As an international financial hub with strong regulations, Hong Kong has become an attractive destination for cryptocurrency companies and investors.
Resistance of Cryptocurrencies in the Dragon’s Fire
In recent years, China has been one of the world’s leading economies. The history of cryptocurrencies in this country is both fascinating and complex. With the introduction of blockchain technology and cryptocurrencies, China became one of the pioneers in adopting digital currencies globally. When the crypto market was booming, China, as a strong nation, led the world. Chinese citizens played a significant and influential role in the growth of the global crypto industry when buying Bitcoin was a hot topic in financial markets.
History of Cryptocurrencies in China
China’s involvement in cryptocurrencies dates back to the launch of Bitcoin in 2009. In the early years, this technology gradually grew in China, and the crypto community expanded significantly.
However, in 2013, the Chinese government, concerned about the security and control of digital currencies, officially declared Bitcoin trading illegal. Despite the ban on Bitcoin transactions, blockchain technology, the primary innovation supporting digital currencies, continued to grow in China. Both companies and the Chinese government explored blockchain applications in various economic and financial sectors. In 2017, the Chinese government’s policy completely shifted, and it began supporting blockchain technology, creating a favorable environment for its development and usage.
In 2018, Chinese regulators expressed concerns about raising capital through blockchain technologies and digital currencies, signaling a warning to the crypto community.
The pinnacle of China’s cryptocurrency history came in 2021 when the Chinese government officially banned all crypto activities, including Bitcoin mining and trading, as well as all transactions related to cryptocurrencies and token issuance services. Concerns over excessive energy consumption in Bitcoin mining and its environmental impact, financial system risks, and prevention of money laundering and financial fraud played a significant role in this decision. The ban drastically reduced crypto-related activities in China, pressuring or shutting down many crypto exchanges and platforms.
Chinese authorities claimed this decision aimed to reduce cryptocurrency-related risks and ensure the financial system’s stability. Simultaneously, China sought to develop its Central Bank Digital Currency (CBDC), the digital yuan (e-CNY), leveraging blockchain technology for greater control over internal financial transactions.
Interestingly, while cryptocurrencies remain banned in mainland China, Hong Kong has taken a different approach. Although part of China, Hong Kong enjoys economic autonomy and seeks to distance itself from China’s comprehensive ban on cryptocurrencies.
The Launch of China’s Digital Yuan and Its Performance to Date
Another milestone in China’s cryptocurrency history is the development of its national digital currency, the digital yuan. Its development began in 2014, and by 2016, China’s central bank had established its official digital currency institute. Pilot versions were launched in cities such as Shenzhen, Suzhou, Xiong’an, and Chengdu, with Shanghai, Changsha, Hainan, Xi’an, Qingdao, and Dalian joining the program in November 2020.
The pilot program tested various scenarios for using the digital yuan. In 2021, China unveiled a five-year plan to further research and develop its local digital currency.
Despite the efforts China has made to develop and implement its Central Bank Digital Currency (CBDC) across various sectors, it seems the country has not achieved the expected level of success, with the performance of the CBDC falling below expectations.
Recent developments in Hong Kong are further evidence of this, indicating that the Chinese government may seek new avenues for re-entry into the global crypto market via the city.
The Hong Kong Securities and Futures Commission (SFC) announced on May 23, 2023, that cryptocurrency trading would resume in Hong Kong from June 1, 2023. This marked a major shift in Hong Kong’s stance on cryptocurrencies, in contrast to mainland China.
Another positive development is that licensed crypto exchanges will now be allowed to serve investors in Hong Kong.
These changes could lead to billions of dollars of investment flowing into the region, potentially triggering a massive and sustained rally in the cryptocurrency market.
Hong Kong: An Autonomous City and Gateway for Cryptocurrencies into China
Hong Kong, an autonomous city and gateway for cryptocurrencies into China, is one of the leading financial and economic centers globally, following New York, London, and Singapore. As a hub for investment and trade in the region, it plays a crucial role in the global economy and, specifically, in China’s economy. With the rising use of cryptocurrencies, Hong Kong has established itself as a center for financial activities, transport, trade, and retail.
Historically, Hong Kong was considered the cradle of cryptocurrencies in China. After China cracked down on the industry during the 2017-2018 bull market and banned cryptocurrencies, Hong Kong emerged as a major crypto hub. This happened because the largest crypto companies and projects were forced to leave their home base and relocate to Hong Kong. It’s worth noting that Hong Kong is a special city located on China’s southern coast and is, in fact, part of China.
The migration of major crypto companies and projects to Hong Kong was due to the principle of “one country, two systems,” agreed upon in the 1980s and operational since 1997. This agreement, which will continue until 2047, allows Hong Kong to join China officially as part of a single country with one governance system after the agreement expires.
The “one country, two systems” principle allows Hong Kong to have its economic regulations and laws separate from mainland China. Consequently, Hong Kong is the first destination for companies and individuals seeking to move their capital out of mainland China, which is cut off from the international financial market.
Hong Kong is a dynamic and diverse financial market, including the Hong Kong Stock Exchange, international banks, insurance companies, and other financial institutions. The city is also renowned as a major international business center, playing a significant role in global trade, exports, and imports.
The history of cryptocurrencies in Hong Kong dates back to 2010. The first cryptocurrency exchange in Hong Kong was established in 2013, and since then, the market has rapidly grown.
In 2017, there was pressure to change cryptocurrency regulations in Hong Kong. As part of these pressures, the Hong Kong Securities and Futures Commission (SFC), the city’s financial regulator, announced that companies dealing with security tokens must obtain a license from the SFC. Additionally, this organization banned transactions related to virtual asset-based funds for everyone except professional investors. Ultimately, despite Hong Kong’s agreement with its mother country on the “one country, two systems” principle, due to numerous objections and in the interest of national security, Hong Kong banned crypto transactions for retail investors in December 2020, which dealt a significant blow to the crypto market. This situation led to uncertainty for many exchanges, and some companies began leaving Hong Kong.
Interestingly, Hong Kong continued its crypto trading and investments despite the cryptocurrency ban. This situation led to a massive migration of China’s crypto industry outside the country and into this coastal city. Operating in Hong Kong required all individuals and investors to make investments of over one million dollars, and legal entities had to invest more than six million dollars in the city. Another important condition for operation was having Hong Kong residency.
A year after the devastating crypto crackdown in China in 2021, Hong Kong authorities sought to shift their approach regarding cryptocurrency regulations to distinguish themselves from China’s comprehensive ban and prevent a blanket prohibition in the city.
In October 2022, Hong Kong announced its intention to legalize retail crypto trading again, due to the significance of the 93% population of Hong Kong citizens and the wealth they held in the city.
Although China claimed it did not wish to align with Hong Kong’s move and only supported Hong Kong’s decision as the ruling country, reports indicated that Chinese state banks were servicing and providing services to cryptocurrency clients in Hong Kong.
Paul Chan, Hong Kong’s Financial Secretary, expressed in November 2022 his desire to make Hong Kong a hub for virtual assets. Chan stated: “Hong Kong’s authorities aim to promote innovation in the financial sector while prioritizing proper risk management.”
Last year, Hong Kong implemented a law allowing investors to invest directly in cryptocurrency assets, whereas China had adopted strict policies on cryptocurrencies for nearly five years.
Despite this, even in 2023, while many Western countries still maintain a cautious approach to cryptocurrencies, Hong Kong has openly expressed its support for digital currencies. This decision reflects Hong Kong’s desire to provide a conducive environment for the growth and development of the cryptocurrency market and attract investment in this field.
Overall, by creating favorable laws and policies for cryptocurrencies, Hong Kong is recognized as a prominent center in the field of technology and digital economy. These measures can contribute to economic development and innovation in this sector and strengthen Hong Kong’s position as a significant global center for cryptocurrency-related activities.
Digital Currency Trading Legalized with Hong Kong’s Green Light
Recently, on June 1, 2023, Hong Kong implemented a new law for trading platforms to facilitate retail investors.
Changpeng Zhao, CEO of the prominent cryptocurrency exchange Binance, said:
“Recent developments in Hong Kong, especially the training of new personnel for retail traders, are likely to set the stage for the next bull market.”
Justin Sun, the founder of TRON, also commented on the past actions of the Hong Kong government:
“Hong Kong’s green light for starting digital currency transactions for retail investors is a major step for the crypto industry in China.”
Hong Kong’s government officials are working to make the city a major hub for the crypto industry and Web3 activities. They have decided to design a set of regulations that will allow retail investors to trade cryptocurrencies without concerns. Consequently, all digital currency platforms and exchanges are required to obtain legal licenses under the new laws.
Under the new Hong Kong law, individual investors can only buy and sell major cryptocurrencies like Bitcoin and Ethereum. However, cryptocurrency companies must comply with the regulations set by the Securities and Futures Commission (SFC) and register with this body to obtain operational licenses; otherwise, they will face penalties.
It is noteworthy that this decision was made after Hong Kong’s economy and reputation as a fintech hub were weakened by the COVID-19 lockdown and the Chinese government’s crackdown on cryptocurrencies.
Sun commented:
“This move by Hong Kong is a significant step for digital currencies in China because it is the first jurisdiction in the country to legalize cryptocurrency transactions. This could have implications for the entire cryptocurrency industry in China.”
He further added:
“The advantage of Hong Kong’s new policies regarding digital currencies is that Chinese citizens can participate in cryptocurrency transactions if they have residency in Hong Kong.”
Johnny Ng, a Hong Kong Legislative Council member, invited all global trading platforms, specifically the cryptocurrency exchange Coinbase, to come to Hong Kong and apply for a license to provide virtual asset services on June 10.
This development came after the SFC announced on May 23 of this year that it would soon allow licensed platforms to meet the needs of retail investors in Hong Kong.
While no regulatory authority in Hong Kong has yet approved cryptocurrency trading platforms, major and prominent exchanges like Huobi, Gate.io, and OKX have applied for licenses to operate in the virtual asset space in Hong Kong and provide “Virtual Asset Service Provider” (VASP) services. If these applications are approved, these companies will be able to benefit from the Hong Kong crypto market to increase their user base and strengthen their presence in the industry.
Additionally, Tether’s headquarters in Hong Kong is another significant matter. On one hand, it enhances the city’s importance as a cryptocurrency hub in China, and on the other hand, it increases the conditions for the Chinese government to distance itself from the dominant Western financial system and gain control over global markets. In this context, economic experts believe that China is currently using Hong Kong as a testing ground for offering and using digital currencies and recent developments in China support this view.
There are speculations that China intends to maximize its economic growth by collecting digital currencies, with growth coming not only from within the country but also from abroad. This is where the Chinese government aims to make the most of crypto. At the same time, China wants to control its citizens’ financial freedom; a common practice among almost all countries. Since all governments fear losing control over their national currencies, many countries are launching and offering their Central Bank Digital Currencies (CBDCs).
Another issue is that the main concern is not Hong Kong’s acceptance of crypto but the challenge that arises with the onset of stringent U.S. regulatory controls over crypto. Soon, when the U.S. sets its regulatory laws for digital currencies, a significant portion of the industry will shift to Asia, and China will ultimately become the market winner. This could mean widespread adoption of crypto in the large Chinese region.
The decision by Hong Kong’s cryptocurrency regulatory authority to grant licenses to approved exchanges for operation in the country is a crucial step towards creating a unified market and building trust in this sector. This move positions Hong Kong towards its goal of becoming a center for virtual assets. In addition to granting licenses to cryptocurrency trading platforms for operation in the country, Hong Kong’s financial regulatory authority is committed to implementing stringent measures to protect investors.
According to Julia Leung, the Executive Director of the Cryptocurrency Regulatory Authority, future guidelines for digital asset trading platform operators will align with commercial legal actions aimed at robust investor protection and risk management.
Leung also mentioned that clarifying regulatory expectations for creating and developing a responsible and innovative environment is important. Leung noted:
“Hong Kong’s comprehensive regulatory framework for virtual assets follows the principle of similar business, similar risks, and similar regulations, aiming for robust investor protection and risk management.”
Final Thoughts
Given Hong Kong’s high appeal as an international financial center and its strong financial regulations, companies and investors are very interested in operating in this city’s cryptocurrency market. Moreover, Hong Kong’s distinct geographic location between Asia and Europe, its stable and transparent legal system, and the use of English as the language of business all contribute to its attractiveness in this field.
The history of digital currencies in Hong Kong is complex and fascinating. However, to improve the situation and achieve the desired outcome, it is essential to adhere to strict regulations and exercise patience. The Hong Kong government has adopted diverse approaches in the cryptocurrency market. On one hand, the city’s officials are working to improve the market with appropriate laws and regulations to prevent violations, and on the other hand, the Hong Kong government seeks to optimize the opportunities related to digital currencies, aiming to regulate and better align with the market.
