China Casts Long Shadow Over Hong Kong's Once-Vibrant Crypto Industry

Hong Kong Fintech Week was erstwhile a buzzing melange of entrepreneurs successful T-shirts with bankers and bureaucrats successful suits, each discussing cryptocurrency’s relation successful the aboriginal of money.

Last year’s gathering, held successful November, was markedly different. Government officials emphasized the imaginable of greater integration with China and its integer yuan, portion conversations astir crypto focused connected what is deemed due connected the mainland.

The opposition points to a larger shift.

As China has tightened its grip connected Hong Kong, the city’s integer assets manufacture has grown uneasy and chastened. Many firms person near Hong Kong oregon downsized operations. Local regulators were mostly inactive past year, lone adding to the uncertainty.

Hong Kong has been an epicenter of crypto passim the plus class’s development, acknowledgment to 1 of the world’s strongest concern ecosystems, a vibrant entrepreneurial tone and proximity to, well, China. (The mainland was erstwhile a hotbed of trading and mining enactment earlier a bid of crackdowns by Beijing, astir precocious successful September.) Iconic firms, specified arsenic exchanges FTX and BitMEX, VC Kenetic Capital and EOS developer Block.one, person their roots successful the city.

Now, astir of the remaining firms successful Hong Kong person backup plans.

"They inactive person a large beingness successful Hong Kong,” but they're looking astatine antithetic options for their operations, said Vivien Khoo, co-founder of the Asia Crypto Alliance, a commercialized relation based successful Singapore.

Many Hong Kong firms are having “active discussions," peculiarly successful airy of COVID-19, "about what it means to beryllium moving remotely due to the fact that that tin springiness them flexibility,” she added.

There are glints of hope. One period into 2022, the Hong Kong Monetary Authority (HKMA) – the city’s equivalent of a cardinal slope – has issued 2 cardinal papers: 1 connected stablecoins and different connected crypto-related exchange-traded funds.

Hong Kong “is opening to found the regulatory model for integer assets that is accordant with its presumption arsenic a planetary hub for fiscal services and wealthiness management,” said Lennix Lai, manager of crypto speech OKX. “With clarity connected the parameters successful which the marketplace tin operate, investors volition nary longer beryllium held backmost by fears implicit a regulatory backlash.”

Yet portion the city’s aboriginal successful the planetary crypto ecosystem is starting to instrumentality shape, it looks a batch much constricted than its freewheeling past. Several manufacture participants told CoinDesk it was apt that Hong Kong’s regulatory authorities would stay unchangeable successful the abbreviated to mean word but agreed that the semipermanent prospects were apt bleak.

Four of the radical who spoke to CoinDesk for this nonfiction requested anonymity due to the fact that they were not authorized to talk publically connected what their firms deem a politically delicate topic. Three of those enactment for crypto fiscal services firms, portion a 4th is simply a banal analyst.

“It’s hard to expect that you are not allowed to bash immoderate crypto successful the mainland, but Hong Kong is [going to remain] a paradise” for the industry, quipped 1 section participant.

As a peculiar administrative portion nether the “one country, 2 systems” principle, Hong Kong is territorially a portion of China but sets its ain laws and regulations.

On paper, Hong Kong’s comparative autonomy from the mainland is acceptable to expire successful 2047, though galore observers, including the U.S. State Department, person noted that China’s cardinal authorities is already chipping distant astatine Hong Kong’s freedom.

The National Security Law that came into unit connected June 30, 2020, criminalized broadly defined acts of sedition, collusion, coercion and subversion and granted authorities extended powers of surveillance, detention and search. As of June, 117 radical had been arrested nether the law; astir of them were politicians, activists and journalists, and the database besides included media tycoon Jimmy Lai, proprietor of fashionable pro-democracy tabloid Apple Daily.

The governmental hazard related to crypto successful Hong Kong dates earlier China’s 2021 crackdown, said Alessio Quaglini, co-founder and CEO of crypto custodian Hex Trust. Hex started looking into a Singapore bureau “since time one,” which the steadfast sees arsenic a “backup plan,” helium said.

The custodian has since acquired a Capital Markets Services licence successful Singapore and is waiting for a crypto license, helium said.

The feeling connected the crushed got grimmer past year. There was small quality from Hong Kong regulators, and what was announced made firms wary.

On May 21, 2021, Hong Kong authorities proposed fines up to $640,000 and 7 years imprisonment for unlicensed speech activity. Compounding this was the mainland’s expanding power connected the metropolis and its staunch anti-crypto stance.

Around mid-2021, the market’s cognition was that regulators felt that “If you’re not licensed, we privation you retired of Hong Kong, fast,” peculiarly successful airy of the imaginable for fines and imprisonment, said Khoo.

On Sept. 24, 10 of China’s apical nationalist concern and tech authorities institutions declared each crypto-related transactions illegal. While this was not the archetypal clip China has restricted crypto, it was the archetypal clip respective of the country’s apical agencies issued a broad enactment program that near small country for interpretation.

Following the announcement, the sentiment connected the aboriginal of crypto successful Hong Kong soured, 1 expert successful the metropolis told CoinDesk, adding that their institution has since forbidden them from publically discussing crypto.

After the mainland tightened its policy, Hong Kong’s biggest retail-focused licensed trading platforms that offered crypto funds, Futu and Tiger Brokers, said they volition halt users from buying crypto products connected their platforms starting Oct. 1.

A Futu typical told CoinDesk the determination was “in effect to applicable regulatory guidelines” but didn’t clarify whether they were referring to China’s guidelines. Tiger Brokers did not respond to CoinDesk’s petition for comment.

For the clip being, Hong Kong is nether an opt-in licensing authorities for crypto firms. To get these optional licenses, firms person to travel the Financial Services and Treasury Bureau (FSTB) recommendations.

The lone licence for automated trading, which is indispensable for operating a crypto exchange, has been granted to OSL Digital Securities. None person been granted since OSL received its licence successful December 2020.

While there’s a batch of speech astir China’s power successful Hong Kong, “At slightest for now, crypto regulations are decided by the Securities and Futures Commission (SFC),” said Henri Arslanian, person of the crypto signifier astatine consulting elephantine PwC.

The SFC has expressed that it is not a instrumentality of crypto derivatives. FTX, 1 of the world’s largest trading platforms for integer plus futures, moved its headquarters from Hong Kong to the Bahamas the time aft China announced its crackdown. FTX laminitis and CEO Sam Bankman-Fried said astatine the clip it wasn’t successful effect to “recent news.”

COVID-19 restrictions – which person lone intensified successful the past fewer months – marque it hard to prosecute successful the city, “So, determination is already immoderate question distant from Hong Kong,” said Leonhard Weese, president of the Blockchain Association of Hong Kong.

Serving overseas customers retired of Hong Kong is simply a cushy option, Weese said. All the large players already enactment nether the presumption that “Hong Kong is simply a bully spot to bent retired in, they’re not funny successful selling their products to the Hong Kong marketplace due to the fact that it’s excessively tiny and complicated,” helium said. So, adjacent if authorities chopped their entree to the section market, it won’t beryllium a large problem, Weese said.

Instead, these companies privation to service the world, and determination is small denotation that mightiness not beryllium acceptable to the regulators successful the future, helium said. Even if things change, they tin easy prime up and leave.

The Hong Kong authorities had announced plans to suggest an anti-money laundering bill successful the 2021-2022 legislative league that is based connected a consultation paper drafted by the FSTB successful November 2020. The bill’s licensing authorities for crypto exchanges is envisioned arsenic a obstruction against wealth laundering, and, dissimilar the existent one, it would beryllium mandatory.

In effect to a CoinDesk enquiry connected whether the crackdown connected the mainland volition impact rules successful Hong Kong, the FSTB reiterated its presumption that virtual assets are not ineligible tender and pointed to the territory’s existing regime.

The SFC did not respond to CoinDesk’s petition for remark portion the HKMA referred the enquiry to the different 2 agencies.

The November FSTB insubstantial recommended requiring licenses for virtual plus work providers, including crypto exchanges, and limiting their services to nonrecreational investors, among different measures.

Hong Kong law defines nonrecreational investors arsenic individuals oregon corporations who person a portfolio worthy upwards of HK$8 cardinal ($1 million) oregon companies with much than HK$40 cardinal ($5 million) successful assets.

Still, with a afloat draught of the measure yet to beryllium publically disposable oregon discussed successful Hong Kong's Legislative Council, galore important details are hanging successful the balance.

The scope of the licensing authorities is not wholly clear, said Weese. It is unclear if smaller over-the-counter (OTC) exchanges and bitcoin ATMs volition beryllium allowed, oregon what benignant of hazard is going to beryllium enactment connected individuals that conscionable commercialized OTC with their friends, helium said.

For galore exchanges, getting a licence volition mean that “Their full systems and products are going to beryllium massively crippled” due to the fact that they tin lone connection spot trading and lone service organization investors, Weese said.

Many firms are preparing to “fly nether the radar” to debar regulatory attraction portion figuring retired however to alteration their concern exemplary specified that they tin spell global, scope caller idiosyncratic bases oregon someway debar falling nether the licensing regime, helium said.

One idiosyncratic who works for a Hong Kong-licensed crypto steadfast described the unlicensed companies arsenic surviving “on different planet,” successful that their behaviour and cognition toward regulations is wholly antithetic from those of licensed firms.

Given the mainland’s draconian argumentation connected integer assets, Hong Kong’s dwindling independency is crushed for interest for the section crypto community.

“The Chinese authorities is taking implicit and dilatory changing the system,” and it is lone a substance of clip earlier it trickles down to crypto, different root successful Hong Kong’s crypto manufacture said.

In the past 2 years oregon so, radical successful Hong Kong person mislaid assurance successful the information that its ineligible strategy is wholly abstracted from mainland China’s, and they are much apt to wound their tongues erstwhile talking astir crypto, Weese said.

Generally speaking, bitcoin conversations often devolve into governmental discussions astir state and the limits of the government, which is progressively a taboo topic, Weese said. If you effort to travel up with real-world examples, you mightiness get into each sorts of issues that are highly arguable successful a metropolis wherever the authorities has seized funds from civilian rights organizations.

Aside from regulatory backlash, Hong Kong firms are intimately tied to China, truthful a dwindling crypto manufacture successful China does not bode good for Hong Kong’s ecosystem.

The crackdown has been a occupation for Hong Kong plus managers who person clients successful the mainland, the expert said, due to the fact that connection is present considered risky.

At the aforesaid time, galore Hong Kong firms person probe and improvement oregon backmost offices successful China, Arslanian pointed out.

“If you privation to beryllium a fiscal center, tech endowment is important,” said Arslanian, adding that Singaporean companies often outsource tech improvement to India, and Hong Kong crypto firms usually enactment with Chinese engineers.

But China’s latest argumentation targets tech endowment moving for overseas exchanges successful China arsenic well.

The question for these connections volition beryllium wherever Chinese regulators gully the line, Arslanian said, and whether overseas exchanges that don’t service Chinese clients volition beryllium allowed to bash probe and improvement successful China.

Peer-to-peer crypto trading volition apt stay vibrant successful Hong Kong due to the fact that it is precise hard to halt and allows for quicker transactions successful a cash-based society, Weese said. These trades could beryllium progressively scrutinized by authorities looking for wealth laundering, specified that ample transactions volition gully attention, the relation caput said.

But what volition hap to virtual plus work providers (VASPs) is unclear.

Khoo and her co-founder, Su Yen Chia, presumption the HKMA’s papers arsenic encouraging developments.

“At slightest present radical cognize that the regulator is looking into it, providing immoderate direction, [...] and they're asking for comments and feedback from the industry,” Chia said.

The insubstantial besides firmly distinguishes HKMA’s views from mainland policy. "On paper, they are looking astatine stablecoins arsenic a outgo tool," she said, successful opposition to the mainland wherever nary crypto tin beryllium utilized successful commerce. For crypto assets not related to payments, HKMA is “looking astatine however it develops hence, they are not stymying innovation,” Chia added.

The city’s regulators are keen to support their competitory borderline vis-a-vis markets similar Singapore, Khoo said.

The projected regulatory model for integer assets successful Hong Kong fits wrong Beijing’s wider model for crypto, Omer Ozden, CEO of Beijing and New York-based task superior steadfast RockTree Capital, told CoinDesk. The mainland authorities wants to debar systemic fiscal risk.

The “blue sky” script is that the rules projected by the FSTB, already immoderate of the world's astir stringent, are the ones that stay successful spot successful the mean term, said the analyst.

If caller rules come, licensed firms volition beryllium the winners, and unlicensed ones volition look expanding regulatory pressure, the expert said.

The exchanges that are inactive based successful Hong Kong are going to determination operations “silently but consistently” distant from the city, Weese said.

“Regulatory clarity is ever invited arsenic it legitimizes the plus class,” Esme Pau, caput of emerging exertion astatine banal brokerage China Tonghai Securities. But whether Hong Kong’s stockbrokers tin connection integer asset-related products remains an unfastened question, she said.