Hong Kong to Woo Crypto Exchanges Away From the US

“It was the best of times, it was the worst of times… It was a spring of hope, it was the winter of despair.”

I’m reminded of a Charles Dickens novel, A Tale of Two Cities, as I write about a crypto spring blooming in Hong Kong amid a harsh crypto winter in the U.S.

The contrasting regulatory developments in Hong Kong and the US are quite a coincidence. The Chinese city-state is wooing global crypto exchanges to its shore just as US regulators attacked homegrown Coinbase and global behemoth Binance.

Let’s uncover the crypto regulatory scene in Hong Kong and the U.S., the differences in their approach, and China’s subtle advancements in blockchain technology.

Hong Kong: China’s Crypto Regulation Sandbox

China has taken a varied approach when it comes to dealing with the cryptocurrency industry. A blanket ban on crypto-related activity – mining and trading – still remains enforced in Mainland China. In Hong Kong, however, the story is different.

On June 1, a new crypto exchange licensing regime went into effect, paving the way for retail investors to legally trade cryptos in Hong Kong. Companies can now apply for crypto exchange licenses with Hong Kong’s market regulator Securities and Futures Commission (SFC).

What Do the Latest Regulations for Licensed Crypto Exchanges in Hong Kong Specify?

Here is everything you need to know about the latest set of rules for licensed crypto exchanges in Hong Kong. These are based on the consultation conclusions published on May 23:

Retail investors get access to crypto trading;
Crypto exchanges conduct an assessment of investor’s understanding of the nature and risks of virtual assets before offering an account;
Stablecoins won’t be listed;
Eligible tokens need to be issued for at least 12 months;
Eligible tokens need to be part of at least 2 acceptable large-cap indices;
Smart contract audit of eligible cryptos before listing;
Exchanges to record all order instructions from clients;
98% of customers’ cryptos are to be held in cold storage;
No crypto derivatives offering; proposal being considered;
Exchanges to only allow transfer of crypto to self-custody wallets that have undergone periodic screening processes and are deemed to be reliable;
Not allowed to offer gifts (e.g. airdrops) tied to the trading of a token;
Exchanges to establish token admission and review committee to conduct due diligence on each crypto before admission for trading;
50% of customers’ assets in cold storage are to be insured; cryptos held in hot storage are to be 100% insured;
Crypto exchanges and related group companies are prohibited from holding positions in virtual assets;
Exchanges are prohibited from providing algorithmic trading services to clients;
Exchanges are prohibited from offering earning, deposit-taking, lending, and borrowing crypto services;
Seeds and private keys for the custody of client assets are to be held in Hong Kong.

U.S. vs HK: Difference in Crypto Regulatory Approach

The lawsuit against Binance and Coinbase put to rest any hopes that the U.S. might take the lead in nurturing the cryptocurrency industry. U.S. regulators led by the SEC chairman Gary Gensler are hell-bent on clamping down the industry.

There is a common view among crypto insiders that the SEC is using its powers to keep cryptocurrencies from challenging the traditional finance system. Others suggest that U.S. regulators are not open enough to understand cryptocurrencies and only focus on negative crypto headlines to justify the clampdown.

On June 6, Chair Gensler said in a CNBC interview:

We don’t need more digital currency. We already have digital currency. It’s called the U.S. dollar. It’s called the Euro. It’s called the Yen. They are all digital right now.

Both Coinbase and Binance voiced their concern that the SEC did not cooperate in discussions regarding industry regulations and compliance even when the companies offered to do so. Coinbase even went on to disclose that the company had met the SEC “more than 30 times over nine months,” but authorities canceled their scheduled meeting in January 2023.

Coinbase explained:

Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none.

In contrast, Hong Kong’s crypto exchange licensing regime – which went into effect on June 1 – was finalized after the SFC consulted associations, professionals, market participants, consultancy firms, and stakeholders in the crypto industry.

The consultation process that began in February 2023 received 152 written submissions. Many welcomed the regulatory clarity, while others sought to solve queries.

Julia Leung, the SFC’s Chief Executive Officer, said:

Providing clear regulatory expectations is the key to fostering responsible development … This will enable the industry to develop sustainably and support innovation.

China Taking the Lead in Crypto Technology

The ban on crypto mining activity and retail crypto trading in Mainland China is deceiving. Asia’s largest economy has been quietly innovating and pursuing advancements in blockchain and crypto technology. According to Coinbase, nine out of ten blockchain patents filed in the world in 2022 came from China.

China is a frontrunner when it comes to central bank digital currency (CBDC) development. The nation was among the first to study and pilot a CBDC project. Over $1.5 trillion of China’s CBDC, called e-CNY, was reported to be in circulation at the end of 2022. Smart contract capabilities have also been introduced to the e-CNY, according to Forbes.

Beijing also has plans to launch a government-maintained global blockchain called the Blockchain-based Service Network (BSN) by 2025. BSN is touted to be the “world’s most advanced blockchain technology” and will be pushed as a global commercial solution.

On June 12, the Bank of China – the world’s fourth-largest bank based on total assets held – became the first Chinese financial institution to issue tokenized securities. The state-owned bank issued 28 million yuan worth of fully digital structured notes on the Ethereum blockchain.

Ying Wang, Deputy CEO of BOCI, a wholly-owned unit of the Bank of China, said: “Working together with UBS, we are driving the simplification of digital asset markets and products.

We are encouraged by the evolution of Hong Kong’s digital economy and are committed to promoting the digital transformation and innovative development of Hong Kong’s financial industry.

The Bottom Line

Cryptocurrency is a rare breed. It looks to disrupt traditional finance – a sector that has never seen disruption of this magnitude before. The U.S. needs to rethink its crypto strategy or risk falling behind.

Global crypto exchanges and companies have already begun their journey eastwards toward Hong Kong, Singapore, and Dubai. As U.S. regulators double down on the aggression, the talent and capital drain are bound to be more significant.