Hong Kong’s reputation as a financial hub is about to grow, in a pro-crypto way.

Last week, Hong Kong hosted a crypto conference called Web3 Festival, one of the biggest ever in the region.

Then and there, the Hong Kong government dropped a major policy announcement, reiterating their intentions to keep growing the Web3 industry under “appropriate” regulations to be set. If things go to plan, the island will become a place where crypto companies set up shop and thrive – of course, within regulatory limits.

The U-turn in crypto policy has given a reason for major crypto players and startups across DeFi, CeFi, NFTs, protocols, and games – locally and internationally – to celebrate and join together in Hong Kong. Meanwhile, in mainland China, Beijing is imposing a strict ban on crypto and NFT trading.

As officials have stressed that the “one country, two systems” policy has granted Hong Kong the freedom to explore innovations in financial technologies, Hong Kong is making the most out of the opportunity to do so – starting with putting in regulations to keep crypto businesses in line.

Warming up in the East

Hong Kong’s shift in attitude towards crypto comes at a time where there is a stark contrast of attitude towards crypto in the West.

While the US has been busy with cracking down on ICO-era projects from 2017 like Algorand, Hong Kong has decided to focus on what they can do to help construct the digital asset space  towards the future, rather than nit-picking on the past.

gary gensler is alleging that algorand is an unregistered security while videos of gary gensler shilling algorand are circulating the internet

the sheer absurdity of it all weakens the SEC's standing beyond any reasonable doubt in the courts

— foobar (@0xfoobar) April 17, 2023

Meanwhile, Hong Kong has also taken on the commitment to ramp up its game in being a global financial hub. Many onlookers have compared Hong Kong’s shift in attitude towards crypto to Singapore’s – a region known for being a friendlier market for crypto activity until Hong Kong’s 2020 National Security Law, which prompted a mass exodus of not only international firms and expats, but also wealthy locals.

Once Hong Kong’s new deal is put into place, the government hopes to relieve  all the troubles caused by the National Security Law. In enacting Hong Kong’s latest crypto policy, the government hopes that giving clear regulatory guidance regarding digital assets and how the sector operates will attract global crypto firms to help grow the industry on the island, which will bring them new tax revenue, talent, and a whole new area for financial activity.

During last week’s Hong Kong Web3 Festival, many asset managers have also said they’re also considering creating branches in Hong Kong, as they recognise that the city is home to many high-networth individuals.

And with high-networth individuals, comes another emerging market: centralised exchanges.

Centralised Exchanges

As a result, centralised exchange players like Huobi and OKX have announced plans to open branches in Hong Kong – which means that the Hong Kong government is doing something right.

To CEXes like Binance, Bybit, Bitget, Huobi, and OKX, Hong Kong is viewed as a hedge (or a back-up plan, if you will) against the crypto climate in Singapore. In their eyes, if something goes wrong in Singapore, they’ll look to Hong Kong to remain strong in the region.

After the collapse of LUNA, and headlines surrounding 3AC, Singapore grew more conscious of crypto – which gives Hong Kong an opportune chance to attract more potential businesses. 

At Web3 Festival, many founders and CeFi industry players have mentioned the desire to be properly regulated, boasting the strengths of their respective compliance teams. 

According to Xiao Feng, founder of HashKey (a firm that operates a crypto exchange, investment, and staking businesses), the Hong Kong government “is very serious about building an international digital asset centre.” 

Feng is amongst the main organisers of the Web3 Festival conference – and leads one of the only two crypto exchanges – HaskKey and OSL – that was awarded licensing to operate in Hong Kong. Hong Kong made licensing mandatory for exchanges in November, and is expected to award them to more exchanges in June.

What else should we watch out for?

Another key announcement was made at Hong Kong’s Web3 Festival: the announcement of ZA bank.

Hong Kong-based ZA Bank – a virtual bank – has received the blessings of the island’s government, and has attracted the attention of crypto startups and institutions from all over Asia. The online bank will facilitate crypto-fiat conversions in conjunction with HashKey and OSL – which means that the conversions will be handled at the licensed, regulated exchanges, rather than ZA Bank itself.

While ZA Bank is likely to be settling transactions for crypto exchanges while more companies are applying to operate business legally in Hong Kong, there remains unanswered questions on how Hong Kong will also help the DeFi sector thrive.

While it was surprising that Hong Kong’s Securities and Futures Commission (SFC) believes DeFi platforms who deal with virtual assets need a licence under existing rules, some are wondering whether this will encroach on DeFi’s original spirit.

“The SFC views DeFi activity through the same regulatory framework that applies to financial activities regulated by the SFC,” said Keith Choy, interim head of the intermediaries division at the SFC. “As such, as long as DeFi activity holds within the scope of securities and futures, it would be subject to the same regulatory requirements applicable to traditional financial activity.”

As of the moment, it can be inferred that everyone in the industry that hopes to set up shop in Hong Kong will be subject to Hong Kong’s licensing requirements – and that “providing automated trading services” also counts as a regulated activity, regardless of being dubbed as decentralised or not.

Hong Kong’s new regulations will go into effect in June, and crypto exchanges that hope to have an audience in Hong Kong must be licensed by the SFC – joining the ranks of HaskKey and OSL. 

“I am very encouraged by what I’m seeing and hearing in Hong Kong and hearing directly from officials. I think there is a sense of inclusion, there’s a sense of forward-lookingness, and I think that’s a good thing,” said Hong Fang, president of cryptocurrency exchange OKX. “It’s a very fluid situation, but I can see Hong Kong being a very important hub for our team, together with the US and some other offices.”