Hong Kong’s Crypto Hail Mary Is Risky Business

Hong Kong’s Crypto Hail Mary Is Risky Business

Tech News

Hong Kong’s embrace of cryptocurrencies could draw more business and talent to the city. But the industry comes with a lot of baggage—and also some China-specific risks.

The Chinese semiautonomous city is rolling out the welcome mat for the crypto industry, in a notable departure from the U.S. approach. Regulators have introduced a new licensing regime for cryptocurrency exchanges. That will enable them to serve individual investors, though small investors would be able to trade only bigger cryptocurrencies such as bitcoin. Hong Kong’s first exchange-traded funds backed by crypto futures were launched in December.

The city is no stranger to crypto. The failed exchange FTX was founded in Hong Kong, for example. But a clearer regulatory framework will certainly attract many crypto companies—especially when across the Pacific U.S. regulators are cracking down. The Securities and Exchange Commission has sued Binance and Coinbase—the two largest crypto exchanges—claiming they operated illegal exchanges. They have denied the charges.

But it is curious that Hong Kong is warming to crypto while the industry remains in the deep freeze in mainland China. Beijing declared all cryptocurrency-related transactions illegal in 2021, including through overseas exchanges providing services to Chinese residents online. Some may hope Hong Kong’s enthusiasm portends a thaw up north—but that is a long shot given persistent concerns in Beijing about crypto’s role in capital outflows and obsession with surveillance and data sovereignty.

Hong Kong’s pivot to cryptocurrency also comes as it is still contending with the fallout of nearly three years of stringent pandemic restrictions, a draconian national-security law and a slowing Chinese economy.

Singapore, in particular, has been gaining in asset management at Hong Kong’s expense. Hong Kong still leads in terms of assets under management, but the gap has been narrowing: AUM in Singapore grew 16% in 2021 versus 2% for Hong Kong.

Hong Kong’s stock market has also been sluggish in 2023 as global investors become less enthusiastic about Chinese stocks because of geopolitical concerns and China’s economic slowdown. Many Chinese companies are also opting to list in Shanghai and Shenzhen instead. The value of new listings in Hong Kong last year was the lowest since 2012, according to data from Dealogic.

A more friendly regulatory regime could therefore give the city’s finance business a much-needed boost. But as high-profile crypto collapses such as those of FTX and the crypto hedge fund Three Arrows Capital have illustrated, the industry is permeated with all sorts of unsavory dealings, too—from money laundering to fraud. That could potentially backfire for Hong Kong if local banking institutions were to get tied up, for example, in cases of interest to U.S. or other foreign regulators.

Striking a balance between protecting investors and attracting business will be hard, given the murky nature of the industry. And success could even end up as a problem as well, if Beijing concludes that a crypto-friendly Hong Kong ultimately undermines its own ability to monitor capital flows in the Greater China region.

Hong Kong has had a rough several years. Whether crypto is really a solution remains to be seen.

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