Hong Kong is set to become a hub for digital assets as new laws for cryptocurrency exchanges are introduced on 1 June. Officials hope that this move will help the local economy recover from the pandemic, social unrest, and the impact of a Beijing-imposed national security law. The new rules will allow retail investors to buy popular cryptocurrencies like Bitcoin on government-licensed exchanges. Observers predict that this will also cement Hong Kong’s position as a key route for mainland investors looking to trade crypto, which is outlawed in China.
New Regulations Boost Hong Kong’s Crypto Ambitions
Despite the “crypto winter” and a string of high-profile failures in recent months, such as the spectacular downfall of trading platform FTX and crypto-friendly US banks Signature and Silvergate, Hong Kong authorities have embraced the sector. The city has had a voluntary licensing system for crypto trading platforms since 2019, but licensees could only service professional clients with portfolios of at least HK$8 million ($1 million). This led to Hong Kong retail crypto traders using offshore websites or brick-and-mortar shops to buy and sell tokens for cash.
Regulators Strive for Balance in the Virtual-Asset Space
Hong Kong regulators hope to attract firms with favourable business conditions while balancing the need for investor protections, a well-developed area in traditional finance but less so in the virtual-asset space. The new regulations are mandatory, meaning all exchanges doing business in Hong Kong will need to get licensed. Some crypto businesses say that the switch is not expected to disrupt day-to-day operations as authorities allow a one-year transition period.
Crypto Stance in China Contrasts with Hong Kong’s Ambitions
China has maintained a strict ban on cryptocurrencies since 2021, whereas Hong Kong, a Chinese city with financial regulations separate from the mainland, holds special appeal for China’s crypto businesses and investors. China sees Hong Kong as a gateway to the lucrative mainland market, as it is common for mainland investors to be recognised as Hong Kong clients if they have a bank account and address in the city. Major crypto exchanges, such as Huobi and OKX, both founded in China, intend to apply for a Hong Kong license.
Regulations Aim to Protect Investors and Manage Key Risks
Hong Kong regulators said the new rules aim to “provide robust investor protection and manage key risks.” Exchanges can only provide “large-cap virtual assets”—such as Bitcoin and Ethereum—to retail investors and must set up internal committees to decide which cryptocurrencies to offer. Retail clients also have to undergo knowledge tests and risk profiling before they can trade. However, it remains unclear what level of knowledge is deemed enough. Products like stablecoins and crypto derivatives are off-limits for retail investors for the time being.
Giuliano Castellano, a law professor at the University of Hong Kong, said, “There is an explicit acknowledgement that these products are becoming more and more part of our economy. It’s wise to have a cautionary approach.” Retail-friendly rules taking effect in June will enable all exchanges doing business in Hong Kong to get licensed, providing clarity for investors and the crypto industry.
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