Cryptocurrency isn’t in favor with global authorities right now, to put it mildly.
Fallen FTX wunderkind Sam Bankman-Fried sits under house arrest in California, facing a lifetime’s worth of fraud and bribery charges. Do Kwon, the mastermind behind collapsed “algorithmic coins” Terra and Luna, was arrested in Montenegro at the request of his native South Korea. The U.S. Commodity Futures Trading Commission last month charged Binance, the world’s largest crypto bourse, with operating an “illegal” exchange and “sham” compliance.
One financial center is surprisingly heading in the opposite direction: Hong Kong. China’s offshore zone shared the mainland’s crypto-skeptic stance during
Bitcoin’s
2020-2021 speculative frenzy, ceding the East Asian crypto field to rival Singapore. That changed when a new government took charge in Hong Kong last October, about when Chinese President Xi Jinping was bulldozing to a precedent-breaking third term.
That government unveiled a new regulatory template for cryptofinance in February, including access for retail investors to “large-capitalization” tokens. “This is an all-encompassing, exceptionally detailed regime,” says Kishore Bhindi, a Hong Kong-based attorney at Linklaters’ financial regulation group. “It’s fair to say that Hong Kong wants to be a market leader.”
Financial Secretary Paul Chan took de facto ownership of the crypto opening, announcing the government had budgeted HK$50 million ($6.5 million) toward the development of a “Web3” ecosystem. The Hong Kong Monetary Authority and Securities and Exchange Commission scheduled a round table April 28 to “facilitate direct dialogue” and “share practical experiences” with the industry.
The new regs require firms to establish a Hong Kong presence by June 1, then apply for licensing by June 2024. Surviving crypto operators have been quick to react. “This is causing a rush into Hong Kong,” says Claire Wilson, a partner at industry consultant Holland & Marie. “There’s a FOMO [fear of missing out] feeling among some of the larger players.”
OK, but why? Unlike Singapore, which relies on its enormous port and related commerce, Hong Kong lives or dies by financial services, Wilson points out. The sector accounts for close to a quarter of gross domestic product. Authorities can’t afford to keep out the wider range of transactions that cryptocurrencies, and their underlying blockchain technology, might eventually spawn: the as-yet protean universe of Web3.
“If we were to look to the long term, Hong Kong is probably more interested in crypto’s application to traditional financial services: tokenized bonds, securities and so on,” Bhindi says.
There’s no way at this stage, though, to foster those nascent applications without a brokerage business that is vibrant if troubled. Bitcoin, which flatlined for much of 2022, has jumped by more than half this year as traditional “fiat currency” banks seem to wobble.
So Hong Kong needs to take a risk on crypto retail trading, maybe. “The government pushing for retail investors is a big milestone,” says Yiwei Wang, a spokesman for crypto broker
Metalpha Technology Holding
(ticker: MATH). “People who were thinking of moving to Singapore have changed their minds.”
Singapore’s experience trying to nurture a trustworthy crypto business is not too encouraging. Of the 169 crypto service providers operating in the city state when the regulatory regime was introduced in January 2020, just 11 have so far met licensing requirements, says Angela Ang, a former Singapore regulator now senior policy advisor at blockchain intelligence firm TRM Labs. The collapse of Singapore-based Terra/Luna, which held up to $65 billion for its customers, diminished local enthusiasm for the sector.
Hong Kong’s proposed regulations are “not much different” than Singapore’s, Ang says. Investors might expect a similar cull of aspirants when the licensing deadline comes a year from June.
Ang remains a crypto-optimist nonetheless. “It’s important not to forget the promise of the underlying technology despite the growing pains,” she says.
The young industry is nothing if not adjustable, Wilson adds. By Hong Kong’s deadline 14 months from now, a critical mass might be ready for its definition of prime time. “Hong Kong sat on the fence and may have learned from the mistakes of others,” she says.
Integrating crypto with Hong Kong’s formidable financial infrastructure, and the huge savings horde held by Chinese retail investors, could forge a global capital for an exciting new world. Or it could all go up in flames again.
The fact that this sophisticated center thinks it can tame crypto is interesting either way.
Corrections & Amplifications
Kishore Bhindi is a Hong Kong-based attorney at Linklaters. An earlier version of this article misspelled his surname as Bhindhi.
Write to editors@barrons.com
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