Hong Kong: a crypto dreamland?

Gilbert Ng, founder of Mura Capital, reflects on the policies and regulations that are shaping Hong Kong to be an attractive crypto hub.

Since the beginning of 2023, Hong Kong has been the spotlight of the Web3.0 industry around the globe. Crypto exchanges, funds, startups, blockchain developers and IT security firms are all trying to be headquartered in Hong Kong or at least have a presence in the jurisdiction. This is all due to recent government policies and regulations such as the new Virtual Asset Service Provider (VASP) licence regime, the government’s policy statement on virtual assets, the financial secretary’s budget announcement on support for the Web3.0 ecosystem, and the issuance of equity traded funds (ETF) for crypto.

Albeit the excitement in the Web3.0 industry, it is certainly not the first time Hong Kong has become a crypto dreamland.

Prior to the outbreak of Covid-19, Hong Kong’s free market economy attracted numerous crypto startups. Examples include:

• Sam Bankman-Fried founded FTX in Hong Kong in 2019 before it moved to the Bahamas.

• Crypto.com was founded in Hong Kong as “Monaco” in 2016.

• Bitfinex, which was once the largest crypto exchange globally, was founded in Hong Kong in 2012. Its parent company, which is also a Hong Kong company, is the owner of Tether, the issuer of the largest stablecoin by market capitalisation, ie. USDT.

• BitMEX, which was once the largest crypto derivative exchange globally, was founded in Hong Kong in 2014. BitMEX also rented the most expensive office in Hong Kong, with $600,000 monthly rent in 2018.

Over the years many crypto startups have relocated out of Hong Kong to other jurisdictions for more favourable government polices and regulations. But recent policies are shaping Hong Kong to be a Web3.0 hub, again.

History of crypto policies and regulations in Hong Kong

To understand why recent government polices and regulations have gained so much traction, it is worthwhile to understand the previous crypto polices in Hong Kong.

Prior to 2018, there is one word to describe the government’s policies towards crypto – fragmented.

Since 2013, various government departments have warned the public on the risks associated with crypto. In March 2014, a government press release stated that “any virtual commodity operators whose transactions involve money changing or remittance services are required to apply to the Commissioner of Customs and Excise for a "money service operator" licence under AMLO (Anti-Money Laundering Ordinance)”.

A month later in April 2014, the Customs and Excise Department issued a statement reminding the “applicants for a MSO (money service operator) licence and members of public that, for the purpose of the AMLO, Bitcoin or other similar virtual commodities are not “money” and do not fall within the regulatory regime administered by the Customs and Excise Department”.

In February 2015, the Hong Kong Monetary Authority (HKMA) reaffirmed in a press release that Bitcoin and other similar virtual commodities are not regulated by the HKMA.

Throughout the years, the Securities and Futures Commission (SFC) issued warnings regarding virtual commodities and reminded licensed corporation of the risks of money laundering. In September 2017, SFC issued a statement on initial coin offerings (ICO) and stated that although certain ICOs may be securities, digital tokens in typical ICOs are usually characterised as a “virtual commodity”.

Up to this point, it was still uncertain as to which regulator(s) should regulate crypto, and in what manner to regulate crypto in Hong Kong. It was not until November 2018 that SFC provided a clearer picture on crypto regulations.

On Nov 1 2018, the SFC issued a Statement On Regulatory Framework For Virtual Asset Portfolios Managers, Fund Distributors And Trading Platform Operators, which set out guidance on the regulatory standards for crypto exchanges, crypto funds and fund distributors in Hong Kong. The SFC also invited crypto exchanges to participate in a regulatory sandbox, providing hopes for exchanges to potentially be granted a licence from the SFC.

But the market was less excited than expected. The first regulated crypto exchange licence was only issued in 2020, and it took two full years to complete the process. The second licence was issued in 2022, which took another two years. At that time, the crypto market still lacked support from other sectors, such as banking and insurance.

A look into the future

Starting from Oct 31 2022, the Hong Kong government started to take a proactive approach to shape Hong Kong as a Web3.0 hub. On that day, the government issued a Policy Statement on Development of Virtual Assets in Hong Kong, which set out the government’s determination and its approach to embrace crypto. The policy statement emphasised several important features, such as the new VASP licence regime, the possibility to allow retail investors to trade on licensed exchange, potential issuance of stablecoin licences, ETFs for virtual assets and pilot projects such as green bond tokenisation.

At first the market was sceptical. How long will it take to achieve those targets, given that regulator took two years to issue one licence? Then the market was amazed by the government’s execution ability and efficiency.

In December 2022, Asia’s first virtual asset ETF was listed on Hong Kong Stock Exchange. In the same month, the Hong Kong Legislative Council passed new amendments to the Anti-Money Laundering Ordinance and officially finalised the VASP licensing regime.

This was followed by the HKMA’s issuuance of the consultation results of a stablecoin regulatory regime, with the goal for it to be into effect in 2024.

In February 2023, the SFC issued a consultation paper seeking comments from the Web3.0 industry about the forthcoming VASP licensing framework and the allowance of retail investors’ participation in crypto investment. In addition, the financial secretary of Hong Kong, Paul Chan, announced that the government will allocate funding for the Web3.0 ecosystem and to set up a virtual asset task force.

The most incredible action taken by the HKMA so far to help the industry to solve banking access problems has been a meeting between crypto companies and banks. The HKMA’s deputy chief executive Arthur Yuen also stated in a press release that the HKMA will provide guidance to banks for providing banking services to Web3.0 industry players. As a result of the meeting, some banks have announced that they could now accept licensed crypto firms as clients.

There is no doubt that the Hong Kong government is determined to shape Hong Kong to be a Web3.0 hub. During the past few months, the industry has seen that the current Web3.0 traction is not pushed by a single regulator, but it has been the result of efficient coordination between various government departments. There are pain points that will need to be resolved, such as insurance coverage for crypto firms and their management, lack of local talent in the crypto industry, lack of crypto knowledge of the general public, lack of guidance on potential defi application of the regulations, and finding landlords who are willing to rent office space to crypto firm. These pain points are generally coming from the risks associated with crypto, or the lack of awareness of the crypto industry and government support will be crucial to resolve them. Education and demonstration projects, such as a licensed stablecoin being issued in Hong Kong and the usage of blockchain technology by the government can help. However, the industry is optimistic that crypto players and the government are moving to the same direction.