Amidst the cryptocurrency market downturn, Hong Kong is emerging as a hub for crypto trading and adoption. This is largely due to its favorable regulatory environment and a sophisticated financial system which has positioned the city as a major player in the global financial industry.
Back in 2019, Hong Kong’s Securities and Futures Commission (SFC) issued new regulatory guidelines for virtual asset trading platforms, which aimed to protect investors and maintain market integrity. The guidelines require platforms to comply with anti-money laundering and counter-terrorism financing regulations, and to implement measures to prevent market manipulation.
As a result, several local and international crypto exchanges have set up operations in Hong Kong, such as Binance, OKX and Huobi. These exchanges offer a wide range of digital assets for trading and have seen a growing user base in the city.
More recently, two exchange-traded funds (ETFs) that track U.S.-listed crypto futures raised a combined US$73.6 million ahead of their launch on the Hong Kong Stock Exchange in December 2022.
Managed by CSOP Asset Management, these ETFs attracted substantial investments. The ETFs invest in bitcoin and ether futures listed on the CME exchange in the United States, which are the only cryptocurrency assets currently approved by the Hong Kong’s Securities and Futures Commission (SFC).
Of the two ETFs, the larger one, CSOP Bitcoin Futures ETF, raised US$53.9 million, surpassing ProShares Bitcoin Strategy ETF, the first U.S. bitcoin futures ETF that debuted on the NYSE Arca exchange in October 2021 with US$20 million in seed capital.
CSOP stated that these ETFs demonstrate that Hong Kong remains open to the development of virtual assets, despite recent liquidity problems faced by some crypto platforms.
The regulator, the SFC, had originally proposed restricting cryptocurrency and ETF participation to professional investors. But it changed its stance in October and began consultation to allow retail investors to trade cryptocurrencies and ETFs.
These ETFs do not invest in physical bitcoin and are traded on regulated U.S. and Hong Kong exchanges, where there are stronger regulatory safeguards for investors compared to tokens traded on unregulated platforms.
Strong growth of Hong Kong crypto market
The crypto market in Hong Kong has seen a significant growth in recent years, with an increasing number of individuals and businesses investing in various cryptocurrencies. Many investors and traders are looking to Hong Kong as a gateway to the Asian crypto market.
Hong Kong’s traditional finance sector has also embraced the crypto market, with several banks and financial institutions launching services for individuals and businesses looking to invest in digital assets. For instance, in July 2020, Standard Chartered launched a digital asset trading and custody platform aimed at institutional clients, while in September 2020, the Hong Kong Monetary Authority and the central bank of Singapore announced a joint project to develop a cross-border digital currency.
Despite the growth of the crypto market in Hong Kong, the city is facing increasing competition from other jurisdictions, such as Singapore, which is seeking to position itself as a leading hub for the Asian crypto market. Singapore has a more stringent regulatory environment, but has also attracted major crypto exchanges to set up operations in the country.
In addition, the crypto market in Hong Kong is also facing headwinds from the Chinese government, which has taken a more cautious approach to cryptocurrencies, cracking down on domestic crypto exchanges and limiting the flow of capital out of the country.
Despite these challenges, the crypto market in Hong Kong is expected to continue its growth in the coming years, driven by increased adoption and innovation. In particular, the increasing use of decentralized finance (DeFi) applications, which allow individuals to access financial services without the need for intermediaries, is expected to drive growth in the market.
Crypto for Retail Trading
The Securities and Futures Commission (SFC) recently announced its plans to propose a selection of cryptocurrencies that will be approved for retail trading in Hong Kong.
The focus of the new virtual asset service provider (VASP) regulations will continue to be the protection of investors. The SFC will also gather public opinions about the specific guidelines for retail trading.
The regulator will begin accepting VASP license applications in mid-2024, with all trading platforms and exchanges required to obtain a license or face fines and jail time.
According to a consultation paper released by the SFC last February, individual investors may trade larger coins on exchanges licensed by the commission. However, certain safeguards such as knowledge tests, risk profiles and reasonable limits on exposure must be implemented.
The consultation period will close on March 31, with the goal of permitting retail trading within the new licensing framework for crypto exchanges by June 1.