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Hong Kong has played a pivotal role in the short history of cryptocurrencies. The Chinese territory is the birthplace of some of the world’s largest crypto companies and the industry’s most pioneering inventions, with trillions of dollars traded through its homegrown exchanges.
Tether, the world’s largest stablecoin, was launched here. Crypto groups such as FTX Trading, valued at $18bn, and blockchain start-up Block.one, which raised $10bn this year, have grown at a rapid pace from their Hong Kong homes, backed by the same investors that nurtured Facebook and PayPal.
The magic formula that has earned the territory its crypto bragging rights is the same mix of financial expertise and entrepreneurial spirit that created billionaire tycoons out of property speculators and plum sauce manufacturers. Most of Hong Kong’s largest crypto exchanges were started by those who left high-flying careers at its international banks.
But what was once a feather in Hong Kong’s cap has become an uncomfortable subject for the city’s financial regulators. Its flourishing industry has become so large that it is increasingly at odds with China’s obstructive stance on cryptocurrencies.
The ongoing crypto crackdown in Beijing leaves Hong Kong’s own industry facing an existential crisis, within incoming regulation threatening to stamp out much of that entrepreneurial freedom.
Hong Kong outlined a new framework to regulate cryptocurrencies in 2018 and further licensing arrangements for exchanges last year that have not yet become law, mirroring the tougher stance that regulators in the UK, US and elsewhere in Asia are taking. However, its latest proposals would make it among the world’s most stringent.
Under the rules, crypto trading would be limited to professional investors — those with $1m of liquid assets (digital currencies not included) and exchanges would have to be licensed in the same way as asset management houses that deal in securities.
At the moment, crypto groups “opt in” to the licensing arrangement. Many have applied, but so far just one, OSL, has been successful, securing a licence last December. The absence of any further approvals has added to existing uncertainty over when the new rules will come into effect, but they already face huge opposition, with some of the city’s fintech groups describing them as extreme and outdated.
“Every large crypto company in Hong Kong has already started a contingency plan to relocate their business due to the uncertainty,” says Henri Arslanian, crypto leader at consulting group PwC and former chair of the FinTech Association of Hong Kong.
Hong Kong risks becoming “like an academy football club that trains these companies before they go to other jurisdictions which will reap the rewards”, he adds.
The industry is lobbying for rule changes that would allow licensed exchanges to sell to retail investors, and is seeking to clarify whether the regulations would allow crypto companies based in Hong Kong to service foreign retail investors. If they do not, critics say, there are few benefits to operating in a location where office rents can be prohibitively expensive.
Investor protection should be a paramount concern for regulators. However, the new rules may not offer much protection. Retail investing in Hong Kong is sophisticated, so it is likely that any clampdown would push investors towards trading crypto via offshore exchanges or risky peer-to-peer deals, just as has been seen in mainland China.
The irony is that Hong Kong has one of the most cutting-edge approaches towards crypto funds in the world. Currently, any licensed fund manager can have up to 10 per cent of their portfolio in cryptocurrencies with no additional licensing conditions. The territory has also been at the global forefront of exploring central bank digital currencies.
But it is Singapore that has flung open its doors to Asia’s crypto groups, heavily marketing its crypto freedoms as a viable alternative for international firms to access Asian markets.
Cryptocurrency exchanges and trading are legal in the city-state, and it has already lured some of the industry’s biggest participants such as Changpeng Zhao, the founder of Binance, and Cameron and Tyler Winklevoss who set up the Asia base of their Gemini exchange there.
Hong Kong groups including OSL have started rapidly building operations in the country, and more than 300 companies have applied to its monetary authority for crypto exchange and payments licences.
For most large crypto groups, Singapore is unlikely to be a first choice, but the growing sense of unease in Hong Kong is adding to its allure. Its early wins appear to demonstrate the benefits of regulatory clarity; something that Hong Kong nervously awaits.
Tabby Kinder is the FT’s Asia Financial Correspondent