China Explores Hong Kong as a Crypto Hub: Investor Story

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Executive Summary: Despite China’s ban on crypto operations, Hong Kong is positioning itself as a regional crypto and Web3 hub, attracting blockchain companies and legalizing cryptocurrency retail. With a strong regulatory framework in place, Hong Kong has already received expressions of interest from over 80 companies providing crypto-related services.

Bitcoin (BTC) and Ethereum (ETH) should be the main beneficiaries, but emerging Web3 services also deserve attention. Investors should watch the evolving regulatory landscape and follow the moves in mainland China, as the relaxation of crypto restrictions could lead to a surge in the market.

China’s evolving stance on crypto

In the early years of bitcoins, China was one of the most important countries for the crypto industry, as it was home to many companies operating exchanges, wallets, and other services. . Additionally, China alone accounted for around two-thirds of all bitcoin mining in 2019-2020.

However, the Chinese government later decided that bitcoin and other cryptocurrencies have many risks that outweigh the potential benefits. The result was that Chinese authorities gradually cracked down on all retail crypto operations.

In 2017, it started with initial coin offerings (ICOs). The government shut down all ICO platforms and operations when they were at their peak. If a local exchange sold ICO tokens, it had to return the funds to investors.

Meanwhile, China clamped down on many crypto exchanges, but the nationwide ban came in 2021. As bitcoin skyrocketed to new highs, China banned crypto mining and banned all transactions cryptos, forcing mining and exchange companies to relocate.

Evolution of the share of countries in mining operations. Via Cambridge Center for Alternative Finance.Hong Kong as experience

Even though Hong Kong is officially part of China, it remains somewhat separate due to its status as a special administrative region (SAR). This status gives more freedom to the city; it could therefore choose not to apply Beijing’s cryptography rules. Due to the proximity to the mainland, many crypto companies might relocate to Hong Kong in search of better terms.

The good news is that Hong Kong plans to become a regional crypto and Web3 hub and even compete with Singapore in attracting blockchain companies, especially after Singapore took a tough stance on crypto companies last year. Above all, Hong Kong would have obtained the green light from Beijing.

In late 2022, Hong Kong said at its government-backed FinTech Week event that it plans to legalize retail cryptocurrency trading and develop a licensing system for cryptocurrency and cryptocurrency exchanges. other blockchain companies.

Some believe China will be watching the Hong Kong crypto story closely before returning to the issue of crypto itself.

Deng Chao, CEO of digital asset manager Hashkey Capital, commented on the Hong Kong crypto initiative:

In the future, it could serve as a model for policy formulation in other regions [in China] if he succeeds.

Strong regulation expected

As Hong Kong prepares to become crypto-enabled, it is creating an expansive regulatory framework for digital assets and blockchain operations. In February 2023, the city’s Securities and Futures Commission (SFC) released draft rules allowing investors to trade certain major cryptocurrencies starting June 1, 2023. However, it did not mention which coins would be supported.

The financial regulator plans to introduce a new licensing regime which will come into force on June 1. The new rules will require all centralized crypto exchanges doing business in Hong Kong to be authorized by the SFC. Regulatory requirements should be similar to those of licensed stockbrokers and automated trading platforms.

SFC CEO Julia Leung said:

In light of the recent turmoil and collapse of some of the world’s leading crypto trading platforms, there is a clear consensus among regulators around the world for regulation of the virtual asset space to ensure that investors are properly protected and that the main risks are effectively managed.

Who is interested ?

In February, the city’s Foreign Direct Investment Department received expressions of interest from more than 80 companies offering crypto-related services. The companies, located in mainland China and overseas, include crypto exchanges, blockchain infrastructure companies, blockchain network security companies, crypto wallets and payment operators, as well as other Web3 companies.

KuCoin, one of the largest crypto exchanges by trading volume, said last year it would open an office in Hong Kong. Huobi, OKX and Gate.io are other big companies planning to expand their presence in the city.

Interestingly, crypto firms have found an unexpected ally: China’s state-owned banks. Bloomberg quoted people familiar with the matter as saying Chinese banks, including Shanghai Pudong Development Bank (600000:CH), Bank of Communications Co. (BKFCF:US) and Bank of China Ltd. (3988:HK), either started providing banking services to crypto companies in Hong Kong or inquired with crypto companies.

Institutional investors are also watching Hong Kong’s transformation into a potential crypto hub, looking to become early beneficiaries of competition for market share.

Which tokens could benefit the most?

Hong Kong is set to preselect cryptocurrencies to be accepted for trade from June 1. Although he did not indicate which digital assets would be accepted, the list will likely include bitcoin (BTC) and Ethereum (ETH), which will likely remain the main beneficiaries.

Ethereum may be a big winner as Hong Kong has suggested becoming a Web3 hub. The majority of decentralized applications (dapps), non-fungible tokens (NFTs), and other Web3 items rely on Ethereum as their underlying infrastructure.

When it comes to currently popular dapps in the Asian region, the 1 inch (INCH) decentralized exchange continues to garner great interest. In terms of centralized exchanges, the leaders include Binance (BNB) and Kucoin (KCS), as well as OKX.

Another potentially winning blockchain will be Polygon (MATIC). This is related to the popularity of the game in Asia in general and in China in particular. According to research by DappRadar, Polygon is the preferred blockchain for game development, with 30.8% of web studio game developers choosing Polygon. This is significant, as Asia has 55% of the total number of global gamers, which amounts to some 1.7 billion users.

In China, gaming is dominated by Tencent (TCEHY: US), and while the company is not currently developing blockchain games, it recently announced a number of partnerships that indicate it may be moving into the blockchain space. in response to the news. Tencent will jointly develop a suite of blockchain API services with Web3 infrastructure provider Ankr (ANKR), and is also partnering with several Web3 infrastructure builders, including Avalanche (AVAX), Scroll, a Layer 2 Scale for Ethereum; and Sui (SUI), a relatively young layer-1 blockchain created by former Meta employees.

Can Hong Kong become a crypto hub?

Despite the strict regulations planned, the Hong Kong crypto hub plan has all the prerequisites to become a reality. The city’s initiative becomes even more relevant today as the United States, until recently one of the top jurisdictions for crypto businesses, has cracked down on crypto operations in response to the collapse of FTX.

Coinbase, the largest crypto exchange in the United States, is considering a move due to regulatory uncertainty. As we can see, the lack of clear regulations can be a problem. It remains to be seen how restrictive Hong Kong will be.

Key takeaway for investors

As Hong Kong takes steps to become a crypto and Web3 hub, investors should keep a close eye on the changing regulatory landscape and the potential impact on the crypto space. It makes sense to monitor the list of approved tokens when it becomes public and the level of support from mainland China. If the latter begins to relax its ban on crypto, the market is likely to explode.

Bitcoin (BTC) and Ethereum (ETH) should be the main beneficiaries, but emerging Web3 services also deserve attention.

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