Hong Kong Grows Its Crypto Ambition with Quiet Backing From Beijing

Hong Kong opened its doors to cryptocurrency companies in October 2022 to revitalise the troubled financial centre. There are hints that Beijing is quietly supporting the initiative, encouraging mainland Chinese businesses to reopen, writes Hannah Parker.

Those who know the situation reported that over the last several months, representatives from China’s Liaison Office and other authorities had been frequent attendees at the city’s cryptocurrency meetings, exchanging business cards and WeChat information.

Local crypto entrepreneurs claim that Beijing’s position on Hong Kong’s attempts to develop into a hub for cryptocurrencies has been clarified by their presence. The understated backing demonstrates that authorities are eager to use the free-wheeling city as a trial ground for digital assets, even as they closely monitor similar activities on the mainland.

Following suit, mainland and foreign companies are attempting to register their operations and preparing to return to Chinese soil 15 months after Beijing outlawed the sector and pushed them to establish operations abroad.

“As long as one does not violate the bottom line… not threaten financial stability in China, Hong Kong is free to explore its pursuit under ‘one country, two systems’,” stated Mr Nicholas Chan, a member of the National People’s Congress and a lawyer who provides advice on digital assets and cyber security.

So, what is Hong Kong’s stance on crypto, and how does this affect China?

Hong Kong’s View on Cryptocurrency

There has yet to be any legislation in Hong Kong that specifically addresses cryptocurrency regulation. Bitcoin and other cryptocurrencies are not considered legal currencies or securities but virtual commodities. 

Hong Kong government officials have forewarned the public not to invest in cryptocurrencies. The reason for this was stated by this Bitcode Method Review , crypto experts who mention that the ICO tokens will be governed as securities under Hong Kong’s Securities and Futures Act and require a licence and authorisation from the SFC, according to the Hong Kong Securities and Futures Commission (SFC). 

The private ownership or transfer of cryptocurrencies between private parties is still unregulated so long as the tokens are acquired and transferred in good faith and do not contradict anti-money laundering rules.

Regardless of whether they deal in securities, Hong Kong will soon supervise all cryptocurrency trading platforms, according to the chief executive of the SFC on November 3, 2020. Before this, Hong Kong-based platforms that permitted trading of at least one security token could apply for a licence from the SFC. Still, the SFC’s 2020 remarks demonstrate the Commission’s intention to broaden its regulatory approach.

The proposed amendment to Hong Kong’s anti-money laundering law will be the new licence “catch-all.” This new regulation’s immediate effect would be prohibiting crypto trading by individual investors. Until the crypto industry is “more mature,” the new licence requirement would force bitcoin trading companies to restrict their clientele to “professional investors.” If this plan is enacted, Hong Kong’s weak cryptocurrency regulation will be replaced with a complete prohibition on retail bitcoin investors.

China’s Response to Hong Kong’s Crypto Ambitions

When China began to crack down on cryptocurrencies in 2017 and outlaw trading in 2021, some of its biggest domestic brands, like Binance and Tron, left the country. The emergence of some non-fungible tokens was only recently made possible by the world’s second-largest economy loosening its control over the blockchain technology that underpins these digital assets.

In light of worries about consumer protection, the use of cryptocurrencies to get over financial controls, and the environmental harm caused by the energy used for Bitcoin mining, there is currently little sign that Beijing will ease its ban.

The objective of the reports from the mainland delegates to their superiors in mainland China is unclear, but they are reporting what they learned in Hong Kong.

“As long as it is still under the Party’s control, there will be no U-turn on China’s crypto policy,” remarked Mr He Yifan, founder and CEO of the blockchain company Red Date Technologies, which the government supports.

In recent months, Chinese officials have openly supported Hong Kong’s goal of becoming a fintech centre. Governor of the People’s Bank of China Yi Gang spoke at essential events in Hong Kong about China’s progress in developing its central bank’s digital currency and its close collaboration with the Hong Kong Monetary Authority.

Hong Kong’s resurgence in cryptocurrency coincided with the demise of industry titan FTX and contrasted with Singapore’s tightening regulations. Hong Kong has to win back the Chinese cryptocurrency entrepreneurs who have fled to other countries in recent years in anticipation of more possible laws in Hong Kong to succeed in its mission.

The creator of Tron, Mr Justin Sun, is preparing a comeback. Last month, he announced on Twitter that he would move to Hong Kong to be “near to the action.” He stated earlier in March 2023 that Huobi, a digital asset exchange, intended to increase its activities there.

“The changing attitude of the Hong Kong SAR government towards crypto signals a nod from the Chinese central government granting pilot status to HK for some forward-looking experiments on how can crypto be best adopted and localised for the huge Chinese market at large,” remarked Mr Sun in a January 2023 interview, and that “I’m very bullish on the outlook for crypto in the greater China region for the next decade.”

Also, smaller businesses are moving into the city. According to co-founder Caspar Wong, around one-quarter of the 300 Web3 companies that have signed up for Hong Kong’s accelerator programme, G-Rocket, were created by mainland Chinese entrepreneurs, while over 70% weren’t.

Hong Kong lawmaker Duncan Chiu said, “It will only push us to do more. The most important thing is the balance on how to regulate, license the industry and yet not over-regulate it so that it hinders innovation.”

As more countries develop regulations for crypto, others are said to follow, including Hong Kong, whose interest was piqued in crypto despite the bear market. The new licencing system for virtual asset exchanges in Hong Kong will go into force in June 2023, while applicants anticipate a longer wait time for official permits. Only a small number of businesses can meet the requirements for capital quality, risk management controls, and systems.

Photo by Matthias Zomer on Pexels.