In December 2022, Hong Kong implemented a revision to its Anti Money Laundering (AML) policy to encompass virtual assets. This regulatory change generated positivity among crypto investors, who have been uncertain about regulations surrounding digital currencies over the past few years. Additionally, the country will create new regulations to accommodate crypto trading. So, what will happen if this regulation passes? Will it have a significant impact on the crypto market? This article will explain what is going on in the Hong Kong crypto market.
In September 2021, China banned all crypto transactions. This essentially shut down China’s mining industry which was the second-largest contributor to Bitcoin’s hash rate. However, Chainalysis data shows that the crypto industry in China is not dead. The value of crypto transactions in China in 2022 is worth around $200 billion. This figure is still higher than in South Korea and Japan. While China maintains its anti-crypto stance, interesting things are happening in Hong Kong.
China has a principle called One Country Two System where some regions can have their own system. Hong Kong is a Special Region of China with its own government, the Hong Kong Special Administrative Region (HKSAR).
Hong Kong is a part of China that can make its own policies independent of China. Hong Kong has always wanted to be a crypto hub for several years. However, it still has various restrictions regarding virtual assets such as crypto.
In late 2022, Hong Kong began making revisions to its AML (Anti Money Laundering) regulations to encourage the growth of the crypto industry. This revision encompasses different facets of virtual assets, including the licensing process that must be obtained from the SFC (Securities and Futures Trading Commission). After this revision, the SFC will regulate all aspects of virtual assets. This revision is the foundation of Hong Kong’s crypto regulation.
One interesting thing about Hong Kong and China’s contrasting crypto policies is that there is no major opposition from the Chinese side on this. In fact, several Chinese officials attended crypto events in Hong Kong. So, many people assume that this is subtle support from Beijing for Hong Kong’s crypto policy. It appears that the Chinese government aims to establish Hong Kong as a “laboratory” for exploring blockchain initiatives.
The process of Hong Kong crypto regulation (called virtual assets in the paper) is going through the consultation stage until March 31, 2023. Then, the regulation will be implemented on June 1, 2023. The regulation is actually the result of a consultation period dating back several years. However, the SFC finally decided to implement it this year.
There are some misconceptions regarding the regulations. Here’s a quick breakdown of what the June 2023 regulations cover.
This regulation will not guarantee that many crypto projects or CEXs will move and open their services in Hong Kong. Hong Kong seems to want to open its crypto market slowly to avoid situations like Terra and FTX where retail investors suffered huge losses. Therefore, the tradable assets will be very limited at first.
The crypto regulations in Hong Kong have some similarities with what Indonesia is implementing. Hong Kong and Indonesia both impose strict conditions where CEXs require an official license to operate. Indonesia and Hong Kong also do not allow futures and derivatives trading. However, Indonesia has eased its crypto asset entry requirements and retail has been free to trade crypto assets in recent years.
You can read the full version of the regulatory document on the Hong Kong SFC website.
Following the implementation of the SFC regulations on June 1, Hong Kong anticipates a large influx of CEX applying for licenses. The regulation also has a special section on a 12-month transition period for CEXs that were already operating. As mentioned, retail investor activity is unlikely to surge dramatically after June 1. Hong Kong will open its market slowly to protect small investors and the current regulations are the foundation.
One thing that is certain about the crypto regulation in Hong Kong is that it will attract various institutional investors and crypto projects looking to establish themselves in Hong Kong. In addition, it will also be easier for Hong Kong to create crypto regulations in the future as it already has a clear foundation.
The conversation about whether retail investors can use licensed CEX or not will also be clearer after June 1. We can also see how the Hong Kong government responds to the still bearish market as the main reason for the retail investor restriction is the huge risk that comes from market volatility. The opening of the Hong Kong crypto market to retail will send a good signal to crypto investors around the world.
Hong Kong has relatively small crypto transaction activity compared to countries in East Asia such as China and South Korea. Although this comparison is unfair because Hong Kong is only a city, it gives an idea of Hong Kong’s position in East Asia. The value of crypto activity in Hong Kong is almost $100 billion dollars, almost on par with Taiwan.
Hong Kong City also ranks 7th on the list of crypto hub cities in the world. This shows Hong Kong’s huge potential. Since Hong Kong’s announcement at the beginning of the year, several crypto assets that are related to Hong Kong or have a strong base in China have risen rapidly. For example, Conflux Network has risen nearly 300% since the beginning of January 2023. The same was true for Alchemy Pay , which rose by more than 300%. Alchemy Pay especially has a strong base in Hong Kong and is already working with several entities from Hong Kong.
You can also read about why Asia can be a hub for the crypto industry in the future.
We will see the full potential of the crypto industry in Hong Kong if the Hong Kong government decides to open its market post the implementation of June 1, 2023.
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