Hong Kong’s crypto hub ambitions in spite of China’s crackdown

The crypto industry has had a rough year with digital currency markets collapsing and companies collapsing across the board.

Despite the volatility, Hong Kong is pushing to become a center for virtual assets.

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The city’s push for digital assets stands in stark contrast to mainland China, where Beijing has effectively banned trading and clamped down on crypto-related activities.

Hong Kong plans to introduce new rules in June that will require crypto trading platforms to be licensed by the Securities and Futures Commission. The regulator has launched a consultation on proposals to regulate virtual asset trading platforms.

The company that spoke to CNBC said that it hopes the central government can watch Hong Kong’s crypto moves.

“If anything, China may see an effect in Hong Kong under the rules, the issuance of new crypto-related products or blockchain-based solutions, and the choice of trade and business activities that can be carried out,” said Justin d’Anethan, director of sales institution in the Amber Group.

Hashkey Capital CEO Deng Chao has similar sentiments, and says Hong Kong’s potential crypto legalization could serve as a compass for China.

“In the future, it can be a model for policy formulation in other areas [in China] if it proves to be successful,” he told CNBC in an e-mail, adding that Web3 and crypto businesses could finally adopt a more compliant approach to their day-to-day operations.

Web3 represents the next generation of the internet. Proponents say it would further decentralize and reduce the power of big tech companies. Some supporters say that cryptocurrencies will be an important part of Web3.

In December, a former member of the Monetary Policy Committee of China’s central bank, Huang Yiping, called on Beijing to review the widespread crypto ban.

Huang said there is a missed opportunity for the development of digital technology if crypto transactions are banned for a long time.

However, caution remains that Hong Kong could become China’s crypto north star.

“While there has been some talk of China loosening its stance on crypto, so far nothing has been seen to indicate anything,” d’Anethan said.

Moreover, it will not be easy for retail investors want to jump on the Hong Kong crypto bandwagon.

“Hong Kong will impose a strict set of regulations on crypto trading platforms,” ​​said Yuya Hasegawa, a market analyst at Japanese crypto exchange Bitbank.

“This means that it will not be easy for new people to join and start a business,” he said, adding that he is not convinced that the government’s plan to allow retail business access to virtual asset trading will generate much growth in the industry and as a hub.

While Hong Kong has high crypto ambitions and has a relatively low tax policy for businesses, the city can still find competition with other crypto hubs.

“Regulation is, of course, necessary for healthy growth, but in order to compete with other crypto hubs, there must also be an attractive tax policy for crypto projects,” Hasegawa said.

He pointed out that Hong Kong has a relatively low tax policy on business: the corporate tax rate for the first 2 million Hong Kong dollars ($254,930) of assessable profits is 8.25%, while profits above that amount are taxed at 16.5 %.

But compared to other crypto hubs like Dubai, which charges an average rate of 9%, and Switzerland – with a corporate rate of 8.5%, “it’s still not competitive,” he said.

Other players who have previously sought to become digital asset hubs have recently introduced legislation to regulate the industry. Observers say regulation is needed to create certainty for the crypto industry and increase consumer adoption.

Last month, the UK government laid out a roadmap to regulate the cryptocurrency industry in line with traditional financial firms.

The European Union last year launched Markets in Crypto-Assets law, which requires stablecoins to maintain sufficient reserves to meet redemption requests in the event of mass withdrawals.

Other jurisdictions like Dubai in the United Arab Emirates are seeking to position themselves as crypto-friendly places to do business.

However, some countries, especially the US, have taken a tougher stance on the cryptocurrency industry – especially after the collapse of major cryptocurrency exchange FTX and the arrest of founder Sam Bankman-Fried.

However, the recent drop in bitcoin prices has not dampened the company’s hopes that crypto adoption will grow.

“For long-term investors, the green light by regulators should highlight the fact that crypto is gaining adoption regardless of the temporary price movements or volatility of this nascent asset class,” said Amber Group’s d’Anethan.

Crypto markets have rallied recently despite bitcoin falling below $20,000 by the end of 2022. Bitcoin was trading at $27,834 at 9:30 p.m. ET Sunday, according to Coinbase. This is still nearly 60% lower than the November 2021 record high of $68,990.

“Although virtual assets are relatively new, retail investors already have some knowledge and experience in the market after years of education. When the climate improves, interest will also rise,” said Deng of HashKey.

– CNBC’s Arjun Kharpal contributed to this report.