Photos by Peter Parkes. Video by Anagha Nair
Retail investors in Hong Kong may soon be able to buy popular cryptocurrencies such as bitcoin on government-licensed exchanges, thanks to new regulations bolstering the city’s standing as a digital asset hub.
The global crypto market has yet to recover from a series of high-profile failures in recent months, including the spectacular declines of trading platforms FTX and crypto-friendly US banks Signature and Silvergate.
But the so-called “crypto winter” hasn’t stopped Hong Kong authorities from embracing the sector, a pivot that began last October and culminated with new laws for crypto exchanges starting June 1.
Officials are also hoping the change will be a boon to the city’s economy, which is struggling in the wake of the pandemic, social unrest and the impact on business confidence from a Beijing-imposed national security law.
Importantly, observers say it will strengthen Hong Kong as an important route for mainland Chinese investors to trade crypto, which is illegal in the country.
Regulators are hoping to entice firms with favorable business conditions, but they must balance that against the need for investor protection – a well-developed area in traditional finance but less so in the virtual-asset space.
“There is a clear recognition that these products are becoming more and more of our economy,” Giuliano Castellano, a law professor at the University of Hong Kong, told AFP.
The city has had a voluntary licensing system for crypto trading platforms since 2019, but licensees can only serve professional clients with portfolios of at least HK$8 million ($1 million).
Without licensed local alternatives, Hong Kong retail crypto traders are relegated to offshore websites such as Binance and Coinbase, or a raft of brick-and-mortar shops that buy and sell tokens for cash.
The client-base restriction was unpopular with Hong Kong crypto businesses, and authorities eventually removed it when designing the upcoming regulations.
“The genie is out of the bottle,” said Christy Swartz, a fintech attorney at DLA Piper, referring to retail crypto trading.
“(They) just have to face the reality … If it’s already there, try to regulate it.”
Hong Kong is racing with regulators around the world to figure out the ground rules for crypto, which despite its crash still has a global market capitalization of over $1 trillion.
The European Union approved the world’s first comprehensive rules on the area earlier this month and IOSCO, the international securities watchdog, soon proposed its own recommendations.
In contrast to the changing attitudes towards cryptocurrencies around the world, China has maintained a strict ban through 2021.
According to Leo Weiss, co-founder of the Hong Kong Bitcoin Association, Hong Kong – a Chinese city with different financial regulations from the mainland – holds special appeal for crypto businesses and investors from China.
“There is a huge appetite from (Chinese) cryptocurrency ventures… for any kind of legal presence on Chinese soil,” he said, adding that the companies see it as a gateway to the lucrative mainland market.
In both traditional finance and crypto, it is common for mainland Chinese investors to be identified as Hong Kong customers if they have a bank account and address in the city.
“Once you have the Hong Kong license, you are going to be able to convince your mainland customers … that it is safe for them to interact with you through their Hong Kong bank account,” Weiss told AFP. Is.”
Major crypto exchanges established in China, such as Huobi and OKEx, have announced plans to apply for Hong Kong licenses.
While Beijing’s anti-crypto stance remains unchanged on paper, senior economy officials have publicly supported Hong Kong’s ambitions.
“You can see China say, ‘Look, if this happens in Hong Kong, population about seven, eight million, that’s fine. We can use that as our petri dish,’” Swartz told AFP .
Unlike the current system, the retail-friendly rules that take effect in June will be mandatory, meaning all exchanges trading in Hong Kong will eventually need to be licensed.
Hong Kong regulators said they expect to move quickly towards issuing the first licences.
Some crypto businesses say the switch is not expected to disrupt day-to-day operations as authorities allow a transition period of one year.
Two existing licensees, Hashkey and OSL, told AFP they would apply for new licenses and increase their retail presence.
“There is a critical need in the market for platforms that are easily accessible…but also properly managed and properly regulated,” said Michelle Li, Executive Chairman of HashKey Group.
“This new arrangement adds a lot more clarity about what you’re getting, what security standards you’ll be provided with.”
With the memory of the FTX collapse still fresh, the Hong Kong regulator said the new rules aim to “provide stronger investor protections and manage key risks”.
One safeguard is that exchanges can only offer “large-cap virtual assets” – such as bitcoin and ethereum – to retail investors, and must form internal committees to decide which cryptocurrencies to offer. .
Retail clients are also required to undergo a knowledge test and risk profiling before trading – although it is unclear what level of knowledge is considered sufficient.
Meanwhile, products such as stablecoins and crypto derivatives are currently off-limits to retail investors.
“The new rules are meant to better protect investors,” said legal scholar Castellano.
“It is wise to take a cautious approach.”
HOLE/DHC/DAN
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