Hong Kong’s embrace of cryptocurrencies might draw extra enterprise and expertise to the town. However the business comes with a variety 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. strategy. Regulators have launched a brand new licensing regime for cryptocurrency exchanges. That may allow them to serve particular person buyers, although small buyers would be capable of commerce solely greater cryptocurrencies corresponding to bitcoin. Hong Kong’s first exchange-traded funds backed by crypto futures have 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 firms—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 fees.
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 could be a lengthy shot given persistent issues in Beijing about crypto’s function in capital outflows and obsession with surveillance and knowledge sovereignty.
Hong Kong’s pivot to cryptocurrency additionally comes as it’s nonetheless contending with the fallout of almost 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 when it comes to 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 develop into much less keen about Chinese language shares due to geopolitical issues and China’s financial slowdown. Many Chinese language firms are additionally opting to record in Shanghai and Shenzhen as an alternative. The worth of recent listings in Hong Kong final 12 months was the bottom since 2012, in keeping with knowledge from Dealogic.
A extra pleasant regulatory regime might due to this fact give the town’s finance enterprise a much-needed enhance. However as high-profile crypto collapses corresponding 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 have been to get tied up, for instance, in circumstances of curiosity to U.S. or different overseas regulators.
Hanging a steadiness between defending buyers and attracting enterprise will probably be exhausting, given the murky nature of the business. And success might even find yourself as an issue as nicely, if Beijing concludes {that a} crypto-friendly Hong Kong finally undermines its personal skill to watch capital flows within the Larger China area.
Hong Kong has had a tough a number of years. Whether or not crypto is known as a answer stays to be seen.
