Hong Kong’s embrace of cryptocurrencies may draw extra enterprise and expertise to town. However the business comes with a number of baggage—and likewise some China-specific dangers.
The Chinese language semiautonomous metropolis is rolling out the welcome mat for the crypto business, in a notable departure from the U.S. method. Regulators have launched a brand new licensing regime for cryptocurrency exchanges. That may allow them to serve particular person buyers, although small buyers would have the ability to commerce solely larger cryptocurrencies akin to bitcoin. Hong Kong’s first exchange-traded funds backed by crypto futures had been launched in December.
The town is not any stranger to crypto. The failed alternate FTX was based in Hong Kong, for instance. However a clearer regulatory framework will definitely appeal to many crypto corporations—particularly when throughout the Pacific U.S. regulators are cracking down. The Securities and Alternate Fee has sued Binance and Coinbase—the 2 largest crypto exchanges—claiming they operated unlawful exchanges. They’ve denied the costs.
However it’s curious that Hong Kong is warming to crypto whereas the business stays within the deep freeze in mainland China. Beijing declared all cryptocurrency-related transactions unlawful in 2021, together with by abroad exchanges offering companies to Chinese language residents on-line. Some might hope Hong Kong’s enthusiasm portends a thaw up north—however that may be a lengthy shot given persistent issues in Beijing about crypto’s position in capital outflows and obsession with surveillance and information sovereignty.
Hong Kong’s pivot to cryptocurrency additionally comes as it’s nonetheless contending with the fallout of practically three years of stringent pandemic restrictions, a draconian national-security regulation and a slowing Chinese language financial system.
Singapore, particularly, has been gaining in asset administration at Hong Kong’s expense. Hong Kong nonetheless leads by way of property beneath administration, however the hole has been narrowing: AUM in Singapore grew 16% in 2021 versus 2% for Hong Kong.
Hong Kong’s inventory market has additionally been sluggish in 2023 as world buyers turn into much less passionate about Chinese language shares due to geopolitical issues and China’s financial slowdown. Many Chinese language corporations are additionally opting to record in Shanghai and Shenzhen as an alternative. The worth of latest listings in Hong Kong final yr was the bottom since 2012, in response to information from Dealogic.
A extra pleasant regulatory regime may due to this fact give town’s finance enterprise a much-needed enhance. However as high-profile crypto collapses akin to these of FTX and the crypto hedge fund Three Arrows Capital have illustrated, the business is permeated with all kinds of unsavory dealings, too—from cash laundering to fraud. That might doubtlessly backfire for Hong Kong if native banking establishments had been to get tied up, for instance, in instances of curiosity to U.S. or different international regulators.
Placing a steadiness between defending buyers and attracting enterprise will probably be laborious, given the murky nature of the business. And success may even find yourself as an issue as nicely, if Beijing concludes {that a} crypto-friendly Hong Kong in the end undermines its personal means to observe capital flows within the Better China area.
Hong Kong has had a tough a number of years. Whether or not crypto is mostly a answer stays to be seen.