Hong Kong risks falling behind in crypto as the city is urged to speed up regulation to keep pace with the rapidly evolving industry.
Hong Kong-based First Digital Trust expressed hopes that the city will accelerate the regulation of the digital assets sector.
Hong Kong, aiming to position itself as a global hub for cryptocurrency, currently has only two fully licensed virtual asset trading platforms: Hash Blockchain and OSL Digital Securities. Many other crypto exchanges are still awaiting full operational licenses in the city.
“It is understandable its (Hong Kong’s) current approach to regulation in trading is more conservative and slower than some other jurisdictions since it prioritizes the protection of investors,” Vincent Chok, CEO of First Digita. However, he pointed out:
“We hope to see regulation move faster to ensure it does not fall behind the industry’s fast pace of development.”
As of June 1, operating an unlicensed virtual asset trading platform (VATP) in Hong Kong became a criminal offense. Meanwhile, Hong Kong’s Securities and Futures Commission published an “alert list” that names “suspicious virtual asset trading platforms” or unlicensed entities operating in Hong Kong. SFC said these entities could be targeting Hong Kong investors.
Will Hong Kong emulate Dubai?
First Digital Trust, which was on the KPMG and HSBC list of Emerging Giants in Asia Pacific for 2022, believes Hong Kong is not yet ready to regulate USD-denominated stablecoins, unlike Dubai, which has a more global approach.
“We look forward to Hong Kong rolling out regulation for USD-denominated stablecoins in the near future,” Chok said.
Source: Hong Kong Monetary Authority
On July 24, Jingdong Coinlink Technology Hong Kong Limited, a subsidiary of JD Technology Group, revealed its intention to launch a 1:1 stablecoin pegged to the Hong Kong dollar (HKD). The Hong Kong Monetary Authority (HKMA) recognizes it as one of the participants in The Sandbox program.
Lenders not in a rush to offer crypto custody services
Chok also does not expect banks to rush to offer digital asset custody services anytime soon. “There is simply more liability beyond their risk appetite,” he said.
Moreover, according to Chok, several companies with established trust structures offering crypto custody services have already stepped in to fill this gap.
However, the United Arab Emirates recently allowed Standard Chartered to start offering crypto custody services. On Sept. 10, the bank said it would start its digital asset custody service with Bitcoin BTC $59,763 and Ether ETH
$2,419.
The bank has initiated its custody services in partnership with Brevan Howard Digital, the cryptocurrency division of the hedge fund Brevan Howard.
Hong Kong raising the bar with Web3 integration in the financial system
While the licensing regime for digital asset trading services may be slow, the city is scoring in other areas of Web3, including applications in central bank digital currencies (CBDCs), and tokenization of real-world assets.
“It is interesting to note that BTC and ETH exchange-traded-funds in Hong Kong allow for a unique ‘in-kind’ subscription mechanism which allows for direct subscription and redemption using BTC and ETH. This innovative structure offers a flexible and simple investment process for investors,” Chok said. Elaborating, he said:
“Hong Kong’s Trust and Company Service Provider licensing also allows for trust structures to hold digital assets, which is a favorable and unique feature compared to other jurisdictions. This robust regime not only paves the way for custody services but also sophisticated services associated with it such as legacy management.”
Initiatives, such as the HKMA’s Project Ensemble regulatory sandbox, are paving the way for the tokenization of real-world assets and interbank settlement using tokenized money.
On Aug. 28, the HKMA introduced the Project Ensemble sandbox. This initiative explores the tokenization of real-world assets and interbank settlements using a wholesale central bank digital currency (wCBDC). The HKMA stated that the project aims to investigate the technical interoperability of tokenized assets, tokenized deposits, and a wCBDC.
Project Ensemble represents the culmination of several earlier initiatives. These include trials of tokenized deposit settlements with HSBC using Ant Group technology, as well as settlement experiments involving the HKMA’s pilot e-HKD CBDC for transactions between HSBC and Hang Seng Bank.
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