Is Hong Kong China’s Crypto Sandbox? – Analysis

By Sauradeep Bag*

In a turbulent and uncertain world, the crypto industry has not been immune to the ebb and flow of fortune. Yet, amidst the chaos, Hong Kong remains steadfastly determined to become a hub for digital assets. This ambition starkly contrasts with mainland China, where Beijing has clamped down on all forms of crypto-related activity.

In June, Hong Kong will implement regulations that mandate licensing by the Securities and Futures Commission for crypto trading platforms. The regulator has begun a consultation on its proposal to oversee virtual asset trading platforms, marking a new chapter in the ever-evolving landscape of digital currencies in China’s special administrative region.

While monitoring this move to bring crypto under closer regulatory scrutiny, the Chinese government is also keeping a close eye on Hong Kong’s foray into the world of cryptocurrency and Web3 at large. Analysts believe Beijing is keenly observing how Hong Kong’s crypto regulations will affect the market. Should Hong Kong’s regulatory approach prove successful, it may guide policy formulation in other parts of China. Besides cryptocurrency, China is also monitoring Hong Kong’s crypto-related activities, including the issuance of new crypto-linked products and blockchain-based solutions.

What is Web3?

Web3, also known as the decentralised web, refers to a new generation of the internet that utilises blockchain technology to enable decentralised and peer-to-peer interactions between users and applications. Unlike Web 2.0, where large corporations hold vast amounts of user data and control over the online experience, Web3 promises to provide users with more control and ownership of their data and interactions. This is made possible by using decentralised protocols and platforms, such as Ethereum and IPFS, which allow the creation of decentralised applications (dApps) and the exchange of value through cryptocurrency transactions. Web3 can potentially transform a wide range of industries, from finance to social media, and create new opportunities for innovation and collaboration.

Proposed Regulations 

Hong Kong’s recent crypto regulations stipulate that centralised virtual currency exchanges operating in the city, or marketing services to the territory’s investors, must obtain licenses from the Securities and Futures Authority. The new regulations include asset safety measures, client identification, conflict resolution, cybersecurity, financial accounting, risk assessment, combatting money laundering and terrorism financing, and thwarting market misconduct. The regulation aims to protect investors while promoting innovation and development in the cryptocurrency industry. It is recognised as a step towards making Hong Kong a more attractive destination for blockchain- and crypto-related businesses, eventually serving as a model for other regions in China to adopt more blockchain-friendly policies.

Bringing Back Innovation?

Following China’s crackdown on crypto trading, crypto firms in the country have been forced to shift their focus overseas, with many opting to set up bases in more accommodating locations. Some of the more innovative firms have established new outposts in places like Singapore and Dubai while still keeping developers in China. Hong Kong’s more relaxed regulatory framework for cryptocurrencies could entice some of these exiled companies to return home. While Beijing’s move to protect individual investors from the volatility of crypto trading appears to be wise in light of the recent market turbulence, it cannot ignore the growing interest in Web3, slated to become the next big thing that the world is actively pursuing.

Lessons for the World 

The regulatory developments in Hong Kong concerning digital asset regulations present an intriguing situation not only for China but also for India and the rest of the world. Hong Kong, as one of the world’s largest financial centres, has a significant impact on the global financial landscape. How it incorporates and adapts to digital asset regulations will have far-reaching consequences for the rest of the world, in terms of both global finance and regulatory prescriptions. Such insights are helpful for policymakers around the world as there is no one-size-fits-all solution for digital assets regulation, but there are key principles that act as building blocks for policy frameworks. Understanding the interplay of these building blocks will help regulators develop unique solutions for their country.

The emergence of digital assets does not necessarily undermine the current financial system but presents an alternative to traditional finance. Cryptocurrencies and blockchain-based tokens have the potential to improve the efficiency, accessibility, and security of finance. However, to remain relevant in the rapidly changing financial landscape, the traditional financial system must adapt to these changes.

Observation and Investigation

Amidst the forthcoming crypto regulations that will take effect in June, Hong Kong has captured the interest of more than 80 foreign and Chinese companies seeking to establish a Web3 company in the city. The Hong Kong Monetary Authority is also working on regulations regarding stable coin, which are expected to be enforced by 2024. Furthermore, the government has allocated HK$ 50 million (US$ 6.4 million) to support the growth of the Web3 ecosystem, as stated by Paul Chan, Hong Kong’s financial secretary, during his 2023-2024 budget speech in February.

As a special administrative region of China, Hong Kong has enjoyed a degree of autonomy in its economic policies and regulatory framework. This has allowed it to maintain its reputation as a global financial hub, attracting capital and talent from around the world. Meanwhile, mainland China has taken a cautious approach by implementing strict regulations and limiting access to these emerging technologies i.e blockchain and cryptocurrency.

China’s policymakers are aware of the potential benefits of blockchain, such as enhancing transparency, improving efficiency, and reducing costs. By observing Hong Kong’s regulatory approach to blockchain and cryptocurrency, China’s policymakers can monitor the impact of these technologies on financial markets, and assess the potential risks and benefits. If Hong Kong’s regulations prove successful in promoting innovation and protecting investors, they could serve as a model for China to adopt more Web3 and blockchain-friendly policies.

China’s digital assets experiment in Hong Kong is an area of interest for the world as it can aid in crafting better policy. The question of whether this space should be regulated is complex, and letting the crypto ecosystem run free to develop new products is perhaps a potential and risky approach. Success and failure are vital aspects of innovation and regulation, and this is yet another opportunity for policymakers to learn from the dynamic interplay between the two.

*About the author: Sauradeep Bag is Associate Fellow at ORF. Sauradeep has worked in several roles in the startup ecosystem and in international development with the United Nations Capital Development Fund. His areas of interest include fintech, economic development and public policy.

Source: This article was published by Observer Research Foundation