Despite the industry’s soiled reputation, Hong Kong is still committed to its goal of being Asia’s capital of digital assets. This position has attracted the tentative interest of shattered crypto firms seeking ways to rebound.
In order to develop a new regulatory framework that can safeguard investors and promote growth, the city asserts that it will use the lessons of a $2 trillion crypto market collapse and a wave of global bankruptcies, including the demise of the FTX exchange.
The three-month-old shift toward promoting the crypto industry is a part of a larger initiative to rehabilitate Hong Kong’s reputation as a financial hub after prior Covid-related restrictions and political upheaval caused a brain drain. The city’s push, however, has been hindered by recent layoffs at digital asset enterprises.
One of the companies evaluating Hong Kong’s developing regulations is Matrixport Technologies Pte, a crypto lender with roughly 300 employees. Singapore, the company’s home country, is now so suspicious of virtual currency that it may outlaw retail token lending altogether.
According to persons familiar with the situation, Matrixport is already considering opening an office in Hong Kong while it waits for the outcome of a Singapore virtual-asset license application.
The persons noted that because Hong Kong’s policies are still changing and the discussions are private, it is difficult to estimate the possible return on the necessary investment.
A consultation on enabling retail trading is part of Hong Kong’s cryptocurrency plan, which also includes a mandated exchange licensing framework that is slated to begin in June. Exchange-traded funds are now permitted to invest in Bitcoin and Ether futures offered by CME Group Inc. Over $80 million has been raised by three such ETFs that have been introduced since mid-December.
According to the report, Companies are interested in the potential crypto regime but also cautious pending more specifics.
ETF Potential
If a currently limited scheme allowing Chinese investors to buy some stock ETFs in Hong Kong is one day expanded to span cryptocurrency, Sin suggested longer-term potential for asset managers. By year’s end, according to the report, the total amount of money managed by Hong Kong ETFs may exceed $50 billion.
As early as the second quarter, according to Sin, regulators should approve spot Bitcoin ETFs. A spot fund may be started if the city grants the go-ahead, according to Samsung Asset Management, which in January launched the Samsung Bitcoin Futures Active ETF in Hong Kong.
As a result of its laissez-faire reputation in the early days of digital assets, the region is in some respects making a complete circle. It was once a hub for cryptocurrency. FTX and Alameda Research, two now-defunct businesses founded in Hong Kong in 2019, belonged to discredited former crypto tycoon Sam Bankman-Fried. It originally served as the headquarters for Binance Holdings Ltd., the largest exchange for digital assets.
However, over time, indications that authorities were adopting a stricter regulatory approach, such as limiting access to cryptocurrency exchanges to clients with portfolios worth at least HK$8 million ($1 million), caused some crypto businesses to reevaluate their strategies. Then, in 2021, China completely outlawed cryptocurrency, which diminished the city’s appeal as a route for mainland money. In the same year, FTX and Bankman-Fried moved to the Bahamas.
FTX’s Shadow
As the leader of the defunct FTX business, Bankman-Fried is currently being charged by the US with one of the largest financial scams. Its bankruptcy is still having an effect; most recently, cryptocurrency lender Genesis Global Holdco LLC, which may owe creditors more than $3 billion, filed for Chapter 11 bankruptcy last month.
The risks shown by these and other recent crypto failures are being addressed by regulators worldwide. Hong Kong’s Financial Secretary Paul Chan has stated that the city is still dedicated to becoming into a regional hub for cryptocurrencies.
This quarter, there must be a consultation on the guardrails and permitted tokens for retail purchasers. The legality of the automatically executing, software-based smart contracts that are essential to many blockchain-based financial services, as well as the property rights for tokenized assets, are also being reviewed by officials.
Since a bubble in token prices burst and investors fled last year, the virtual asset market is still in a severe decline, which poses a significant obstacle to Hong Kong’s aspirations. Several companies, including Huobi, Crypto.com, and Coinbase Global Inc., have cut nearly 1,600 positions in the cryptocurrency industry this month.
The idea that Beijing is gradually taking control of the financial center is another worry. Due to worries about irrational speculation and the enormous amount of energy used by the computers that mine tokens and safeguard blockchain networks, China continues to prohibit the majority of cryptocurrency activities.
According to blockchain expert Chainalysis Inc., Hong Kong experienced the least growth in East Asia outside of a downturn in China in terms of digital-token transaction volume in the 12 months through June compared to a year earlier. In the second half of 2022, the bear market in cryptocurrencies only became worse.
A lot of businesses are in a holding pattern as they wait for a rebound and the final version of Hong Kong’s revised digital-asset regulations against this backdrop.
When the government’s road map is more clear regarding what is permitted and encouraged, Justin Sun, who is responsible for setting the strategy for the Huobi exchange, stated, they are ready to expand our local operations and add jobs. Hong Kong, he claimed, is becoming the driving force in regulated crypto adoption in the Asia Pacific.
