Introduction

Hong Kong’s small investors may soon be in able to buy popular cryptocurrencies such as bitcoin on government-regulated exchanges, thanks to new rules aimed at solidifying the city’s position as a hub for digital assets.

Challenges Facing Cryptocurrencies

The global cryptocurrency markets have not yet recovered from a recent series of major failures, including the collapse of the cryptocurrency platform trading FTX and cryptocurrency banks Signature and Silvergate.

But the difficulties facing cryptocurrencies have not dissuaded the Hong Kong authorities from taking an interest in the sector, which began in October last year and culminated with the new cryptocurrency exchange laws that will enter in effective June 1, according to AFP.

Economic Boost and Investment from China

Officials also hope the change will boost the city’s economy, which is still grappling with the COVID-19 pandemic and social unrest in Hong Kong, as well as the impact of Beijing’s national security law on investor confidence.

Observers point out that the new laws will make Hong Kong a major haven for Chinese investors looking to trade cryptocurrencies, something prohibited on the mainland.

Regulator’s Balancing Act

Regulators hope to attract companies with favorable trading terms, but must balance this with the need to protect investors, knowing that quest’area has been well developed in the traditional financial world and is even less developed in the space of asset virtual.

“There is a clear recognition that these products are increasingly becoming a part of our economy,” Giuliano Castellano, a law professor at the University of Hong Kong, told AFP.

Voluntary Licensing Scheme and Customer Restrictions

The city has put in It has implemented a voluntary licensing scheme for cryptocurrency exchanges since 2019, but licensees can only serve clients with wallets worth HK$8 million (US$1 million).

In the absence of locally licensed options, crypto traders turn to sites web offshore such as Binance and Coinbase or to physical stores that buy and sell cryptocurrencies in cash.

Customer restrictions were not popular with the business of cryptocurrencies in Hong Kong, so officials finally abandoned them when they created the new rules.

Investor Protection

Testing Ground for China

Hong Kong is racing with regulators around the world trying to find ground rules for cryptocurrencies which, despite the slumps it has suffered, still maintain a global market value of over $1 trillion.

Earlier this month, the European Union approved the prime rules complete to the world relating to the sector and the International Organization of Securities Commissions has made its recommendations in merit shortly after.

Contrary to the evolution of the attitude towards cryptocurrencies in around the world, China maintained a strict ban imposed in 2021.

Hong Kong Bitcoin Association co-founder Liu Weese noted that the Chinese city, which enforces financial rules separate from those of the mainland, holds a special appeal for Chinese cryptocurrency businesses and investors.

“There is a lot of interest from Chinese cryptocurrency projects to have a legal presence of any kind on Chinese soil,” Weese said, adding that the companies see the city as a gateway to the lucrative mainland market.

Recognizing Mainland Chinese investors as clients in Hong Kong is commonplace, both in the traditional and financial world in the digital one, as long as they have a bank account and an address in city.

“Once you have a license in Hong Kong, you will be in able to convince many of your customers on the mainland…that they can safely do business with you through their account in Hong Kong,” Weese explained.

Major cryptocurrency exchanges such as Huobi and OKX, both founded in China, have announced plans to apply for licenses in Hong Kong.

Investor Protection

Unlike the previous system, the rules for small investors who will enter in force in June will be mandatory, which means that all platforms of trading operating in Hong Kong will need to obtain licenses.

Some cryptocurrency-related firms report that the switch is unlikely to disrupt day-to-day operations, as authorities have granted a one-year transition period.

HashKey and OSL, the two existing licensing parties, said they will apply for new licenses and expand their retail presence.

“There is a great need in the market for platforms that are easily accessible… yet well managed and organized,” said Michel Lee, CEO of HashKey Group.

“This new system adds a lot of clarity on what you are getting and which ones standard security will be offered to you”.

With the FTX crash still fresh in their minds, Hong Kong regulators stress that the new rules aim to “provide strong investor protection and manage key risks.”

One of the safeguards includes that exchanges can only offer “high-capital virtual assets” like Bitcoin and Ethereum to small investors and must set up internal committees to determine which cryptocurrencies to offer.

Small investors are also required to undergo test of knowledge and risk assessment before trading, although it is not yet clear what level of knowledge is sufficient.

Meanwhile, products such as stablecoin and cryptocurrency derivatives are still off-limits for small investors at the moment.

“The new rules aim to better protect investors,” Castellano said, “it would be prudent to take a prudent approach.”