Asia’s financial center aims to become a center for digital assets, but the road to achieving that is a long one.

Second time’s a charm

Ever since last year’s announcement welcoming crypto retail trading by the Securities and Futures Commission (SFC) at the Hong Kong Fintech Week, the city has been buzzing with new energy and drive to become the hub for digital assets in Asia.

The unique combination of top talent in the traditional finance industry and robust financial infrastructure, such as the capital markets and HKEX, sets Hong Kong as a direct competitor to Singapore. However, in recent years, Singapore has overtaken Hong Kong as the leading destination for Asia’s cryptocurrency industry. Can Hong Kong regain its competitive edge?

Hong Kong, with its established reputation as a financial center, has seen regulators actively developing a virtual asset service provider (VASP) framework. This initiative aims to facilitate retail investors’ entry into the cryptocurrency market while maintaining compliance with relevant regulations, thereby leveraging the city’s financial expertise and infrastructure.

Taking lessons from the recent big-name crypto company fallouts, global regulators have much to balance between regulation and fostering an environment for innovation. This means for Hong Kong that going too far or too little will have far-reaching consequences, not to mention several roadblocks are still in the way for many crypto firms planning to relocate to the city.

Banking the unbanked

A primary challenge for cryptocurrency companies seeking to operate in Hong Kong is the difficulty in establishing a bank account within the jurisdiction. In light of this, Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA), recently issued a reminder on the regulator’s official website stating that cryptocurrency firms are not prohibited from accessing banking services, spotlighting the plight many crypto companies are facing.

Following the closure of cryptocurrency-friendly banks in the US, including Silicon Valley Bank, many companies and users have initiated conversations on social media to identify banks that welcome crypto clients. Some Chinese state banks and other financial institutions have reportedly started providing services to local cryptocurrency businesses. Nevertheless, there remains a limited number of banks that have formally declared their openness to cryptocurrency companies and provided comprehensive guidelines for registration.

Without government-backed investments in cryptocurrency, similar to Singapore’s sovereign fund Temasek, mainstream banks might remain cautious about accepting crypto companies as clients. International crypto firms may encounter challenges in determining which banks are receptive to businesses without local founders or residents, given that banks often mandate physical presence or HKIDs to set up an account. As far as being crypto-friendly goes, firms hope to gain basic banking access established first as virtual banks that natively offer crypto services, such as Revolut, have yet to launch in the region. Further institutional support will be necessary for international firms to establish operations in the city.

What’s next?

The road to become Asia’s top crypto hub is not an easy, straightforward one, as the city’s supervisory authority has attempted to regulate digital assets in the past. These efforts were commonly seen as too conservative and unresponsive to the fast-changing nature of the crypto industry, hence driving away some of the biggest crypto exchanges and brokerages to places like Singapore and the Bahamas.

As the cost of living and real estate in Singapore rises considerably, numerous entrepreneurs are considering Hong Kong as an alternative destination. This interest is further supported by the easing of pandemic-related restrictions on entry to the city from Mainland China. Consequently, some startup founders are opting to reside in Shenzhen while conducting their business in Hong Kong. Additionally, recent data suggests that those who decide to live in Hong Kong may find rental costs to be more affordable than in Singapore.

The stance by the HKMA on crypto regulation marks a fresh chapter for the financial hub to be more forward-looking and inclusive. The crypto industry can serve as an engine to attract top talents and boost the digital economy’s development. It can help rejuvenate beleaguered financial markets, as the Hang Seng Index fell by almost 30 percent since June 6, 2019, and strengthen weakened Hong Kong Dollar. The digital assets industry is one of the rare opportunities that the city can seize to reinvigorate a brighter future. Don’t miss it the second time.

With contributions from Nick Ruck, COO of ContentFi Labs.

Yiwei Wang is an avid blockchain enthusiast with a focus on the intersection of crypto, economics, and public policy. He was previously the Global PR Lead at Babel Finance and he began his career at Ogilvy in Beijing. He is currently the Head of Global PR at Metalpha.

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