Crypto embrace faces challenges | The Standard

The region has seen an influx of billions of US dollars in trading volumes amid an unfavorable regulatory environment in the West.

While Europe is to roll out a comprehensive set of rules to regulate crypto assets next year, the UK is also tightening its grip on the sector, and regulators in the US are taking legal action against three major crypto exchanges.

Binance, the world’s biggest cryptocurrency exchange, has lost almost all of its market share in the US and more than half of its share in trades denominated in euros, according to researcher Kaiko.

All these factors have led to a 20 percent decline in market depth for the top 10 cryptocurrencies this year, Kaiko says.

Retail trading

In Hong Kong, however, things are going in the opposite direction.

The Securities and Futures Commission has allowed retail investors to buy and sell larger tokens like bitcoin and ether on two virtual-asset platforms it granted licenses to last week, after the new regulatory regime took effect in June. The licensees, HashKey Exchange and OSL, were also the only two exchanges permitted to offer crypto trading to professional investors under the city’s voluntary licensing scheme earlier.

Firms such as Huobi Global, OKX, and Amber Group have expressed their intention to apply for licenses under the new regime, and a unit of Chinese state-owned developer Greenland Group is also said to have planned to do so.

HashKey chief operating officer Livio Weng believes that licensed exchanges will become mainstream because the public would tend to trade on platforms with more investor protection measures.

Nevertheless, it remains unclear whether the regulations are compelling enough to attract substantial investments from them.

Bloomberg reported in May that HashKey was in talks to raise up to US$200 million. And it is estimated that a license and relevant expenditure could cost between HK$20 million and HK$50 million for established crypto firms and up to HK$100 million for players new to the industry.

The SFC’s focus on retail investor protection measures covering onboarding, governance, disclosure, and token due diligence and admission could also have the potential to impact service providers’ profitability.

The investment scope of individual investors is restricted to coins that are included in at least two “acceptable, investible indexes from independent providers, one with experience in the traditional financial sector.”

That might be a hurdle for companies eyeing transaction fees from trading of various coins.

It is estimated that Coinbase might lose half of its revenue if the US Securities and Exchange Commission stops Coinbase from trading 19 digital tokens including Binance Coin, which the watchdog has defined as securities.

The SFC’s rulebook also prohibit platforms from providing services like earning, deposit-taking, lending and borrowing, as well as having any positions in virtual assets.

Still, there are a few key areas such as derivatives and non-fungible tokens that the regulator does not explicitly address, leaving room for ambiguity.

The watchdog says whether NFTs are investment products that require a license, artwork or collectibles is still open to debate and it will make decisions on a case-by-case basis.

And stablecoins, which play an important role in the crypto world, are temporarily off-limits to retail investors until the regulatory framework is established by the Hong Kong Monetary Authority.

But the regulatory arrangements are expected to be implemented only by the end of next year – six months after the end of the 12-month transition period for the new licensing regime.

Speculative assets

Some experts remain skeptical about Hong Kong’s pivot to digital assets.

Former HKMA chief executive Joseph Yam Chi-kwong questions why the government is actively promoting the development of crypto that “doesn’t even have a balance sheet to look at” and how the “self-serving” asset class can help support the economy.

Yam says he wouldn’t buy any cryptocurrencies whose prices are driven by speculation. “If you want to speculate, you might as well go to casinos.”

Yam’s remarks echo activist investor David Webb’s views on the subject. Webb calls it a “mistake” endorsing trading in tokens which “in most cases have no underlying value and are not a claim on anyone.”

“Ironically, gambling is illegal in Hong Kong, except via the Jockey Club, and now, via newly-regulated virtual asset trading platforms,” Webb says in a tweet.

He notes that Hong Kong “always jumps on financial bandwagons just as the wheels are about to come off, or in this case, have already done so” and compares the new scheme with the city’s ambition to become an Islamic finance hub in 2007, which did not take off.

Test-bed

Few people know exactly why the SAR suddenly ditched its stance and started to embrace digital assets after last year’s collapses of two stablecoins and the crypto winter triggered by a series of defaults and bankruptcies, including FTX, an exchange that was founded in Hong Kong.

Some speculate that China wants to use Hong Kong as a testing ground for crypto and might one day reverse its ban, especially after representatives from the Liaison Office were reportedly observed attending crypto events in the city.

But the appointment of Pan Gongsheng as the governor of China’s central bank — the People’s Bank of China — has dampened these hopes. Back in 2017 and much before China implemented crypto curbs, Pan famously said that “if you sit by the riverside and wait, one day you will see the corpse of bitcoin float by.”

Hong Kong officials including SFC chief executive Julia Leung Fung-yee have emphasized that the territory is not aiming to be a crypto trading hub but recognizes trading as an important part of the virtual asset ecosystem.

Bringing in regulations is the only pathway to embrace innovation, instilling trust in it as the city “embraces the application of distributed ledger technology in the realms of financial services from tokenization of bonds to investment funds,” she says.

Banking on support

To speed up the process, the HKMA has also repeatedly urged lenders like the Hongkong and Shanghai Banking Corporation and Standard Chartered Hong Kong to support regulated virtual asset companies with their “legitimate need for bank accounts.”

Yet, at least two local banks with a global presence refuse to be linked to any crypto activities and many peers are reluctant to offer banking access to exchanges for fear that they may be punished once cryptocurrencies are used for money laundering, according to the Wall Street Journal.

With the implementation of Hong Kong policies, more banks are expected to cooperate to open up fiat channels, attracting more people to participate in the market, says HashKey, which has a partnership with Standard Chartered (2888) on fiat currency deposit and withdrawal services.

While HSBC has allowed its customers to trade the three crypto-linked exchange-traded funds in Hong Kong, prominent financial players like BlackRock and Fidelity are seeking approval for spot bitcoin ETFs among dozens of attempts in the US.

BlackRock is filing for the fund on hopes that an approval of such an ETF would attract new investments and enhance market liquidity.

But JP Morgan believes it won’t be a game-changer as similar products have already been available in Canada and Europe for years without experiencing substantial capital inflows, and investors have shown little interest in bitcoin funds over the past two years.

Bitcoin, which accounts for nearly half of the crypto market share by value, has jumped by over 75 percent this year but has not yet reached half of its peak at US$69,000 in 2021.

Still, Standard Chartered (2888) expects the price to reach US$50,000 by the end of this year before more than doubling to US$120,000 in 2024 as miners hold on to a greater amount of the token, anticipating even higher prices in the future.