Hong Kong’s New Licensing Program for Crypto Firms

The Hong Kong government has introduced a mandatory licensing program for crypto firms, set to launch in March 2023. This initiative is part of a broader effort to boost retail trading in the city. Sources close to the matter, who asked to remain anonymous, revealed that Hong Kong regulators are open to listing major tokens but will impose restrictions on specific cryptocurrencies like Ethereum (ETH) and Bitcoin (BTC). The public consultation on the program’s details is currently underway, with the final rules expected to be passed by the European Parliament by the end of this year or early 2023.

This new regulatory push is part of Hong Kong’s strategy to restore its reputation as a leading financial center after the political unrest and the COVID-19 pandemic, which contributed to a significant talent exodus.

Gary Tiu, the executive director of BC Technology Group Ltd, emphasized the importance of mandatory licensing for regulators to meet the needs of retail investors.

Criteria for Listing Cryptocurrencies

When it comes to listing tokens for retail exchanges under the new regime, factors such as liquidity, market value, and third-party crypto index membership will likely be considered. This approach is similar to how traditional structured products like warrants are evaluated. Although the Hong Kong Securities and Futures Commission (SFC) has declined to provide specific details, it is clear that the regulatory environment is evolving.

Shares of crypto-related firms in Hong Kong rose, with BC Technology seeing a 4.8% increase, the highest in three weeks. These developments reflect the global debate over the best ways to regulate the volatile crypto industry. After a $2 trillion crash since the peak in November 2021, the industry is recovering, though some firms have collapsed due to excessive leverage and poor risk management.

Hong Kong’s main financial rival, Singapore, has also felt the effects of the downturn and is tightening its crypto rules, even proposing to ban leveraged retail token purchases. Meanwhile, mainland China declared crypto activities illegal last year.

Plans to Expand Beyond Retail Trading

Michel Lee, the executive president of HashKey Group, revealed that the city’s proposed crypto regulatory regime will go beyond retail trading. Major exchanges like Binance and FTX had previously called Hong Kong home due to its more lenient regulatory approach and ties to mainland China. However, in 2018, Hong Kong introduced a voluntary licensing system, limiting exchanges to clients with at least a $1 million portfolio. This led to a decline in retail-facing businesses, with FTX relocating to the Bahamas last year.

There is ongoing debate over whether Hong Kong’s efforts to attract crypto entrepreneurs will be successful. There are still concerns about whether mainland Chinese investors will be allowed to trade crypto in the city. Leonhard Weese, co-founder of the Bitcoin Association of Hong Kong, acknowledged that there are fears about the licensing regime, and the city’s appeal to retail users may not match that of overseas platforms.

According to Chainalysis, crypto transaction volume grew by less than 10% from July 2021 to June 2022, the slowest growth in East Asia, excluding China. As a result, Hong Kong dropped in its global crypto adoption ranking from 39th in 2021 to 46th in 2022.

Revitalizing Hong Kong as a Global Financial Center

Hong Kong is taking additional steps to bolster its position as a leading crypto hub, including exploring the possibility of creating exchange-traded funds (ETFs) that would provide exposure to virtual assets. Elizabeth Wong, Head of Fintech at the Hong Kong Securities and Futures Commission, emphasized that Hong Kong’s ability to introduce its own regulatory framework, in contrast to China’s stance, demonstrates the “one country, two systems” approach in financial markets.

Wong also revealed that the government is considering a crypto regulation bill that would allow direct investments in virtual assets by individuals, further solidifying Hong Kong’s role as a key player in the crypto space.