Title: Hong Kong’s Crypto Policy: An Open and Diverse Approach
Author: Asher Zhang
The United States recently launched a Bitcoin spot ETF, and Hong Kong followed suit by introducing its own Bitcoin spot ETF. Moreover, Hong Kong also introduced an Ethereum spot ETF. At first glance, it may seem like the Hong Kong government is following in the footsteps of the US, but is that really the case? Recently, established cryptocurrency exchanges such as OKX, Gate, and Bybit have withdrawn their license applications, leading some to claim that Hong Kong is backtracking on its crypto policies. So, is Hong Kong tightening or continuing its lenient crypto regulations? And how does its approach differ fundamentally from that of the US?
Hong Kong’s crypto policy is more progressive than that of the US. Overall, Hong Kong’s crypto policy is more open and daring. This is evident in three aspects: the design mechanism of crypto asset ETFs, the approval of crypto exchanges, and the issuance of security tokens.
In terms of the mechanism for crypto asset ETFs, Hong Kong pioneered the physical subscription mechanism and allows Ethereum ETFs to participate in collateralization. Unlike the US Bitcoin spot ETF, which can only be traded with cash, the physical subscription mechanism provides investors with more flexible trading options. Additionally, the physical subscription mechanism plays a significant role in promoting Web3, as it can serve as an exit channel for Web3 investors, bridging traditional finance with Web3 and facilitating the circulation of capital. Regarding Ethereum spot ETFs, Hong Kong’s Securities and Futures Commission is in discussions to allow Ethereum ETF issuers to participate in collateralization. In contrast, US Wall Street institutions have removed collateralization clauses in their Ethereum ETF filings submitted to the SEC.
Although the approval process for crypto exchanges in Hong Kong is strict, it is still relatively lenient compared to the US. Currently, the only crypto exchange listed on the US stock market is Coinbase, while Hong Kong has extended its olive branch to multiple crypto exchanges. On June 1st, the Hong Kong Securities and Futures Commission updated its list of virtual asset trading platforms. Eleven platforms, including HKbitEX, PantherTrade, Accumulus, DFXLabs, Bixin.com, xWhale, YAX, Bullish, Crypto.com, WhaleFin, and MatrixportHK, were included in the “licensed” list, while six platforms, BGE, HKVAX, VDX, bitV, HKX, and bitcoinworld, were not. Although the Securities and Futures Commission stated that none of the platforms listed have officially obtained licenses, it is expected that more licenses will be granted.
Hong Kong is ahead of the US in terms of security tokenization. In November last year, the Hong Kong Securities and Futures Commission published a circular on approved investment products, which outlined the requirements for tokenizing investment products under the Securities and Futures Ordinance. In addition to tokenized securities, the commission has already recognized the issuance of investment tokenized products. As early as September last year, Tai Chi Capital launched the PRINCE Token, the first real estate fund security token offering in Hong Kong targeting professional investors. According to a report on May 27th, the Hong Kong Securities and Futures Commission recently clarified that the issuance of security tokens (STOs) and investment in real-world assets could be open to retail investors. This further expands the virtual asset market and is expected to attract more funds and fintech talent to Hong Kong. In February last year, the Hong Kong government successfully issued an HKD 800 million tokenized green bond, which is a typical RWA tokenization project.
Has Hong Kong’s Web3 ended before it even began?
Recently, established crypto exchanges like OKX, Gate, and Bybit have withdrawn their applications for crypto exchange licenses from the Hong Kong government. Some claim that “Hong Kong is backtracking,” and others even believe that “Hong Kong’s Web3 has ended before it even began.” But is this really the case?
This article believes that Hong Kong still has strong competitiveness in the Web3 field thanks to the government’s strong support and its remarkable achievements. On May 19th, the Financial Secretary of the Hong Kong Special Administrative Region, Paul Chan Mo-po, disclosed in his essay “Consolidating Our Foundation and Enhancing Our Competitiveness” that over 400 companies have joined Cyberport in the past year, bringing the total number of companies in the community to over 2,000, including eight unicorns. Start-ups have raised over HKD 40.6 billion in funding, with significant advantages in fintech and third-generation internet companies. The development of artificial intelligence is also accelerating, providing technical support for the digital transformation of Hong Kong enterprises.
In addition, Hong Kong has a strong crypto-friendly environment. According to the latest survey conducted by KPMG China and Aspen Digital on May 15th, 92% of Hong Kong respondents are interested in investing in virtual assets, with 58% of family offices and high-net-worth individuals already making related investments, and 34% planning to do so. Furthermore, 60% of the surveyed family offices and high-net-worth individuals have less than 5% of their investment portfolios allocated to virtual assets, while 54% expressed interest in allocating 5% to 30% to this asset class.
Despite the absence of participation from cryptocurrency exchanges in the crypto asset ETFs, the traditional financial market has shown strong interest in crypto assets, with many influential figures in the crypto industry remaining optimistic.
Eric Balchunas, a senior ETF analyst at Bloomberg, previously predicted that it would take two years for the Hong Kong virtual asset ETF market to reach the $1 billion mark, but it reached $292 million on the first day. He also stated that although the trading volume may not match that of the US, in terms of proportion, the $310 million Hong Kong ETF is equivalent to $50 billion in the US market. Therefore, the impact of the Hong Kong virtual asset ETF on its local market is as significant as that of the US Bitcoin spot ETF on its local market.
Sui Chung, CEO of CF Benchmarks under Kraken, predicts that the asset management scale of Hong Kong’s Bitcoin ETF will reach $1 billion by the end of 2024.
Wong Hei-ki, Chief Operating Officer of HashKey Group and CEO of HashKey Exchange, stated that the custodial assets under HashKey Exchange have increased from HKD 2.2 billion before the ETF launch to HKD 3.3 billion, and he believes that more funds will continue to flow into the market. He also believes that ETFs can attract more traditional investors to enter the virtual asset market, and expects the overall scale to reach around $10 billion in one year, accounting for 20% of the US market. He believes that the virtual asset market still has a long way to go before reaching saturation.
Hong Kong’s Grand Web3 Strategy
Hong Kong’s Web3 strategy is diverse and encompasses more than just the launch of Bitcoin ETFs. It extends its hand to many cryptocurrency exchanges, promotes the issuance of security tokens (STOs) and RWAs, and most importantly, introduces the digital yuan into the Web3 economic ecosystem, creating an innovative financial market infrastructure. This is something that the US lacks and is challenging to achieve quickly due to its two-party political tug-of-war.
With various virtual currencies being introduced in Hong Kong and traditional assets being tokenized, what is the most convenient way to purchase digital assets? Native digital yuan is undoubtedly more trustworthy compared to stablecoins issued by centralized companies. While the Hong Kong government is actively developing Web3, the digital yuan is also expected to experience unprecedented growth. On May 17th, the Hong Kong Monetary Authority announced further progress in its cooperation with the People’s Bank of China on the cross-border payment pilot of the digital yuan, expanding the scope of the pilot in Hong Kong. Hong Kong residents can now open and use personal digital yuan wallets through their Hong Kong mobile phone number. Users can top up their wallets through 17 local retail banks using “Faster Payment System” (FPS). Apart from being usable in the Greater Bay Area, the digital yuan can also be used in other pilot areas in mainland China.
From the statements of Hong Kong government officials, it is clear that the government is making efforts in this regard as well. On May 9th, Hong Kong Securities and Futures Commission licensed individual Pang Po-lin revealed that the market expects Hong Kong to promote the interconnection of virtual asset trading and security tokenization (STO). The Hong Kong Monetary Authority has already conducted sandbox research on matters such as the interbank settlement and clearing of tokenized deposits, preparing for future payment tests of digital Hong Kong dollars and stablecoins, and laying a solid foundation for innovative financial market infrastructure and future digitization.
In conclusion, although it may appear that Hong Kong’s crypto initiatives are lagging behind the US, a closer look reveals that Hong Kong’s crypto policy is, in fact, more open and diverse. From a broader perspective, Hong Kong’s crypto policy is progressing through top-level design and ongoing sandbox experiments, while the US is caught up in political struggles. This article believes that with the conclusion of the sandbox experiments, Hong Kong’s crypto policy will be implemented more quickly and strategically, potentially revitalizing Hong Kong’s Web3 sector and establishing the digital yuan as an economic cornerstone in the Web3 world.
