Hong Kong has been stepping up its attempts to become Asia’s prime hub for trading digital assets, including a series of new regulations to achieve its ambition of attracting global investors. The move comes as competition from the US and other countries in the Asia-Pacific region, led by Singapore, intensifies.
Law practices in the Chinese territory have been supporting lenders in the rollout of pioneering products, including digital bonds and tokenised gold, that are designed to grab the territory a slice of this global digital asset market with an estimated market capitalisation of $3tn.
“Hong Kong wants to make itself a digital hub. A lot is happening,” says Chin-Chong Liew, a Hong Kong-based capital markets partner at law firm Linklaters, who has advised clients on digital assets and tokenisation. “Regulators are looking at this and trying to facilitate growth.”
The Asian financial centre is keen to present itself as offering an attractive and predictable regulatory framework for investors as the city pits itself against rivals such as Singapore and Dubai in a push to cater for digital assets.
It can, for instance, point to its reputation for operating a significant stock market.
The city’s ambition to become a leading venue for digital asset investment and trading also faces increased competition from its prime rival, the US. President Donald Trump’s administration has adopted a crypto-friendly stance with initiatives that include the promotion of $Trump, his own cryptocurrency, and a strategic bitcoin reserve.
In 2023, Hong Kong introduced a regulatory regime allowing retail investors to trade cryptocurrencies by requiring exchanges operating in the city to apply for regulatory approval. As many as 24 companies made bids at one point for the licences, but so far 10 have been issued and some, including a Binance-affiliated exchange, decided to withdraw.
New licensing regimes for over-the-counter trading in virtual assets and for custody services are also in the pipeline, while derivative trading for virtual assets targeting professional investors — those with portfolios of more than $1mn — is also under review, according to Hong Kong’s Securities and Futures Commission. Last year, Hong Kong’s government also rolled out proposed legislation for stablecoin issuers, following the EU’s Markets in Crypto-Assets Regulation (MiCA) rules, which regulate stablecoins.
In February, the city’s financial secretary Paul Chan put the case for the territory as an attractive venue for digital asset investing, by telling an industry conference that “Hong Kong stands out as a market with consistent, predictable, forward-looking policies, and a balanced regulatory framework”.
Some analysts think the territory is being used as a testing ground that might lead to more liberalisation in the use of crypto and other digital assets in the mainland. Hong Kong first outlined its goal of becoming a digital asset hub in 2022, a year after Beijing announced a sweeping ban on crypto trading in mainland China.
With Hong Kong progressing in its digital assets campaign, Chinese financial institutions have tapped the city in their launch of new digital products.
$300mn
Digital bond issued by Bank of Communications in January
Bank of Communications, one of China’s largest state-backed banks, in January issued a $300mn digital bond in Hong Kong, following Chinese state-owned conglomerate Zhuhai Huafa Group’s issuance of a $190mn digital bond in December.
“I think what the [Hong Kong] government is doing here — and I think we’re doing quite well in that digital asset space — is [to] make sure that Hong Kong is plumbed in. That capital flows still come through Hong Kong,” says Ben Hammond, managing partner at Ashurst’s Hong Kong office and leader of the law firm’s financial regulation practice for the territory.
To increase its attractiveness in digital asset transactions, the city plans to exempt private equity funds, hedge funds and the investment vehicles of the super-rich from paying tax on gains from cryptocurrencies.
“Hong Kong is really interested in institutional, high net worth, family offices, sophisticated large volume money, institutional money flowing through,” Hammond says. “[Investors are basically] dealing with all the things that they’ve always come to Hong Kong for, but doing it with the benefits of digital ledger technology.”
Lawyers also note that Hong Kong’s regulators remain protective of retail investors who may be tempted by highly volatile cryptocurrencies and other digital assets.
The fall of Sam Bankman-Fried’s FTX in 2022 — the crypto exchange, which once called Hong Kong home — and a high-profile investigation into crypto group JPEX over misleading retail investors in 2023 have heightened concerns among the territory’s regulators.
Similar to traditional financial markets, Hong Kong’s regulations for digital assets involve more protections and restrictions on less sophisticated retail investors, says Rocky Mui, a Hong Kong-based partner at Clifford Chance, whose focus includes crypto-related matters.
From Taiwan, Jaclyn Tsai, chair of the Asia FinTech Alliance and a tech lawyer, observes that “quite a few industry players are closely monitoring the development of [digital asset] regulations in Hong Kong”. She also highlights the city’s digital asset moves as “aggressive”.
At Linklaters, Liew foresees plenty of further innovation in products to meet investor interest and to keep up the pace. “I am having conversations on a daily basis [with] people who want to [tokenise] not just financial assets,” he explains.
“We have seen art, real properties, we have seen trees, people talk about tokenising receivables, or tokenising certificates of deposit, [foreign exchange], or other derivatives transactions. There are a lot of ideas.”
https://www.ft.com/content/16c411c5-5116-44bf-8b71-abb9440a5ebf
