How is it possible for Hong Kong to compete as a global virtual asset center?

Author: Runsheng, ChainCatcher

In the face of Web3, FOMO has always been the norm. This has become increasingly evident during the global economic downturn, affecting both individuals and governments alike. As Chinese Web3 entrepreneurs flock to neighboring Singapore, Hong Kong seems to have recently fallen into FOMO as well.

On October 17, Hong Kong's Financial Secretary Paul Chan revealed that Hong Kong will host a FinTech Week from October 31 to November 4, during which the Special Administrative Region government will release a policy declaration regarding the development of virtual assets in Hong Kong. The content will cover "vision and strategy, regulatory framework, stance on allowing investors to access virtual assets, and pilot projects to harness the technological advantages brought by virtual assets."

Paul Chan stated, "The policy declaration will clearly express the government's position, showcasing our vision to develop Hong Kong into an international virtual asset center and our commitment to exploring financial innovation together with the global asset industry."

The news immediately attracted keen market attention, particularly the discussion around the "international virtual asset center." Prior to this, cities like Tokyo, Singapore, Seoul, Bangkok, and Ho Chi Minh City had announced plans to build crypto finance centers and virtual asset hubs. Especially Singapore, which has seemingly become a pilgrimage site for Chinese Web3 entrepreneurs. Countless entrepreneurs and investment institutions have gathered here, with active capital and flowing talent, along with skyrocketing local rents, making Singapore a prominent crypto center in Asia.

The industry is filled with anticipation for the upcoming policy declaration from Hong Kong, and the sentiment behind it is clear: Hong Kong was once an important capital center in the crypto world. Backed by the once-thriving crypto landscape of mainland China, along with a good rule of law environment, favorable tax policies, and a relaxed regulatory environment, Hong Kong attracted numerous early-stage projects in the crypto space to raise funds and create wealth legends. Well-known crypto institutions like Bitfinex, BitMEX, FTX, Alameda, and Crypto.com all started here and went global.

However, the endless past glory contrasts with an unavoidable awkward reality: in recent years, Hong Kong has become disconnected from the fast track of the crypto world. A clear example is that several well-known crypto institutions have announced their headquarters relocation elsewhere. FTX and Alameda moved to the Bahamas, while BitMEX's core operations moved to Singapore. The gaze of Chinese Web3 entrepreneurs has now shifted from mainland China and Hong Kong to Singapore and even further afield, with new entrepreneurs often unaware of Hong Kong's brief period of brilliance.

The lockdown policies and travel restrictions caused by the COVID-19 pandemic are the most direct reasons, leading to increased communication costs and forcing most crypto institutions to leave. According to CoinDesk, BitMEX CEO Alexander Hoeptner explained the move of its core department to Singapore by saying, "We love Hong Kong very much, but because of the COVID-19 pandemic, we moved out," as many foreign employees wanted to be closer to their families.

Beyond the pandemic, a more significant reason for Hong Kong's disconnection from Web3 is the severe regulatory constraints faced by the mainland market it relies on, which has caused the power center of the crypto world to shift westward. Since then, Hong Kong is no longer the capital center for project parties and exchanges to raise funds.

Of course, these factors alone are not enough to completely hinder the development of Hong Kong's crypto industry; the core issue that the industry truly cares about is regulation. International accounting firm Deloitte once surveyed financial practitioners in ten major countries or regions, including mainland China and Hong Kong, and based on this, wrote the report "2021 Global Blockchain Survey," which showed that regulation is one of the main obstacles to recognizing digital assets. Among all financial institution practitioners surveyed, 63% viewed regulation as the biggest barrier to recognizing digital assets.

Additionally, according to Blockworks, when FTX moved its headquarters from Hong Kong to Nassau in the Bahamas in September 2021, FTX founder SBF explained that "the positive attitude of the Bahamas and its regulators towards cryptocurrencies" was one of the main reasons for FTX's relocation, as its regulatory environment is more favorable than Hong Kong's.

In short, regulatory uncertainty may be the biggest factor hindering Hong Kong and other regions from becoming centers of the crypto world. So, what is Hong Kong's current regulatory policy regarding virtual assets? What will the new regulatory policy look like after adjustments and improvements? Can Hong Kong surpass Singapore to become an international virtual asset center?
Public information shows that Hong Kong still does not have a dedicated legal system for the virtual asset industry; instead, it issues corresponding licenses within the virtual asset framework based on existing financial service licenses for companies applying for virtual asset licenses. In December 2020, OSL Exchange announced that it had obtained the first virtual asset license issued by the Hong Kong Securities and Futures Commission. This was the first cryptocurrency license issued in Hong Kong.

Between November 2020 and January 2021, the Hong Kong SAR government's Financial Services and the Treasury Bureau conducted public consultations on amending the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and the licensing system for Virtual Asset Service Providers (VASP), and published a "Consultation Summary" in May 2021. On July 6, 2022, the amendment bill for the Anti-Money Laundering and Counter-Terrorist Financing Ordinance completed its first reading in the Hong Kong Legislative Council, with government sources indicating that the bill is expected to be passed in the first quarter of 2023.

The "Amendment Bill" establishes a licensing and regulatory system for virtual asset service providers based on the consultation summary and incorporates it into written legislation. Specifically, anyone operating a business providing virtual asset services in Hong Kong, or actively promoting (as defined by the amendment bill) virtual asset services to the public in Hong Kong, must apply to the Hong Kong Securities and Futures Commission for a virtual asset service provider license ("VASP license") in advance and comply with relevant anti-money laundering and counter-terrorist financing legal provisions.

Furthermore, conducting regulated virtual asset activities without a license can result in a fine of up to 5 million HKD and imprisonment for seven years; if it constitutes a continuing offense, an additional fine of 100,000 HKD can be imposed for each day the offense continues.

Currently, the relevant licenses cannot provide services to retail investors and are only available to professional investors or institutions. Critics point out that this will push ordinary citizens towards using foreign-registered platforms. The "Amendment Bill" adds that, without a license, Hong Kong-based foreign institutions or individuals actively promoting virtual asset trading from other places to the public in Hong Kong will also be considered to have committed the same offense.

It is worth noting that, according to Elizabeth Wong, the head of licensing at the Hong Kong Securities and Futures Commission and the financial technology department, the regulatory agency is considering allowing retail investors to invest directly in crypto assets. Elizabeth Wong emphasized, "Hong Kong's crypto regulatory environment is different from that of the mainland and can introduce its own legislation to regulate cryptocurrencies."

In an interview with China Fund News, Liang Hanjing, head of financial technology at the Hong Kong SAR Invest Hong Kong, pointed out that the Hong Kong government is highly concerned about the development of the fintech industry, including digital asset trading and related technologies, and is actively advancing relevant preparations. Given the risks of money laundering associated with blockchain-based virtual asset trading, Hong Kong, as an international financial center, must align its anti-money laundering legislation with international standards to enhance global investors' confidence in Hong Kong.

Liang Hanjing explained the steps involved: the first step is to have a compliant trading platform recognized by the Hong Kong Securities and Futures Commission, which has already been completed, with several virtual asset trading platforms like OSL and HashKey having completed registration.

The second step is to have products, and currently, trading platforms and other institutions are collaborating to design pilot securities token products. The third step is to promote securities token products. "The most important step is to improve the relevant legislation for the regulation of virtual asset service providers," Liang Hanjing said.

In summary, based on the need for risk prevention against illegal activities such as money laundering and referencing international experience, Hong Kong is establishing a licensing and regulatory system for virtual asset service providers, distinguishing it from mainland China's regulations. Since the end of 2020, Hong Kong has implemented a licensing regulatory system for virtual asset trading platforms like OSL and supports the issuance of securities token products. Only after obtaining a license from the Hong Kong Securities and Futures Commission can one operate legally, currently only available to professional institutions and professional investors. However, Hong Kong is considering providing retail investors with some trading space.

In comparison, Singapore recognizes cryptocurrencies as legal. The Monetary Authority of Singapore (MAS) categorizes cryptocurrencies into three types: Utility Tokens, Security Tokens, and Payment Tokens. Among them, Utility Tokens are not regulated, while Security Tokens and Payment Tokens are governed by two specific regulations: the "Guidelines on Digital Token Offerings" and the "Payment Services Act." The "Guidelines on Digital Token Offerings" came into effect in May 2020, and the "Payment Services Act" came into effect in January 2020. Additionally, the Singapore Parliament passed the "Financial Services and Markets Bill" in April 2022, strengthening anti-money laundering and counter-terrorism financing measures related to cryptocurrencies.

Adding to the competitive atmosphere, the Singapore FinTech Festival will also be held from November 2 to 4, coinciding with the agenda of Hong Kong's FinTech Week, which hosts a three-day Global Financial Leaders Investment Summit. In late September this year, Singapore successfully hosted Asia's largest offline Web3 event, "TOKEN 2049," attracting over 7,000 attendees.

Another concerning factor is the confidence in Hong Kong's financial market. Just today, the Hang Seng Index plummeted by 6.3%, marking the largest drop since 2008, reflecting negative sentiment in the capital market towards Hong Kong's financial environment, which is likely to affect the perception of frontier industries like Web3 regarding Hong Kong's future.

Of course, the core still lies in specific policies. Currently, the crypto regulatory policies of most major countries and cities, including the United States, are not friendly to Web3 entrepreneurs and have faced criticism. If the Hong Kong government is willing to propose groundbreaking, globally leading regulatory policies, it may inject more feasibility into its Web3 vision.