Hong Kong’s Crypto Hub Ambitions Despite China’s Intervention

The crypto industry has had a tough year with digital currency markets crashing and companies collapsing across the board.

Despite the volatility, Hong Kong is pushing to become a virtual asset center.

The city’s digital asset push stands in stark contrast to mainland China, where Beijing has effectively banned trading and halted crypto-related activities.

Hong Kong plans to introduce new rules in June that will require crypto trading platforms to be licensed by the Securities and Futures Commission. The regulator has already launched a consultation on its proposal to regulate virtual asset trading platforms.

Companies that spoke to CNBC say they hope the central government can look into Hong Kong’s crypto movements.

“If anything, China could see the effect on Hong Kong following these rules, the issuance of new crypto-linked products or blockchain-based solutions, and the build-up of trade and business activity that may follow,” said Justin d’Anethan, director of institutional sales at Amber Group.

Hashkey Capital CEO Deng Chao had similar sentiments, saying Hong Kong’s potential crypto legalizations could serve as a compass for China.

“In the future, it can serve as a model for policy-making in other regions [in China] if it proves successful,” he told CNBC in an email, adding that Web3 and crypto businesses could eventually take a more compliant approach to their day-to-day operations.

Web3 refers to the next generation of the internet. Advocates say it will become more decentralized and reduce the power of big tech companies. Some proponents say that cryptocurrencies are likely to be a central part of Web3.

In December, a former member of the monetary policy committee of China’s central bank, Huang Yiping, called on Beijing to revise the comprehensive crypto ban.

Huang said opportunities for digital technology development could be missed if crypto transactions are banned for a long time.

Still, caution remains over whether Hong Kong could eventually become China’s crypto north star.

“While there is some chatter about China potentially loosening its stance on crypto, so far there’s really nothing we can see to suggest anything like that, d’Anethan said.

Also, it is not going to be easy for retail investors who want to jump on the Hong Kong crypto bandwagon.

“Hong Kong is going to introduce a set of strict rules for crypto trading platforms,” ​​said Yuya Hasegawa, a market analyst at Japanese crypto exchange Bitbank.

“It means it won’t be easy for newcomers to casually join and start business,” he said, adding that he is not sure whether the government’s plans to give retail businesses access to virtual asset trading will necessarily generate much growth for the industry and as a hub.

While Hong Kong has high crypto ambitions and has relatively lower corporate tax policies, the city could still potentially find competition from other crypto hubs.

“Regulation is of course necessary for healthy growth, but in order to compete with other crypto hubs, there must also be appealing tax policies for crypto projects,” Hasegawa said.

He pointed out that Hong Kong has a relatively low corporate tax policy: the corporate tax rate for the first 2 million Hong Kong dollars ($254,930) of assessable profits is 8.25%, while all profits above that amount are taxed at 16.5%.

But compared to other crypto hubs such as Dubai, which charges a flat rate of 9%, and Switzerland – with a corporate rate of 8.5%, “it’s still not that competitive,” he said.

Other players who have previously attempted to become digital asset centers have recently implemented legislation to regulate the industry. Observers say regulation is needed to create security for the crypto industry and increase consumer adoption.

Last month, the UK government released a roadmap to regulate the cryptocurrency industry on par with traditional financial firms.

The European Union last year launched the Crypto Asset Markets Act, which required stablecoins to maintain ample reserves to meet redemption requests in the event of mass withdrawals.

Other jurisdictions such as Dubai in the United Arab Emirates are looking to set themselves up as crypto-friendly places to do business.

However, some countries, notably the United States, have taken a tougher stance on the cryptocurrency industry – especially after the collapse of major cryptocurrency exchange FTX and the arrest of its founder, Sam Bankman-Fried.

However, Bitcoin’s recent price drop has not dampened the hopes of companies that crypto adoption will grow.

“For the long-term investors, the green light from regulators should highlight the fact that crypto is being adopted regardless of temporary price movements or the volatility of this still young asset class,” said Amber Group’s d’Anethan.

Crypto markets have rallied recently despite bitcoin falling below $20,000 by the end of 2022. Bitcoin was trading at $27,834 at 9:30 p.m. ET Sunday, according to Coinbase. That is still nearly 60% lower than the November 2021 record high of $68,990.

“Although virtual assets are relatively new, private investors already have some knowledge and experience in the market after these years of education. As the climate improves, perhaps interest will also increase,” said HashKey’s Deng.

— CNBC’s Arjun Kharpal contributed to this report.