Hong Kong – officially the Hong Kong Special Administrative Region of the People’s Republic of China – is a city of more than seven million inhabitants in the eastern Pearl River Delta of southern China. The city is known for its pro-innovation and technology, and over the past year, it has introduced legislation to promote and adopt cryptocurrencies.
Hong Kong is a major world economy and serves as a hub for investment and trade in the region. A cosmopolitan metropolis with Western and Asian influences, the city is a well-established data hub for major businesses in finance, shipping, trading and retail, with crypto becoming the latest addition.
While China has maintained a staunch anti-crypto stance for nearly half a decade, last year, Hong Kong introduced its own crypto legislation, allowing retail investors to invest directly in crypto assets.
In 2023, with most countries in the West still wary of cryptocurrencies, Hong Kong took a pro-crypto stance.
In January, Hong Kong’s Financial Secretary Paul Chan said the local government and regulators wanted to build a crypto and fintech ecosystem by 2023 as the crypto industry reeled from the FTX crisis.
On Jan. 13, days after Chan’s statement, Korean tech giant Samsung announced the launch of a bitcoin futures active ETF, or exchange-traded fund, on the stock exchange in Hong Kong.
In mid-February, sources claimed that some Chinese officials were reportedly giving Hong Kong’s pro-crypto efforts a tacit approval. Local business operators have stated that the Chinese government is even willing to use Hong Kong as a test bed for crypto as long as it does not threaten the country’s financial stability.
By March, more than 80 crypto firms had 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 firms. The HKMA urged banking institutions to pay attention to market developments and adopt a forward-looking approach to the emerging technology sector, including cryptocurrencies.
Global crypto exchanges are eyeing the Hong Kong market
In May, the chairman of Hong Kong’s fintech association told Cointelegraph that the pro-crypto state would launch a licensing system for crypto service providers and exchanges, including retail, with a June 1 deadline. At the end of the month, the Hong Kong Securities and Futures Commission (SFC) announced that it will allow licensed crypto platforms to serve retail customers.
At the time of writing, crypto exchanges Huobi and Gate.io had applied for virtual asset licenses, and on May 31, Huobi became the first member of the Hong Kong Virtual Asset Consortium.
Hubei opened its retail trading services on May 29 as the company submitted its license request 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 an additional year.”
#Hoobi HK uobi HK 已于 5 月 29 January 29, 2018 29 January 上海牌猎.
In the next six months, Huobi HK… pic.twitter.com/qkYSqKbLBH
— 火倸Huobi中文骑言 (@HuobiGlobalzh) May 29, 2023
Having already operated as a custodian in Hong Kong since August 2022, Gate.io announced that it is applying for a virtual asset license.
A spokesperson from the exchange told Cointelegraph that Gate.HK will officially file its license application in the second half of 2023.
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The exchange said, “Compared to other regulators, the SFC has strict requirements for virtual asset service providers. It has mandatory insurance/indemnity arrangement requirements in place to help protect clients. Additionally, there is a 98% cold wallet storage requirement that licensed corporations must comply with. We believe that only the best virtual asset service providers can 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 “actively engaged 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 options to better promote the adoption of cryptocurrencies.
Bitfinex, another leading global crypto exchange, told Cointelegraph that developments in Hong Kong’s crypto landscape clearly reflect the ever-evolving nature of the digital asset space.
The exchange welcomed favorable regulations that would allow innovation and business growth while providing a protected environment for all stakeholders. When asked if the exchange was looking to apply for a virtual asset license, a Bitfinex spokesperson said:
“Allowing retail participation 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 taken by Hong Kong.
The China factor
Although Hong Kong enjoys a degree of autonomy, it is still part of China, which – as exemplified by the 2019-2020 anti-criminal law protests – could have a significant impact on the region.
China’s anti-crypto stance made headlines in 2018 when the country banned foreign cryptocurrency exchanges. In the years that followed, China became the center of Bitcoin (BTC) mining and imposed a blanket ban on all crypto activities, including mining, trading or exchange, although bitcoin possession will be legal in 2021.
Many in the industry believed that China’s crypto policy could influence Hong Kong. However, Hong Kong’s progressive crypto approach may turn out to be an escape for crypto users and interested parties in China, with many Hong Kong-based crypto firms receiving interest from Chinese banks.
Institutions such as Shanghai Pudong Development Bank, Bank of Communications, and Bank of China have either started offering banking services to cryptocurrency ventures in Hong Kong, or have directly tied up with such organizations to offer services.
As of April 2023, the Hong Kong arm of major Chinese state-owned Bank of Communications is collaborating with several cryptocurrency businesses.
A spokesperson for Gate.io’s exchange said, “Since Hong Kong and mainland China have different regulatory stances and are independent of each other, we cannot interpret the implications for mainland China.”
Vivian Khoo, co-founder of the Crypto Industry Association and chairman of the Asia Crypto Alliance, told Cointelegraph that it is important to differentiate between crypto and Web3 more broadly when looking at the relationship between Hong Kong and China.
“The Hong Kong government has been a bigger proponent of Web3 than being particularly pro-crypto. The digital asset ecosystem is much broader than crypto; While Mainland China bans cryptocurrencies in 2021, it is bullish on the potential of Web3 and the application of blockchain technologies. It looks like the Web3 and digital finance industries will continue to grow in China as a whole,” explained Khoo.
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Yuanjie Zhang, co-founder of Conflux Network, told Cointelegraph that developments in Hong Kong will unfold under 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, where they come together and explore the frontier of the industry”, and on the other hand, “Mainland China will continue its policy under the central. Bank’s guidance to prevent the spread of crypto offshore on the stabilization of capital controls. More Exchanges will exit mainland markets, ditch mainland ID users and relocate their staff to Hong Kong, Thailand, Singapore, etc.
Binance CEO Changpeng Zhao said developments in Hong Kong, especially the onboarding of retail traders, could become a driving force for the next bull run.