Could Hong Kong really become China’s proxy in crypto?

With its partial autonomy, the island metropolis of Hong Kong has historically served as “a gate to China” — the native commerce heart, backed by clear English-style widespread regulation and an brazenly pro-business authorities technique. Could the harbor, residence to seven million inhabitants, inherit this position in relation to the crypto trade, changing into a proxy for mainland China’s experiments with crypto? 

An impulse to such questioning was given by Arthur Hayes, the previous CEO of crypto derivatives big BitMEX in his Oct. 26 weblog put up. Hayes believes the Hong Kong authorities’s announcement about introducing a invoice to control crypto to be an indication that China is attempting to ease its means again into the market. The opinion was instantly replicated in a variety of business and mainstream media.

What occurred

In late October, the pinnacle of the fintech unit on the Securities and Futures Commission (SFC) of Hong Kong, Elizabeth Wong, introduced the liberalization of Hong Kong’s regulatory panorama by permitting retail traders to “immediately make investments into digital belongings.” 

Up till lately, solely people with a portfolio price at the very least $1 million (which marks about 7% of town’s inhabitants) have been granted entry to centralized crypto exchanges by the SFC. The regulator has additionally been reviewing whether or not to permit retail traders to speculate in crypto-related exchange-traded funds, Wong famous.

Roughly a number of days after, on Oct. 21, Hong Kong’s Secretary for Financial Services and the Treasury, Christopher Hu, shared his metropolis’s fintech plans, amongst different efforts, directed at “transferring wealth to the subsequent era.” The key’s establishing a regulatory regime for digital asset service suppliers, and a sure invoice was already launched to town’s lawmakers, as Hu specified.

Finally, on Oct. 31, through the metropolis’s FinTech Week 2022, Hong Kong Financial Secretary Paul Chan assured attendees that the digital transformation of economic companies is a key precedence for his crew. Chan’s colleague, the CEO of the Hong Kong Monetary Authority (HKMA), Eddie Yue, promised “radical open-mindedness” concerning the improvements. 

According to him, the HKMA is in the method of creating a regulatory regime for stablecoins and has already issued tips to banks about cryptocurrency or decentralized finance-related companies.

Crackdown on the Mainland, uncertainty on the island

Hong Kong’s intention to open up for crypto comes a yr after a devastating crackdown on the trade in Mainland China. Until 2021, the People’s Republic Of China has been having fun with a standing of a world chief in hash fee and cryptocurrency mining. 

Starting in May 2021, Chinese regulators started prohibiting involvement in crypto for monetary establishments, then mining operations and, lastly, the work of exchanges and buying and selling for people. Although that didn’t successfully outlaw the crypto possession as such, any potential for institutional improvement of the crypto trade in the nation was frozen.

Back then, Hong Kong officers didn’t verify (or deny) that the island metropolis would adjust to Beijing’s hardline coverage on digital belongings, however traders however began contemplating their choices.

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While at the moment it might sound ironic, in 2021, relocating his headquarters to the Bahamas, Sam Bankman-Fried of FTX was highlighting the significance of long-term regulatory steering and readability, which Hong Kong laced in his opinion.

This uncertainty took its toll certainly — after attracting $60 billion in crypto between July 2020 and June 2021, Hong Kong began to witness the most important gamers opening up various places of work in the Caribbean or neighboring Singapore. FTX was joined by the likes of Crypto.com, BitMEX and Bitfinex.

The Hayes narrative

Mixing two plot traces — one which traces all a very powerful crypto improvements to China, and the opposite which notes Hong Kong’s historic position because the entry level to communist China — Hayes argued:

“Hong Kong’s pleasant reorientation in direction of crypto portends China reasserting itself in the crypto capital markets.” 

According to Hayes, Hong Kong authorities can not diverge too removed from Beijing in their choices, so opening up the crypto market amid the crackdown in the Mainland couldn’t be an autonomous act. 

The cause behind Beijing’s benevolence to such a U-turn lies in the nervousness of Hong Kong dropping its standing because the principal Asian monetary heart. It has definitely faltered through the COVID-19 pandemic when the hardline lockdown coverage, exercised in China and Hong Kong, brought about an funding escape wave to the neighboring competitor, Singapore, which had eased its restrictions a lot earlier.

Another main issue behind China’s potential help of Hong Kong’s crypto liberalization, based on Hayes, is the previous’s downside with an enormous United States greenback commerce proficit. Historically, like nearly any nation in the world, China has been storing greenback revenue in belongings like U.S. Treasury bonds.

But the instance of Russia, whose overseas belongings had been blocked attributable to monetary sanctions after an invasion of Ukraine, has nervous Chinese officers. Hence, it’s extremely possible they’d search one other sort of asset in which to retailer their USD revenue. Cryptocurrencies and associated monetary merchandise is likely to be the choice.

Reality verify

Speaking to Cointelegraph, David Lesperance, founding father of Lesperance & Associates regulation agency, who has been coping with Hong Kon and China-based shoppers for greater than 30 years, doubted the potential curiosity of the Chinese authorities in opening as much as crypto:

“Rather, they’re in having full management over their inhabitants, together with those that reside in HK. This is demonstrated by such actions as social credit score scoring, facial recognition, family registration, exit bans, zero COVID-19, and so forth.” 

Putting crypto apart, current years have seen tightening political, cultural and financial management of China over Hong Kong with the nationwide safety regulation of 2020 sweeping the earlier civil freedoms away, a change in college curricula to emphasise the Chinese historical past of the area and the continuing integration of Mainland firms into the island’s juridical house. 

These indicators of the shortening distance between the Mainland and Hong Kong would possibly entice the eye of worldwide regulators. As one banker mentioned to CNN lately, “The worst situation is that the West would deal with Hong Kong as the identical because the Mainland China, after which Hong Kong would endure the type of sanctions.”

The elephant in the room is China’s central financial institution digital foreign money (CBDC) challenge. The speedy improvement of the digital yuan (also called e-CNY) and the ban on crypto is hardly a coincidence. As Ariel Zetlin-Jones, affiliate professor of economics at Carnegie Mellon University’s Tepper School of Business, instructed Cointelegraph again in 2021, in the aftermath of the crackdown:

“China clearly desires to advertise the digital Yuan. Removing its opponents by banning crypto actions is a method to do that so it appears affordable to think about this motivation as one rationale for his or her insurance policies.”

The digital yuan turned essentially the most actively transacted foreign money in a current six-week m-Bridge pilot of cross-border funds among the many digital currencies issued by central banks of China, Hong Kong, Thailand and the United Arab Emirates. As state-owned Chinese media famous after the experiment, “Hong Kong [is] poised to be a vibrant heart for e-CNY’s use in worldwide commerce.”

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Lesperance emphasised that the introduction of e-CNY and the persevering with restrictions on the remainder of the crypto, even relating to home miners, confirms Beijing’s drive to manage the monetary sphere in the primary place:

“Control over the monetary lives and belongings of the Chinese residents is the last word management. This will likely be achieved when all transactions are achieved in e-yuan. Facilitating different crypto-currencies would undermine this transfer towards full management.”