Hong Kong Opens Doors to Retail Crypto Trading
New regulations and Web3 budget position Hong Kong as a potential future leading market for retail crypto trading
Hong Kong, one of Asia’s largest capital markets, has grabbed the headlines in recent weeks following a series of moves to make the special administrative Chinese region a hub for crypto and Web3 startups. Hong Kong regulators have launched a proposal that would legalize retail crypto trading for the first time in the city's history. Additionally, the region will be one of the first in the world to launch a dedicated Web3 fund and a new set of regulations for stablecoin issuers.
Hong Kong's rapidly changing crypto landscape has been a subject of much speculation and concern, given the city's high-profile status internationally. We dive into the recent developments and their implications for Hong Kong's 7.5 million residents. We also consider its potential impact on the broader cryptocurrency market and why investors must pay attention.
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Hong Kong adapts to the changing crypto landscape
Hong Kong's current regulatory stance on crypto and Web3 is notably different from how the region first reacted to the public interest in digital assets. Following crypto's meteoric bull run in 2017, Hong Kong introduced a regulation the next year which allowed trading platforms to offer their services only to accredited investors. This pseudo-ban on retail crypto trading may have dampened public interest in cryptocurrencies, but it has been gradually lifted in the past year as Hong warms up to the growing industry.
Hong Kong’s Securities and Futures Commission (SFC) admitted in its recent proposal that the "virtual asset landscape has changed significantly" since the introduction of its regulatory regime four years ago. To align itself with the changing times, Hong Kong is proposing new laws to open up crypto to the investing public. Comments on the new rules are open until March 31st, with the final version expected to be implemented from June 1, 2022.
A key takeaway from the new rules is that retail investors can trade cryptocurrencies on regulated trading venues. The SFC is introducing a new licensing regime for exchanges with existing and new platforms required to meet certain requirements. The decision to open the door to retail investors follows last year's move by the SFC to allow retail to trade crypto-based derivatives and exchange-traded funds (ETFs).
Meanwhile, the Hong Kong Monetary Authority (HKMA) is on the verge of introducing new regulations for stablecoins. The new rule, expected to go live later this year, may require stablecoin issuers to set up a Hong Kong entity and maintain fully-backed reserves for issued assets.
Hong Kong also recently revealed that its 2023-2024 budget includes a 50 million HKD ($6.37M) allocation towards Web3 development. The budget will go towards the city's Cyberport initiative, funding seminars and honing talents to help Hong Kong tap into the opportunities presented by digital assets and the Web3 economy.
Could Hong Kong's move impact the global crypto market?
Astute investors have good reasons to pay close attention to Hong Kong’s new crypto stance. Despite its relatively low population, Hong Kong is one of the world’s most prosperous economies and home to Asia’s third-largest stock exchange – the Hong Kong Stock Exchange (HKSE).
HSKE reports a market capitalization of roughly HK$ 39 trillion ($5 trillion), trailing only Japan’s Tokyo Stock Exchange (TSE) and China’s Shanghai Stock Exchange (SSE) in the whole of Asia. Hong Kong is reportedly the world’s most active initial public offerings (IPOs) market, underlining the region’s huge appetite for investment opportunities.
By providing clear regulations for digital assets investors, Hong Kong appears intent on gaining a foothold on the emerging industry. After all, previous restrictions on preventing retail crypto adoption have generally proved abortive. A Visa study in late 2021 found that up to 18% of Hong Kongers are active cryptocurrency investors. It is estimated that around 245,000 residents or 3.27% of the city's population owns cryptocurrencies.
One potential impact of the plan to unlock crypto to retail investors is that the number of Hong Kongers that own cryptocurrency could rise substantially. A Finder survey found that the city ranks highest in the world in terms of stock trading with up to 25% of respondents investing as much as HK$25,000 ($2500). The opportunity to tap into a historically profitable cryptocurrency market may see a portion of such capital flow into the industry.
The recent launch of the first ever Bitcoin and Ethereum futures ETF for Hong Kong residents is another gateway for capital to flow into the market but has seen limited inflows to date. The CSOP Bitcoin Futures and Ether Futures ETFs garnered a mere $53.8 million and $19.7 million, respectively on their launch. Investments into the funds have also remained relatively low with the CSOP Bitcoin Futures having a slightly lower $51.4 million in assets under management at the time of writing.
The low uptick of investments into the ETFs may be attributable to the presence of a 2% yearly management fee and the fact investors only get exposure to the price of BTC, not the underlying asset. The option for retail investors to legally own and trade cryptocurrencies via regulated exchanges would eliminate these barriers and may spur greater participation.
Nevertheless, it is noteworthy that the newly proposed regulations also include clauses that severely limit the scope of cryptocurrencies available to retail investors. The SFC proposed that retail-facing exchanges only list "eligible large-cap virtual assets" included in "two acceptable indices" offered by "two independent index providers." This clause limits the number of cryptocurrencies to just Bitcoin and Ethereum, as these are the only assets listed on the HKSE through the aforementioned futures products.
Other restrictions include an ambiguous insurance requirement and a KYC process that mandates users to take a risk assessment test to determine how much the cryptocurrency exchange would let them invest. Exchanges will also not offer derivatives or futures trading, or offer staking or yield earning products to consumers. The absence of these offerings evidently means less revenue for exchanges and limits the ability of local platforms to compete with offshore exchanges.
Another net positive of Hong Kong's new stance on crypto is that it could boost investments into HK startups by institutional investors. Within the past year, Hong Kong-based firms HashKey Capital and Animoca Brands have raised $500 million and $185 million respectively to invest into the crypto and Web3 ecosystem. Clearer regulations may evidently accelerate investments into HK's crypto scene which in turn broadly impacts the global crypto market.
Hong Kong's sovereign stance on cryptocurrencies is notably different from Mainland China where almost all forms of crypto-related activities are under blanket ban. However, the indications from the newly proposed regulations are that Hong Kong remains cautious about allowing retail investors exposure to the emerging market. HK-based startups may be the biggest beneficiaries, with the new regulations likely to have less impact on the global crypto market.
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