In my previous article, I analyzed the regulatory attitude of Mainland China towards cryptocurrencies, whereas, in this article, I am going to analyze the regulatory attitude of one of China´s two Special Administrative Regions, Hong Kong, towards cryptos.
As explained last week, the Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not cryptocurrencies, even though there is of course some relation between both categories (CBDCs could to some extent be categorized as stable coins).
As I said, the rationale behind CBDCs and cryptos is actually the opposite: whilst CBDCs are Central Bank Money adopting a digital form (therefore, legal tender issued by a central bank, representing a claim against that central bank) and thus centralized, cryptocurrencies are a key pillar of the movement known as DeFi (Decentralized Finance).
Both Hong Kong and Macau are poised to play a key role when it comes to Digital Yuan´s tests and future roll-out. This is so because, unlike the tests conducted thus far in the Mainland (focused on domestic payments), the tests in Hong Kong and Macau will focus on cross-border payments, and a cross-border deployment of the Digital Yuan is China´s main rationale behind its CBDC, since it will help take some of the USD-denominated exports and convert them into yuan-based exports, thus challenging the global domination of the USD.
In this sense, last December 4, Hong Kong’s Monetary Authority (HKMA) Chief Executive Eddie Yue announced that the HKMA and the Digital Currency Institute of the People’s Bank of China are discussing the technical pilot testing of using the Digital Yuan for making cross-border payments, and are making the corresponding technical preparations.
Hong Kong, as the largest offshore yuan trading center and a crucial part of the Guangdong-Hong Kong-Macau Greater Bay Area, will be a good case study for the use of the Digital Yuan for cross-border transactions, and Macau will be so as well. It is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers´ retail payments, but also to enhance the yuan as a payments currency in the global financial system.
However, all these things I just explained in the last paragraphs apply to the Digital Yuan and to the importance that its tests in Hong Kong and Macau will have, but what about Hong Kong´s regulatory attitude towards cryptocurrencies?
Mainland China has undoubtedly adopted a tough stance on cryptocurrencies, but this is not the case in Hong Kong.
Ashley Alder, the CEO of the Securities and Futures Commission (SFC), announced in early November, during the Hong Kong FinTech Week, a proposed new licensing regime for virtual assets trading in Hong Kong, with the launch of public consultation (which was due on January 31, 2021) on legislative proposals designed to enhance anti-money laundering and counter-terrorist funding (AML and CTF) in Hong Kong.
Hong Kong will regulate all cryptocurrency trading platforms operating in the financial hub, changing its previous opt-in approach. All cryptocurrency trading platforms that operate in the Special Administrative Region, or target investors there, will need to apply for an SFC license. According to Ashley Alder’s speech, “successful applicants would be subject to expectations covering their financial resources, experience and the soundness of their business and risk management“.
The operators must make sure there are no retail investors trading on their platforms, which should only be available to professional investors who have over HK$8 million ($1m) in assets, according to Clara Chiu, director of licensing and head of the FinTech Unit of the SFC.
The new regulations will cover all types of virtual assets’ trading platforms operating in Hong Kong, as well as overseas platforms targeting local investors.
Related to this, the FinTech Association of Hong Kong, in his Response to the Public Consultation on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (February 1, 2021), welcomed the continued endeavors of the Financial Services and the Treasury Bureau (FSTB) to enhance anti-money laundering and counter-terrorist financing (AML/CTF) regulation in Hong Kong.
The association considered, among many other things, that “a balanced approach should be taken that serves to mitigate the risks of financial crime and which protects Hong Kong persons, but also which does not unnecessarily impose restrictions on doing business in Hong Kong. We do feel however that the current legislative proposals require further calibration to more appropriately balance these factors”
To me, the proposed regime will be mostly beneficial, since it will put everyone in a level playing field and will give investors a safety net, thus helping the digital asset market to grow in the long run by giving investors more confidence in this new asset class.
However, excluding retail investors from accessing virtual asset services in Hong Kong does not seem a good solution. This segment represents a significant portion of the market, and, more importantly, this investor groups is the one that, due to its nature, precisely needs more regulatory protections. As stated by the FTAHK, “to willfully allow such activity to be driven offshore, and potentially towards unregulated venues, does not feel in our opinion to be in the best interest of the investing public.” Therefore, retail investors should, in my opinion, be allowed to access virtual asset services.
To sum up, Hong Kong is eager to promote CBDCs, not only through testing the Digital Yuan for cross-border payments, but also through engaging in other CBDC-related projects, such as the Inthanon-Lion Rock Project. However, when it comes to cryptocurrencies, the approach in Hong Kong is different from that in the Mainland: the Special Administrative Region is more friendly towards cryptocurrencies, although the proposed new legislation has some areas that should be discussed and perhaps even amended, such as excluding retail investors from accessing virtual asset services in Hong Kong.
The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.
