Hong Kong throws open the doors to cryptocurrency even as debate rages on whether it's a security or commodity

·5 min read

The debate over whether cryptocurrencies are securities or commodities has continued among regulators in the US as it would determine which agency assumes primary oversight of digital assets.

And the confusion persists, with chairman of the Commodity Futures Trading Commission (CFTC) Rostin Behnam in March calling the ether token a commodity during a congressional hearing, while the US Securities and Exchange Commission (SEC) Chairman Gary Gensler argued that every cryptocurrency other than bitcoin falls under securities laws.

"The [Biden] administration, like many administrations, has a lot of priorities. And it appears that providing a constructive atmosphere in the United States for cryptocurrency is not among those priorities any more," Bill Hughes, Senior Counsel and Director of Global Regulatory Matters at New York-based blockchain software company ConsenSys, told Forkast in an interview.

China banned cryptocurrency trading in 2021 and Hong Kong turned frosty on the industry as a result, even though it was home to several early cryptocurrency businesses, including the now-bankrupt FTX that left for the Bahamas where it eventually collapsed.

Toward the end of 2022, Hong Kong did an about face, declaring that new rules will be introduced in June and sending a message that the city was ready to do business with the digital asset industry.

More than 80 foreign and Chinese companies have expressed interest in establishing cryptocurrency operations in the city, Christopher Hui, Hong Kong's Secretary for Financial Services and the Treasury, said in a speech at the Aspen Digital Web3 Investment Summit in March.

"I am pretty certain we will see more cryptocurrency firms, entrepreneurs and projects move to Hong Kong. It's not guaranteed that Hong Kong will be the cryptocurrency hub it used to be, but Hong Kong's decision to pursue its position as a cryptocurrency hub once again is noteworthy and of global significance," Ben Caselin, chief strategy officer at Dubai-headquartered cryptocurrency trading platform MaskEx, told Forkast in an e-mail.

While cryptocurrency firms moving to Hong Kong should expect tight regulations, the city aims to become a global hub for the industry, Eddie Yue, the chief executive of the Hong Kong Monetary Authority, said earlier this month.

"There is a chance of more cryptocurrency firms moving to Hong Kong as they seek a friendlier environment. Firms could decide to move entirely or to open offices in the city to benefit from Hong Kong's financial and business infrastructure," said Denys Peleshok, head of Asia at London-based financial trading firm CPT Markets.

The cryptocurrency industry could tap Hong Kong's financial sector for expansion and attracting talent. However, competition could remain fierce as other Asian majors look to lead developments in the industry.

Japan has said it sees a future in blockchain technology and released a white paper in April that laid out the nation's ambitions to achieve widespread adoption of Web3 technologies including cryptocurrency. The East Asian country has moved on from the lessons of Mt. Gox - an exchange that once handled as much as 80% of all global Bitcoin trades before it collapsed in 2014.

South Korea, too, is charging up to grab a piece of the Web3 industry, with the announcement of an investment of about US$21 million into local services looking to utilise the metaverse. South Korea has also established a US$30 million metaverse fund to help start-ups expand. The country has stated that digital assets that have the characteristics of a security will be regulated under the Capital Markets Law, while those outside that definition will be governed by regulations for digital assets that are currently being prepared.

"Hong Kong could be facing strong competition from Japan and South Korea, both of which have advanced regulation for cryptocurrencies. In this regard, Hong Kong could stand as a newcomer and could be obliged to put up some additional efforts to level the playing field," said Peleshok of CPT Markets. "Both countries could provide a larger talent pool that cryptocurrency firms could need to develop more rapidly."

Caselin of MaskEx added, "Both South Korea and Japan are much more focused on their domestic systems and populations. They play a very important role in the industry at large and for a long time Japan has been at the forefront of regulation."

Singapore, which sought response on two consultation papers published in October on proposed regulatory measures, aims to publish cryptocurrency and stablecoin consultations feedback by the middle of this year. However, a series of bankruptcies and liquidations last year has led the city state to adopt a more cautious and risk averse approach. While Singapore still wants to build the island nation into a "cryptocurrency hub" fuelled by instant settlements, tokenised assets and programmable money, it does not encourage speculative cryptocurrency trading, especially for retail investors.

"What this means for Singapore is that tighter regulations could make it more difficult for some cryptocurrency trading platforms to operate in the jurisdiction and increase compliance costs for those that do. This could lead to some consolidation in the industry and potentially slow down its growth in the short term," said Vincent Chok, chief executive officer of Hong Kong-based consultancy First Digital Trust.

Simultaneously, Dubai's announcement of an Islamic Coin may turn the city into the next cryptocurrency hub. The Emirati state has said it aims to be one of the top 10 cities globally in the metaverse economy, creating 40,000 virtual jobs and adding US$4 billion to the city's economy.

Dubai has been attracting cryptocurrency exchanges with its favourable regulatory environment and faster approvals for licenses, including granting licenses to Singapore-based Crypto.com and Hong Kong's Q9 Capital.

"Hong Kong, along with Dubai and the UAE will be the most important cryptocurrency cities in Asia at large," Caselin said.

"For Hong Kong, it might be less about adopting a new monetary network, and more around capital allocation, while in Singapore, tokenisation to expand the reach of its capital markets might be the right move. To each its own - we all have a role to play," Caselin added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.