Hong Kong’s Crypto Hub ambitions are quietly gaining support from Beijing

by Arthur · February 20, 2023

(Bloomberg) — In October, Hong Kong rolled out the red carpet for crypto businesses to help revitalize the struggling economic hub. Signs are now emerging that the push has under-the-radar support from Beijing, providing impetus for mainland Chinese firms to return.

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Representatives from the China Liaison Office and other officials have been frequent guests at the city’s crypto gatherings in recent months, exchanging business cards and WeChat details, said people familiar with the matter, who asked not to be named and discussed private information. The meetings have been friendly, with officials checking on developments, asking for reports and in some cases making follow-up calls, the people said. The Liaison Office, the top mainland body based in Hong Kong, did not respond to a request for comment.

Local crypto operators say their presence removes any doubt about Beijing’s stance on Hong Kong’s bid to become a crypto hub. The low-key support shows that officials are keen to use the laissez-faire city as a testing ground for digital assets, as they keep a tight rein on any such activity on the mainland.

Mainland and foreign firms are taking action, pushing to register their businesses and planning a return to the Chinese territory 15 months after Beijing slapped a ban on the industry and forced many to set up overseas.

“As long as one does not violate the bottom line, so as not to threaten China’s financial stability, Hong Kong is free to explore its own pursuit under ‘One Country, Two Systems,'” said Nick Chan, a member of the National People’s Congress and a lawyer who provides advice on cyber security and digital assets.

The city on Monday outlined a further opening to crypto, releasing a plan to allow retail investors to trade digital tokens such as Bitcoin and Ether. Individual investors will be allowed to trade major coins on exchanges licensed by the Securities & Futures Commission, which provide safeguards such as knowledge tests, risk profiles and reasonable limits on permissible exposure, the regulator said in a consultation document.

China began its crackdown on crypto in 2017 and banned trading in 2021, prompting some of the biggest homegrown names, such as Binance and Tron, to leave the country. Only recently has the world’s second largest economy eased its grip on the development of the blockchain technology behind these digital assets, allowing some NFTs to be developed.

For now, there is little sign that Beijing will relax its own ban due to concerns about consumer protection, the use of crypto to avoid capital controls, and environmental damage from the energy consumed by Bitcoin mining.

The mainland representatives are reporting their findings in Hong Kong to superiors in mainland China, although the purpose of those reports is not clear, the people said.

“As long as it remains under the party’s control, there will be no reversal of China’s crypto policy,” said He Yihan, founder and CEO of state-backed blockchain firm Red Date Technology. “It doesn’t help the real economy.”

In recent months, Chinese officials have been explicit in their endorsement of Hong Kong’s ambitions to become a fintech hub. Yi Gang, Governor of the People’s Bank of China, delivered addresses at key Hong Kong events on China’s development of its digital central bank currency and close cooperation with the Hong Kong Monetary Authority.

Hong Kong’s renewed interest in crypto came at a turbulent time when industry stalwart FTX collapsed, and contrasts with tightening regulations in rival Singapore. For Hong Kong to succeed in its pursuit, it will need to woo back the Chinese crypto-entrepreneurs who in recent years have moved to Singapore and beyond while they await clearer regulations in Hong Kong.

One who is planning a return is Tron founder Justin Sun, who said on Twitter last month that he wanted to move to Hong Kong to be “closer to the action.” Earlier this month, he said digital asset exchange Huobi plans to expand its operations in the city.

“The changed stance of the Hong Kong SAR government on crypto signals a nod from the Chinese central government giving pilot status to HK for some forward-looking experiments on how to best adopt and localize crypto for the vast Chinese market at large,” Sun said in an interview in January. “I am very optimistic about the outlook for crypto in the greater China region for the next decade.”

Smaller established firms are also flocking to the city.

Web3

About 70% of the 300 Web3 firms that have registered for Hong Kong’s accelerator program G-Rocket were founded by overseas Chinese entrepreneurs, while about a quarter were based in mainland China, said co-founder Caspar Wong.

“We are the window to China, and yet we have globally adopted legislation, practices and economic principles,” said Duncan Chiu, a lawmaker in the Hong Kong technology industry.

“There will always be competition from other places like Singapore and Dubai,” he said. “It will only push us to do more, and the most important thing is the balance of how to regulate, license the industry and yet not over-regulate it so that it prevents innovation.”

Hong Kong’s new licensing regime for virtual asset exchanges will take effect from June, although applicants expect to face a longer wait to obtain formal licenses.

The wider financial industry is closely following developments, but warns that entry may be difficult. Only a few firms are likely to satisfy requirements on risk management controls, systems, product knowledge and capital quality to justify a license, said Tan Yueheng, chairman of BOCOM International and permanent honorary chairman of the Chinese Securities Association of Hong Kong.

–With assistance from Zheping Huang, Kari Lindberg and Joanna Ossinger.