. It has mandatory insurance/indemnity arrangement requirements to help protect customers. Moreover, it has 98% of the cold wallet storage requirements that businesses must have.” Licensed to comply with. We believe that only the best virtual asset service providers will be able to comply with the financial and operational requirements.”
Binance, the largest global cryptocurrency exchange with a large presence in the Asian market, is currently monitoring developments in Hong Kong. A Binance representative told Cointelegraph that he actively participated during the “public consultation period and contributed to the policy-making process of regulating the virtual asset platform in Hong Kong.”
The cryptocurrency exchange said it welcomes more regulatory clarity for the industry and is currently examining its options to best encourage cryptocurrency adoption.
Bitfinex, another prominent global crypto exchange, told Cointelegraph that developments in the crypto landscape in Hong Kong clearly reflect the ever-evolving nature of the digital asset space.
The exchange welcomed favorable regulations that allow innovation and business growth, while providing a protective environment for all participants. When asked if the exchange is looking to apply for a virtual asset license, a Bitfinex spokesperson said:
“Allowing fragmentation further democratizes access to the crypto market. Accessibility for all is one of the reasons the crypto industry was born in the first place, and we welcome the progressive approach that Hong Kong has taken.”
China factor
While Hong Kong enjoys a certain degree of autonomy, it is still part of China, which – as evidenced by the 2019-2020 Anti-Extradition Act protests – could exert significant influence over the region.
China’s anti-cryptocurrency stance made headlines in 2018 when the country imposed a ban on foreign currency exchanges. In the following years, China became a hub for Bitcoin (BTC) mining but imposed a blanket ban on all cryptocurrency activities, including mining, trading or exchange, in 2021, although owning Bitcoin is still legal.
Many in the industry believe that China’s crypto policy will affect Hong Kong. However, Hong Kong’s progressive crypto approach may become a haven for crypto users and interested parties in China, as several Hong Kong crypto companies are receiving interest from Chinese banks.
Companies such as Shanghai Pudong Development Bank, Bank of Communications, and Bank of China either started to provide banking services to cryptocurrency institutions in Hong Kong, or approached these organizations directly to provide services.
As of April 2023, the Hong Kong arm of the main state-owned Chinese Bank of Communications is collaborating with several cryptocurrency firms.
A Gate.io exchange spokesperson said: “We cannot explain the implications for mainland China, as Hong Kong and mainland China have different regulatory positions that are independent of each other.”
Vivian Ko, co-founder and president of the crypto industry association Asia Crypto Alliance, told Cointelegraph that it’s important to differentiate cryptography from Web3 more broadly when looking at the relationship between Hong Kong and mainland China.
“The Hong Kong government is a big supporter of Web3 rather than a supporter of cryptocurrency specifically. The ecosystem for digital assets is much broader than crypto alone; while mainland China banned cryptocurrencies in 2021, it is optimistic about the potential of Web3 and the application of blockchain technologies. Khoo explained that the Web 3 and digital finance industries will continue to grow in general in Greater China.
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Yuanjie Zhang, co-founder of Conflux Network, told Cointelegraph that developments in Hong Kong will unfold within the framework of “one country, two systems.”
On the one hand, Hong Kong will “become a platform for Chinese founders, venture capitalists, institutions and exchanges as they gather together and explore the frontiers of the industry,” while on the other hand, “mainland China will continue its policy under the bank’s guidelines to prevent the spread of cryptocurrency internally in the consistency of capital control.” More exchanges will exit mainland markets, away from mainland ID users and move their staff to Hong Kong, Thailand, Singapore, etc.”
Binance CEO Changpeng Zhao stated that developments in Hong Kong, particularly the qualification of retail traders, could act as a driving force for the next bullish wave.
