How Did the Hong Kong Blockchain Market Evolve Over Time?
Reclaiming Hong Kong's Status as a Financial Hub
TL;DR
Hong Kong has been experiencing a decline in its status as a global financial hub due to the 'China risk' stemming from its ties with mainland China, which has forced some financial institutions to relocate.
Recently, however, Hong Kong has been shifting its focus back to the blockchain market, actively easing regulations and striving to attract blockchain companies.
Through this, Hong Kong aims to 1) regain its reputation by evolving into a digital financial hub, and 2) potentially serve as a testbed or outpost for cryptocurrency transactions from mainland China's capital.
Is Hong Kong Losing Its Status as Asia's Financial Hub?
Hong Kong, holding the fourth-largest financial market in the world following the U.S., Japan, and China, has long been revered as Asia's financial hub. It even managed to surpass New York in 2018, becoming the largest IPO market worldwide for a while. However, the city is currently seeing a departure of numerous financial institutions due to 1) geo-political tensions between the U.S. and China, 2) political uncertainties resulting from electoral reforms, and 3) intense pandemic measures owing to China's 'Zero-Covid' policy.
The primary cause behind companies leaving Hong Kong stems from the 'China risk' associated with Hong Kong's relationship with China. To understand 'China risk', it is essential to be aware of Hong Kong's 'one country, two systems' principle. When China reclaimed Hong Kong from the UK in 1997, it allowed the 'one country, two systems' framework, which guaranteed political, economic, and social autonomy in Hong Kong for 50 years considering its economic development. However, control has been tightening in recent years, with electoral reforms carried out in Hong Kong in 2020 and increasing regulations. Consequently, Hong Kong, which was once ranked first in the world in terms of economic freedom, has even been excluded from the list of countries evaluated.
This situation has given rise to the term 'China run', referring to the global funds leaving Hong Kong and gathering in Singapore, thereby strengthening Singapore's position as the largest financial hub in Asia. Moreover, it's worth noting that Hong Kong, which accounted for nearly one-fifth of China's total GDP in 1997, now only accounts for 2.
Why Is Hong Kong Returning to the Blockchain Market?
In the past, Hong Kong was one of the most active countries in the blockchain market. While the Chinese government was limiting the circulation of cryptocurrencies, the Hong Kong financial authorities adopted a liberal approach to new investment methods by “testing before regulating”. As a result, numerous Chinese blockchain teams moved to Hong Kong to raise funds through ICOs, and many global blockchain companies, including Binance, were established in Hong Kong. However, as the 'China risk' loomed, blockchain companies, like other businesses, began to leave Hong Kong, distancing themselves from the cryptocurrency market.
Hong Kong has started to bounce back. Recently, the government authorities in Hong Kong have been unfolding proactive strategies to attract blockchain companies again. The Securities and Futures Commission (SFC) in Hong Kong has announced a Virtual Asset Trading Platforms (VATP) license, permitting operations from June 1, and granting licenses to virtual asset exchanges. They're also allocating a budget for the Web3 sector. In response, global cryptocurrency exchanges like Coinbase are opening offices in Hong Kong and applying for compliant exchange licenses. Other companies are also applying for licenses to enter Hong Kong as well.
This move stands in stark contrast to the U.S. The regulatory bodies in the U.S. are tightening regulations on cryptocurrency companies, seemingly declaring a war on cryptocurrencies. Hong Kong is most likely leveraging this opportunity, hoping to 1) regain its reputation by becoming a digital financial hub and 2) serve as a testbed or outpost for cryptocurrency transactions from mainland China.
Major changes in Hong Kong Crypto Regulations in 2023
February 20, 2023: The Hong Kong Securities and Futures Commission (SFC) submits an advisory report, including plans to permit virtual asset trading.
February 22, 2023: The Hong Kong government sets a budget for the development of the Web3.0 sector, deciding to promote the development of CBDC and fintech infrastructure.
March 31, 2023: The Hong Kong court rules that cryptocurrencies are recognized as assets.
April 12, 2023: A Hong Kong SFC official states that DeFi services can also obtain a VATP license.
April 27, 2023: The Hong Kong Monetary Authority (Central Bank of HK) recommends banks to provide adequate services for virtual asset companies.
May 20, 2023: The Hong Kong SFC announces guidelines for virtual asset business operators. The guidelines cover topics such as banning business operators without licenses, allowing private investors to trade virtual assets, and building anti-money laundering and anti-terrorism financing systems.
May 31, 2023: The SFC in Hong Kong begins accepting applications for virtual asset trading platform licenses.
June 20, 2023: Hong Kong announces the preliminary research results of Web3 policies, mainly covering cases from Japan and the UAE.
As of June 30, 2023, no approvals have been given yet, since the SFC only started accepting applications for Virtual Asset Service Provider (VASP) licenses on June 1. As only a month has passed since the applications were opened, there was no available information regarding the current status of the licenses.
Unanswered Questions and Possibilities
There are several unanswered questions and potential developments as we consider Hong Kong's latest moves.
Given that Hong Kong already allows partial cryptocurrency trading for professional investors (or 'whale' investors) who possess over $1 million, and many users have been accessing exchanges like Binance through VPNs, it's unclear to what extent the establishment of officially licensed exchanges through Hong Kong's proactive VASP regulation will increase user inflow. However, if banks do not discriminate against crypto service providers with “undue burden” as suggested by HKMA, the ease of on/off ramps could significantly improve which may lead to a meaningful result.
Similar to how China used Hong Kong as a conduit for external funding, there is a possibility that an active cryptocurrency market in Hong Kong might reconnect with mainland China, despite its strict stance on crypto assets.
Hong Kong is considering DeFi services for VASP approval. This approach indicates the potential for development of a wide range of financial products based on cryptocurrencies within Hong Kong, similar to how BlackRock is currently pushing for a Bitcoin ETF. With the right balance of regulation and innovation, Hong Kong could reposition itself as a leading financial hub.