Hong Kong’s crypto U-turn injects optimism into a tumultuous 2022

“2022 has been a tumultuous year for digital assets globally,” said Joy Lam, a partner at law firm Baker McKenzie in Hong Kong. “We’ve seen several high-profile incidents that have rattled investor confidence and shone a searing light on aspects of the nascent industry which need to be addressed quickly and decisively.”

As governments around the world begin to tighten scrutiny over the crypto industry after the spate of scandals, Hong Kong authorities have embarked on a new campaign to boost the city’s virtual asset sector and restore its status as a crypto hub.

For months, Beijing’s strict ban on cryptocurrency trading on the mainland, along with the Hong Kong government’s stringent Covid-19 travel controls and ambiguous attitude towards cryptocurrencies, had increasingly frustrated the city’s industry players, who complained that talent and businesses had been driven away to rival markets including Singapore.

Then on October 31, during the city’s annual FinTech Week, the Hong Kong government unveiled a range of policy measures aimed at developing the virtual asset industry, including legalising retail participation with a new licensing regime and allowing exchange-traded funds (ETFs) with exposure to bitcoin futures.

The move marked a major U-turn in the city government’s approach towards virtual assets, which until recently were only allowed to be traded by individuals with a portfolio of at least HK$8 million.

“The raft of approvals that we have seen from the SFC this year for new virtual assets related products and services, taken together with the SFC’s decision to allow some degree of retail investor access to virtual assets, are a game changer for virtual asset investors and businesses alike in Hong Kong because they expand access,” said Lam.

Hong Kong’s new regulatory framework is expected to draw crypto businesses from mainland China to the city next year, even as the abrupt meltdown of FTX came right on the heels of the Hong Kong government’s policy pivot, rattling investors.

“As travel restrictions continue to ease and inbound and outbound travel return to pre-Covid levels, 2023 is set to be a bumper year for events and conferences in Hong Kong, further helped by more Chinese investors deploying funds into Web3 investments,” said Vivien Khoo, co-founder and chair of industry association Asia Crypto Alliance (ACA).

“Earlier this year, the Singapore government issued a series of policies to attract virtual asset and Web 3.0 providers,” said Kenneth Lai, founder of Hong Kong-based online payments firm Payment Asia. “But now we see more people coming back to Hong Kong, or setting up offices in Hong Kong as their tech or operation centre.”

In December, Hong Kong passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022, which specifies that the licensing regime for virtual asset services will come into operation on June 1 next year, when the regulator may receive an influx or applications.

“I expect that in 2023, Hong Kong will make up a lot of ground that has been lost in recent years in the battle to be crowned Asia’s digital assets hub,” said Baker McKenzie’s Lam.

She added that there is a sense of urgency among many of her clients, who are racing to ensure that their businesses are established and appropriately licensed before the next bull market starts, when they expect significantly greater investor demand.

In the short term, however, cryptocurrency companies and investors may still need to brace for further fallout from the FTX fiasco, according to ACA’s Khoo.

“We will see continued consolidation in the market with more companies, with either direct or indirect crypto exposure, under stress and defaulting, as well as closure of funds,” said Khoo. “And the contagion effect will continue well into the first half of 2023.”