According to industry experts, upcoming regulatory changes in Hong Kong for cryptocurrency-related service providers could attract businesses and talent back to the city as it seeks to reclaim its international crypto hub status.
Hong Kong Securities and Futures Commission (SFC) has published a draft rules for virtual asset trading platforms on Monday on the press release and invited public comment on the proposals. The SFC intends to require cryptocurrency exchanges to apply for licenses that will allow retail investors to trade certain large-capitalization tokens as part of the new licensing regime that will go into effect in June, 2023.
The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, announced in January 2023 that it intends to implement a mandatory licensing regime for stablecoin issuers as early as this year and will not allow algorithmic stablecoins, followed by an issued consultation conclusion following feedback on its 2022 discussion paper.
In 2021, even though China has banned cryptocurrencies transaction, a new licensing regime were eventually set up in Hong Kong in order to help extending the retail crypto trading as stated by Paul Chan, the city’s financial secretary of Hong Kong at a Web3 event. As of 2023, Hong Kong has became a special administrative region which allows only institutions and professional investors with portfolios of US$1 million or more to trade digital assets in Hong Kong.
“The third generation Internet [Web3], currently in its start-up period, has the same huge potential,” said Chen during his annual budget speech at the Legislative Council. Chen also stated that the government is allocating HK$50 million (US$6.37 million) to develop the Web3 sector, describing it as a “golden opportunity” to lead innovative development.
Angela Ang, senior policy advisor at the California-based blockchain intelligence firm TRM Labs and a former Monetary Authority of Singapore regulator, stated that: “Like many of its global counterparts, including Singapore, the SFC is attempting to thread the needle between digital asset innovation and investor protection in a post-FTX world.”
Following the announcement of the pro-crypto space at the FinTech Week in October 2022, more potential Web3 businesses are seen among the industries setting up firms in Hong Kong cities, which helps with Hong Kong taking the crypto-friendly regulatory approach stated by experts.
On Monday, Justin Sun, advisor of Crypto exchange Huobi Global, said in a Monday Tweet that they are applying for the crypto trading license in Hong Kong. Furthermore, Sun also mentioned to Nikkei Asia that Huobi Global have the initiate plan to relocate their Asia headquarters to Hong Kong from Singapore as well.
Hong Kong-headquartered digital asset management platform Metalpha chief executive, Adrian Wang, said that the latest SFC consultation paper reflects its intention to “welcome retail investors to get into the digital asset space.”
“The proposed policy went into more detail on anti-money laundering and know-your-customer with new requirements such as conflict of interest also included. Overall, this is good for the industry safeguarding the rights of retail investors.”
Aside from crypto currencies and blockchain, an array of non-fungible token (NFT) companies have expressed interest in expanding in Hong Kong. ShucangCN, a Chinese NFT platform that launched in January 2022 in China and quickly became one of the country’s largest players, told Forkast last month that it has established NFT China in Hong Kong to build NFT platforms.
Stablecoins
According to global fintech law firm Linklaters in a February research report, the HKMA “clarified its intention to give regulatory priority to stablecoins” in the January stablecoin consultation paper.
“Hong Kong, which has the world’s largest offshore yuan market and has served as an important offshore yuan business hub, is an ideal testing ground for the development of crypto assets,” said Jason Jiang, a senior researcher of OKG Research Institute, a unit of Beijing-headquartered blockchain firm OKG. With the advancement and importance of stablecoins, it has become increasingly prominent, “if a regulator gets to master stablecoin regulation, they would pretty much get a hold of the development trend of crypto asset markets,” Jiang added.
The stablecoin proposal is “a step in the right direction,” according to Joanna Cheng, associate general counsel of product and regulatory (APAC) at crypto custody firm Fireblocks. “Technological advancements may happen faster than the regulator can keep up with; by the time the legislation takes effect in late-2023 or early-2024, the issues surrounding stablecoin may have changed, so this remains to be seen,” said Cheng.
Algorithmic Stablecoins are not permitted.
A further major takeaway from the HKMA’s January document was that the authority had publicly stated that algorithmic stablecoins would not be permitted.
According to Jonathan Cheong, head of legal, risk, and compliance at Singapore-based cryptocurrency exchange Bybit, the new regulations will most likely address a long-standing issue with stablecoins: redemption value.
“The proposed regulations will have a great focus on control processes of redemption at par and to achieve this, issuers of stablecoins will need to have control processes on price stabilization and capital adequacies,” Cheong said.
The new regime has also attracted the attention of some Hong Kong blockchain firms that accept stablecoin payments. BSN Spartan Network, for instance, is a Chinese blockchain which function and operates outside of mainland China, are planning to expand it’s business in Hnog Kong to the stablecoin sector too according to the vice president of global sales at Red Date Technology, the developer of BSN, Tim Bailey.
Currently, BSN Spartan has already accept USDC as part of their payment methods. “We are actively engaged in monitoring and studying the stablecoin space and, depending on the regime rules when they are released, would consider applying for a license for an official BSN Spartan Stablecoin,” Bailey, told Forkast. “The licensing of payment-related stablecoins will make payments and settlements much more efficient,” Bailey added.
