Hong Kong authorities will legalize crypto trading for retail investors to rebuild the fintech hub status of the Island city. The new policy is expected to be effective in March 2023.
Currently, Hong Kong only allows institutional investors to conduct crypto trading within the region. This policy has been a subject of criticism for limiting innovation and causing start-ups to move to other places, like Dubai and Singapore. By taking this step, authorities said that the city was “ready to engage” in global crypto activities and invited crypto companies to operate in Hong Kong.
Authorities will focus on offering retail investors "a suitable degree of access" to digital currencies by starting a consultation process, which includes reviewing the property rights of digital tokens and seeking to legalize smart contracts in blockchain. Financial Secretary Paul Chan said that the city aimed to create a clear set of policies regarding crypto.
"We want to make our policy stance clear to the global market, to demonstrate our determination to explore fintech with the global virtual asset community," Chan said.
Analysts have claimed that Hong Kong is looking to initiate real estate security token offerings (STOs). These network-based tokens represent the holders’ entitlement to income and dividends that come from tangible assets.
Should I publicly blab my opinions about crypto regulation more? Feels unfair to let other people get attacked by CT but never actually poke my own head out.— vitalik.eth (@VitalikButerin) October 30, 2022
At the moment, Hong Kong traders can only participate in retail trading using non-regulated crypto exchanges like Binance. Once the new regulation is in place, only licensed crypto exchanges are allowed to provide the service.
The decision to legalize retail crypto trades sets Hong Kong further apart from the stance taken by the government of mainland China, which bans citizens from participating in crypto trading. Metapha chief Adrian Wang called the decision “a positive move” because it showed that the region had a different approach to its capital market regulation.
Gemini's chief compliance officer for the Asia-Pacific region, Andy Mehan, emphasized the importance of Hong Kong’s decision in the global crypto industry, saying that the upcoming regulation could put it on par with Singapore, an infamous hub for decentralized finance.
Mehan added, "Industry participants want to see consistency in the global regulatory regime, otherwise there will be opportunities for bad actors to exploit loopholes in jurisdictions with less rigid laws.”
The "KYC on defi frontends" idea does not seem very pointful to me: it would annoy users but do nothing against hackers. Hackers write custom code to interact with contracts already. Exchanges are clearly a much more sensible place to do the KYC, and that's happening already.— vitalik.eth (@VitalikButerin) October 30, 2022
Singapore reportedly plans to introduce new policies regarding cryptocurrency. Although the Island nation allows its citizens to conduct retail crypto trading, Singaporean authorities caution people against participating in the speculative market and restrict the advertisement of crypto services in public.
Hong Kong experimenting with CDBC
Like other central banks, Hong Kong is anticipating the increasing role of digital currency in the future. Hong Kong Monetary Authority is currently experimenting with central bank digital currency (CBDC) through Project Aurum, which offers an innovation as retail customers do not directly hold CBDC and instead use private stablecoins to conduct transactions. Thus, the payment model will work similarly to card payments.
In a report, the developers claim that the use of CBDCs by retail users allows for enhanced privacy and flexibility. It adds that customers can still trace their funds if the transaction goes “bust,” but user privacy remains protected.
“Bringing CBDC-backed stablecoins to life has never been done before,” the report reads. “The system developed for the CBDC-backed stablecoins is unique and can be useful.”