Hong Kong is set to launch a new regulatory framework that will allow retail investors to trade cryptocurrencies. The move on June 1 is part of an effort to make the city – which is governed as a special administrative region of the People’s Republic of China – a hub for digital assets and blockchain technology.
This is a major development for anyone who follows the nascent yet rapidly growing cryptocurrency and blockchain sector. This is because historically China has taken a strict anti-crypto stance (crypto is essentially outlawed in the country, though anyone with knowledge of the market could work around this rule by using decentralized exchanges). Many observers see the liberalization of the sector taking place in Hong Kong as a test for adoption and policymaking in China.
“In the future, it may serve as a model for policy formulation in other regions [in China] if it proves successful,” the CEO of digital asset manager Hashkey Capital recently told the Bitcoin Market Journal.
“This is a major development in Chinese thinking since the country’s long-standing ban on digital assets,” said a compliance expert at the crypto financial services firm Flowdesk in a recent report by Decrypt. “Authoritarian regimes are, logically, very averse to anything related to decentralization and transparency, the core values of blockchain technology. Hence allowing Hong Kong to embrace a more crypto-friendly stance towards crypto, from the outside, suggests that Beijing wants to use the territory as a testing ground.”
A catalyst for increased Chinese investment in crypto
According to Tony Perkins, an MIT-trained computer scientist and founder of the cryptocurrency protocol Elephant Money – touted as the world’s first globalized decentralized community bank – Hong Kong’s new framework is a major development that will be a catalyst for increased Chinese investment in crypto.
“Hong Kong and China institutions will be able to purchase crypto legally, that’s why this is important because the bigger your financial business is, the less you can participate in crypto if there is no legal framework,” Perkins recently told some 11,000 members on his Telegram chat group (a preferred communication platform for crypto investors and developers).
“Crypto is diverging from other asset markets, it’s a place where you can gain on a lot of leverage, even on the spot market, and this is going to be a big deal in terms of high net-worth individuals in Hong Kong and China, where they are being minted more than anywhere else.”
Gediminas Butkus, a Dubai-based financial consultant focused on assisting cryptocurrency clients in banking matters and entering the European market, told Access Asia that he believes Hong Kong’s new legal framework will not only result in an uptick of Chinese investment, but also will likely lead to a greater adoption of Web3 technologies.
“I believe that the introduction of Hong Kong’s new legal framework will serve as a catalyst for significant growth in the cryptocurrency market, leading to an uptick in Chinese investment. This development will likely result in increased adoption of web3 technologies, which are enabling individuals to participate in the next phase of the internet’s evolution, where individuals have greater control and ownership over their data and digital assets, and where decentralized networks and applications can provide greater security and privacy for users.”
To be sure, challenges persist and it is premature to determine what the ultimate outcome will be of Hong Kong’s initiative. “China is always doing initiatives and then shelving them, so I wouldn’t want to talk this up too much,” said long time China observer Chris Taylor, founder of ChinaDiction. “I’d take a wait-and-see approach to this.” Taylor also noted there is a talent crunch to fill top roles at crypto firms in Hong Kong. “There are also problems with so-called ‘responsible officers’ [to fill roles in the sector]] and Hong Kong just doesn’t have enough of them, there’s a real shortage.”
Hong Kong hub
Regardless of the ultimate outcome, it is clear that Hong Kong is trying to position itself as a hub for the digital economy. And already, the lucrative market potential in Hong Kong has attracted several Chinese banks, such as the Bank of Communications, Bank of China, and Shanghai Pudong Development Bank, according to Bloomberg. These banks have either started offering services to local crypto companies or are currently negotiating to implement the services.
Moreover, there is a flurry of international crypto firms and exchanges flocking to Hong Kong to take advantage of the positive, crypto-friendly environment. As reported by the Bitcoin Market Journal, Hong Kong has already received expressions of interest from over 80 firms providing crypto-related services.
As Markus Thielen, head of research at the crypto financial services platform Matrixport told Blockworks:
“There is now a gold rush from international crypto firms to serve Hong Kong-based retail investors actively engaging in high-volatility products such as warrants and other derivative contracts. With nearly 100 local billionaires, the city is rich in tycoons and well-capitalized family offices that could fund crypto firms moving into the city.”
According to Perkins – whose Elephant Money token in the past year has outperformed Bitcoin, Ethereum and every other top 100 cryptocurrency tracked by CoinMarketCap – the opening up of crypto trading to Chinese and Hong Kong investors (and companies) could trigger the next crypto bull run. “There are tons of profitable manufacturing businesses that have narrow margins in China that can pull a Michael Saylor and pump their balance sheets into blue chip crypto on the lows. It’s going to be epic.”
While Access Asia is not in the business of market forecasting, we believe that cryptocurrency and its underlying blockchain technology will likely be a major disrupter of business and finance in the coming years and that Hong Kong’s new initiative shows that the innovative city wants to be a leader in this space. We also believe that decentralized finance will grow immensely in the coming years, particularly in light of the banking crisis that has highlighted the fragility of the current, centralized financial system. Literally and figuratively, the global financial system has an elephant in the room.