After years of brutal crackdowns, crypto trading is coming back to China... or at least Hong Kong for now.
On Thursday, Hong Kong took a step toward becoming a cryptocurrency hub with the start of applications for licenses to run trading platforms and exchanges, Nikkei reported. Trading of cryptocurrencies in the Chinese territory has been restricted to institutional investors and other professionals since 2018, but Hong Kong's new regulations will allow retail trading as soon as the second half of 2023, which means that HK will soon emerge as the conduit by which billions in Chinese retail savings mysteriously disappear into the outside world, a function that until not too long ago was served by Macau.
Officials said the city's move to welcome crypto, which comes amid global regulatory headwinds for the industry, is backed by safeguards for investors.
"Hong Kong's comprehensive virtual assets regulatory framework follows the principle of 'same business, same risks, same rules' and aims to provide robust investor protection and manage key risks," said Julia Leung, CEO of the Securities and Futures Commission. "This will enable the industry to develop sustainably and support innovation."
Requirements for obtaining a license include capital of at least 5 million Hong Kong dollars ($638,000), measures to combat money laundering and the appointment of experienced managers.
"Operators of virtual asset trading platforms who are prepared to comply with the SFC's standards are welcome to apply for a licence," the commission said in a May 23 notice. "Those who do not plan to do so should proceed to an orderly closure of their business in Hong Kong."
More than 80 companies have expressed interest in obtaining a license, authorities say. Mainland Chinese companies are particularly eager to enter the Hong Kong market, because they face a total ban on providing cryptocurrency-related services at home.
A subsidiary of Chinese state-owned property developer Greenland Group plans to apply for a license, local media report. Online lender ZA Bank said on May 24 that it would partner with licensed companies to offer trading services for individuals.
"We welcome the licensing guidelines issued yesterday by the Hong Kong SFC, and we are excited to offer the new investment opportunities brought by virtual assets to our users," ZA Bank CEO Ronald Iu said.
In Asia, South Korea and Singapore have taken the lead in regulating the crypto market, attracting some businesses that fled the U.S. and other countries. Hong Kong was regarded as being tough on the industry after China's move to ban related services in 2021, but the city has reversed its stance.
In October, Hong Kong announced a policy of promoting virtual currencies. An exchange-traded fund (ETF) tracking bitcoin listed on the Hong Kong exchange in December.
"The fact that an international finance hub like Hong Kong is setting out to create and support a crypto trading environment means a boost of investor confidence in the industry," said Eddie Chou, a blockchain lecturer and fintech consultant.
A cloud has hung over Hong Kong's status as an international financial hub since China imposed a national security law in 2020 that critics say erodes the city's autonomy.
"Without Beijing's approval and backing, there can be no policy change in Hong Kong," an asset management executive here said. "They may intend to treat it as an exception like Macao, the only place in China where casinos are allowed, and use it as a testing ground" for crypto.
That is precisely what Beijing is doing, because even in China the local elite understands that as a result of the massive Chinese capital account monetary firewall, the country needs some way to transfer some of those trillions in savings offshore.
For now, Hong Kong regulators are promising a firm hand.
"Our regulations will be tight," Eddie Yue, chief executive of the Hong Kong Monetary Authority, said at the Bloomberg Wealth Asia Summit in May. "We will let the industry develop and innovate. We will let them create the ecosystem here, and that actually brings a lot of excitement. But that doesn't mean light-touch regulation."