The island metropolis of Hong Kong has long acted as "a doorway to China"—the hub of regional trade, supported by an overtly pro-business legal system in the English common law tradition. Could the harbor, which is home to seven million people, take on this function in terms of the crypto sector and act as a stand-in for mainland China's crypto experiments?
The former CEO of crypto derivatives behemoth BitMEX, Arthur Hayes, provided an impetus to such concerns in his blog post from October 26. According to Hayes, the Hong Kong government's declaration that it will be introducing a bill to regulate cryptocurrency is evidence that China is attempting to gradually reenter the industry. The viewpoint was quickly echoed in a variety of commercial and mainstream media.
Retail investors will now be able to "directly invest into virtual assets," according to Elizabeth Wong, head of the fintech division at the Securities and Futures Commission (SFC) of Hong Kong, who made the announcement at the end of October.
Up until recently, the SFC only permitted people with portfolios worth at least $1 million (about 7% of the city's population) access to centralized crypto exchanges. According to Wong, the regulator has also been considering whether to permit regular investors to invest in exchange-traded funds with a focus on cryptocurrencies.
The key is creating a regulatory regime for virtual asset service providers, and as Hu specified, a specific bill was already introduced to the city's lawmakers. About a week later, on Oct. 21, Hong Kong's Secretary for Financial Services and the Treasury, Christopher Hu, shared his city's fintech plans, among other efforts, directed at "transferring wealth to the next generation."
Finally, Hong Kong Financial Secretary Paul Chan promised attendees on October 31 during the city's FinTech Week 2022 that his team's top goal is the digital transformation of financial services. Eddie Yue, CEO of the Hong Kong Monetary Authority (HKMA), a colleague of Chan's, pledged to approach the innovations with "radical open-mindedness."
He claims that the HKMA has already provided instructions to banks about cryptocurrencies or services connected to decentralized finance and is currently setting up a regulatory framework for stablecoins.
Mainland Crackdown, Uncertainty on the Island
A year after a disastrous crackdown on the sector in Mainland China, Hong Kong plans to open up for cryptocurrencies. The People's Republic of China has held the title of global top in hash rate and cryptocurrency mining up until 2021.
Chinese government started banning participation in cryptocurrency for financial institutions in May 2021, followed by mining operations and eventually individual traders' use of exchanges and trading. Despite not effectively outlawing cryptocurrency ownership as such, the country's institutional development of the cryptocurrency business was put on hold.
Investors began weighing their choices even though Hong Kong officials at the time did not confirm (or deny) that the island city would adhere to Beijing's strict policy on digital assets.
While it may seem ironic now, Sam Bankman-Fried of FTX was emphasizing the value of long-term regulatory direction and certainty in 2021 when he moved his headquarters to the Bahamas. He felt that Hong Kong lacked these qualities.
As a result of the $60 billion in cryptocurrency that Hong Kong attracted between July 2020 and June 2021, the biggest players began to establish alternative offices in the Caribbean or close-by Singapore. The likes of Crypto.com, BitMEX, and Bitfinex joined FTX.
The Hayes Account
Combining two story lines—one that attributes all significant cryptographic advancements to China and another that highlights Hong Kong's historic function as a gateway to communist China—Hayes argued:
“Hong Kong’s friendly reorientation towards crypto portends China reasserting itself in the crypto capital markets.”
The opening up of the cryptocurrency market in the midst of the crackdown in the Mainland couldn't be an autonomous act, according to Hayes, who claims that Hong Kong authorities cannot deviate too far from Beijing in their judgments.
Beijing's compassion toward such a U-turn is motivated by its concern over Hong Kong's potential loss of its position as the major Asian financial hub. It definitely fell apart during the COVID-19 pandemic when the stringent lockdown measures implemented in China and Hong Kong led to a rush of investment fleeing to Singapore, a rival neighbor that had loosened its limits much earlier.
According to Hayes, China's issue with a massive US dollar trade deficit is another key reason why Beijing would favor Hong Kong's crypto liberalization. China has historically been keeping dollar income in assets like U.S. securities, much like practically every other country in the globe. Treasury securities.
Chinese leaders are concerned about the example of Russia, whose foreign assets were frozen as a result of financial penalties following an invasion of Ukraine. Therefore, it is very likely that they would look for a different kind of asset to store their USD income. The choice might be cryptocurrencies and similar financial items.
Presenting the Reality
The founding attorney of Lesperance & Associates, David Lesperance, who has more than 30 years of experience representing clients in Hong Kong and China, expressed uncertainty about the Chinese government's potential interest in legalizing cryptocurrencies:
“Rather, they are interested in having complete control over their population, including those who reside in HK. This is demonstrated by such actions as social credit scoring, facial recognition, household registration, exit bans, zero COVID-19, etc.”
Putting cryptocurrency aside, China has tightened its political, cultural, and economic control over Hong Kong in recent years. The national security law of 2020 removed previous civil liberties, school curricula were changed to place more emphasis on the area's Chinese history, and Mainland businesses have continued to be incorporated into the island's legal system.
These indications of the Mainland's proximity to Hong Kong could draw the attention of international regulators. The worst-case scenario, according to a banker who spoke with CNN recently, is that Hong Kong would face sanctions if the West treated it similarly to Mainland China.
China's central bank digital currency (CBDC) programme is the proverbial "elephant in the room." It is probably a coincidence that the digital yuan, also known as e-CNY, is growing quickly and that cryptocurrency is prohibited. Following the crackdown, Ariel Zetlin-Jones, an associate professor of economics at the Tepper School of Business at Carnegie Mellon University, mentioned wayback in the year 2021 that:
“China clearly wants to promote the digital Yuan. Removing its competitors by banning crypto activities is one way to do this so it seems reasonable to consider this motivation as one rationale for their policies.”
In a recent six-week m-Bridge cross-border payment trial involving digital currencies issued by the central banks of China, Hong Kong, Thailand, and the United Arab Emirates, the digital yuan emerged as the currency that was used the most frequently. Hong Kong "is positioned to be a thriving center for e-application CNY's in international trade," according to state-owned Chinese media after the experiment.
Lesperance added that Beijing's intention to maintain control over the financial arena is confirmed by the launch of e-CNY and the ongoing restrictions on the rest of the cryptocurrency, including with regard to domestic miners:
“Control over the financial lives and assets of the Chinese citizens is the ultimate control. This will be achieved when all transactions are done in e-yuan. Facilitating other crypto-currencies would undermine this move toward complete control.”
