Hong Kong flag with Bitcoin at the corner

Hong Kong’s new crypto regulation may lure Web3 firms back

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Upcoming regulatory changes in Hong Kong for cryptocurrency-related service providers could attract businesses and talent back to the city, as it seeks to regain its international crypto hub position, industry experts told Forkast.

The Hong Kong Securities and Futures Commission (SFC) on Monday published draft rules for virtual asset trading platforms and sought public feedback. As part of the new licensing regime set to take effect in June, the SFC plans to require cryptocurrency exchanges to apply for licenses that would allow retail investors to trade certain large-capitalization tokens.

Just last month, the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, said in a consultation document that it plans to introduce a mandatory licensing regime for stablecoin issuers as early as this year, and will not allow algorithmic stablecoins

China banned cryptocurrency transactions in 2021, but Hong Kong has set up a new licensing regime that may eventually extend to retail crypto trading. Current regulations in Hong Kong, a special administrative region, allow only institutions and professional investors with portfolios of US$1 million or more to trade digital assets. 

“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,” said Angela Ang, senior policy advisor at California-based blockchain intelligence firm TRM Labs and a former regulator at the Monetary Authority of Singapore.

To fuel the city’s Web 3.0 industry development, Hong Kong’s Financial Secretary Paul Chan said on Wednesday that the government is setting aside HK$50 million (US$6.37 million) to develop the Web3 sector, which has brought a “golden opportunity” to lead innovative development.

Hong Kong beckons

As Hong Kong continues taking a crypto-friendly regulatory approach after it announced its pro-crypto stance in October, the industry may see more Web3 businesses setting up shop in the city, experts said.

Crypto exchange Huobi Global, for example, is applying for a crypto trading license in Hong Kong, said Justin Sun, an advisor to the exchange, in a Monday tweet. Sun also told Nikkei Asia that Huobi is looking to relocate its Asia headquarters from Singapore to Hong Kong.

“I believe more crypto exchanges, market makers and hedge funds will probably follow suit returning to Hong Kong,” Youwei Yang, chief economist of New York-based BIT Mining and an adjunct professor teaching blockchain courses at China’s Xiamen University, told Forkast.

Adrian Wang, chief executive of Hong Kong-headquartered digital asset management platform Metalpha, 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,” Wang said.

More exchanges are likely to expand their businesses to Hong Kong if the city continues its crypto-friendly stance. “I’m very bullish on (Hong Kong),” Henry Liu, CEO of BTSE, a crypto exchange based in British Virgin Islands with half of its operations in Taiwan, told Forkast. “If we get to be compliant ourselves, we will go in, and as a company, if we need to find a local partner and we can support them in any way, we’re happy to do that as well.”

Non-fungible token (NFT) firms have also shown interest in expanding in Hong Kong. ShucangCN, a Chinese NFT platform that launched in January 2022 in China that quickly became one of the largest players in the country, told Forkast last month that it has set up NFT China in Hong Kong to build NFT platforms in the city.

Stablecoin regime

In the January stablecoin consultation paper, the HKMA “clarified its intention to give regulatory priority to stablecoins,” global fintech law firm Linklaters wrote in a February research report.

The authority’s move to prioritize stablecoin regulation makes sense, as stablecoins are used as an on- and off-ramp tool to buy or sell native crypto assets, Kelvin Low, a law professor at National University of Singapore, told Forkast.

Stablecoins are “a good choke point to regulate access to the larger crypto markets,” said Low. “They are also important to regulate because they are more readily sold as safe assets when in truth they are not.”

The importance of stablecoins has become increasingly prominent, and “if a regulator gets to master stablecoin regulation, they would pretty much get hold of the development trend of crypto asset markets,” said Jason Jiang, a senior researcher of OKG Research Institute, a unit of Beijing-headquartered blockchain firm OKG.

“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,” Jiang added.

While the stablecoin proposal is “a step in the right direction,” technological advancements may happen faster than the regulator can keep up with, said Joanna Cheng, associate general counsel of product and regulatory (APAC) at crypto custody firm Fireblocks.

“By the time the legislation takes effect in late-2023 or early-2024, the issues around stablecoin may have changed so this remains to be seen,” Cheng said.

No algorithmic stablecoin allowed

Another major takeaway from the HKMA’s January document was that the authority had made it clear they would not allow algorithmic stablecoins.

“Algorithmic stablecoins just don’t work, so the HKMA is correct to exclude them from licensing,” Low said. “The theory of algorithmic stablecoins relies on assumptions that do not hold in the real world so they are always in danger of collapse.”

One of the problems with many crypto companies, Low added, is that “they misuse game theory to design tokenomics to constrain human behavior, but if you consult actual games theorists, you will find that their usefulness in this respect is highly controversial.”

Jonathan Cheong, head of legal, risk and compliance at Singapore-based cyrpto exchange Bybit told Forkast that the new regulations will likely target a long-standing issue of 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 sparked interest from some blockchain firms in Hong Kong that accommodate stablecoin payment. For example, BSN Spartan Network, a Chinese blockchain available only outside the Chinese mainland, may expand its Hong Kong business to the stablecoin sector, according to Tim Bailey, vice president of global sales at Red Date Technology, the developer of BSN.

“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. BSN Spartan currently accepts USDC as one of its payment methods.

“The licensing of payment-related stablecoins will make payments and settlements much more efficient,” Bailey added.

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