Small Hong Kong investors will soon be able to buy popular cryptocurrencies like bitcoin on state-regulated exchanges thanks to new rules aimed at strengthening the city’s position as a digital asset hub.
The global cryptocurrency markets are yet to recover from a recent series of major disruptions, including the collapse of the FTX trading platform and crypto banks Signature and Silvergate.
But the difficulties surrounding cryptocurrencies have not stopped the Hong Kong authorities from expressing interest in this sector, which began in October last year and culminated in the adoption of new laws on the exchange of cryptocurrencies, which will come into force from June 1, according to AFP.
Officials also hope the shift will boost the city’s economy, which is still struggling with the COVID-19 pandemic and social unrest in Hong Kong, as well as the impact on investor confidence from Beijing’s national security law.
Observers note that the new laws will make Hong Kong a major haven for Chinese investors seeking to trade cryptocurrencies, which is prohibited on the mainland.
Regulators hope to attract companies with favorable trading conditions, but they have to balance this with the need to protect investors, knowing that this area is well developed in the traditional financial world and still less developed in the virtual asset space.
“There is a clear understanding that these products are becoming more and more part of our economy,” Giuliano Castellano, a professor of law at the University of Hong Kong, told AFP.
Since 2019, the city has introduced a voluntary licensing system for cryptocurrency exchanges, but licensees can only serve clients with portfolios worth HK$8 million (US$1 million).
In the absence of local license options, cryptocurrency merchants turn to offshore websites such as Binance and Coinbase or physical stores that buy and sell cryptocurrencies for cash.
Client restrictions weren’t popular in Hong Kong’s cryptocurrency business, which is why officials finally abandoned them when they created the new rules.
“The genie is out of the bottle,” said Christy Schwartz, a financial technology lawyer at DLA Piper, referring to the cryptocurrency retail business.
“They have to face reality. If it really exists, let’s try to organize it,” she added.
“test field” for China
Hong Kong is competing with regulators around the world to find ground rules for cryptocurrencies that, despite the crashes it has suffered, still hold a global market value of over $1 trillion.
Earlier this month, the European Union adopted the world’s first comprehensive rules for the sector, and shortly afterward, the International Organization of Securities Commissions presented its recommendations in this regard.
In contrast to the changing attitudes towards cryptocurrencies around the world, China has maintained a strict ban introduced in 2021.
Hong Kong Bitcoin Association co-founder Liu Wiese noted that the Chinese city, which has different financial rules than the mainland, has a particular attraction for Chinese crypto companies and investors.
“Chinese crypto projects are showing a lot of interest in any legal presence in China,” Wiz said, adding that the companies see the city as a gateway to the lucrative mainland market.
Recognition of Mainland Chinese investors as customers in Hong Kong is common, whether in the traditional or digital financial world, as long as they have a bank account and an address in the city.
“By obtaining a license in Hong Kong, you will be able to convince many of your customers on the mainland … that they can safely do business with you through their Hong Kong account,” Wiz explained.
Major cryptocurrency exchanges such as China-based Huobi and OKX have announced plans to apply for a license in Hong Kong.
While Beijing’s stance on crypto has not changed on paper, senior economic officials have publicly expressed support for Hong Kong’s ambitions.
“You can see China saying ‘look,’ if it happens in Hong Kong with 7 to 8 million people, that’s fine. We can use that as our guinea pig,” Schwartz said.
Investor protection
Unlike the previous system, rules for small investors coming into effect in June will be mandatory, which means that all trading venues operating in Hong Kong will need to obtain licenses.
Hong Kong regulators hope to quickly issue the first licenses.
Some crypto-related companies report that the transition is unlikely to disrupt day-to-day operations as authorities have allowed a one-year transition period.
HashKey and OSL, two existing licensees, said they would apply for new licenses and expand their retail footprint.
“There is a very strong need in the market for platforms that are easily accessible… yet well managed and organized,” said Michelle Li, CEO of HashKey Group.
“This new system adds clarity to what you are getting and what security standards you will be offered.”
With the FTX crash still fresh in mind, Hong Kong regulators are stressing that the new rules aim to “provide robust investor protection and manage key risks.”
One of the guarantees includes that exchanges can only provide “virtual capital assets” such as bitcoin and ethereum to small investors and must form internal committees to determine which cryptocurrencies to offer.
Small investors are also required to pass knowledge tests and risk assessments before trading, although it is not yet clear what level of knowledge is considered sufficient.
Meanwhile, products such as stablecoins and derivatives of cryptocurrencies are currently still out of reach for small investors.
“The new rules aim to better protect investors,” Castellano said. “It would be wise to be cautious.”
