In late December, Hong Kong’s Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority jointly issued a circular in which they said that the city is prepared to authorize ETFs with direct exposure to virtual assets, including spot virtual asset ETFs – which allow investors to gain exposure to digital assets without directly buying any crypto tokens. They are largely seen as key to helping crypto become more popular with mainstream investors.
Hong Kong’s decision makes the city just the ninth jurisdiction globally to allow retail investors this type of access to crypto-linked ETFs. The others include Canada, Germany, Switzerland and a number of offshore tax havens, according to CoinGecko.
Also in late December, the HKMA and Financial Services and the Treasury Bureau (FSTB) launched a stablecoin issuer consultation that will run until the end of February. Licensing requirements apply to issuers who issue a stablecoin in Hong Kong or reference the Hong Kong dollar. Additionally, any stablecoin issuer that “actively markets” to Hong Kong users needs to apply for a license. Any issuers not licensed by the HKMA can only offer stablecoins to professional investors.
There is some evidence that Hong Kong’s crypto hub push, which began in 2022, is bearing fruit. Data compiled by research firm PitchBook show that companies based in Hong Kong and Singapore together received about 11% of global venture capital funding for blockchain and crypto projects in 2023, up from 2% in 2021.
That said, PitchBook also found that overall crypto funding fell 60% year-on-year in the third quarter of 2023. It is unclear if this cycle has bottomed out yet.
Hong Kong’s regulators, however, seem to have viewpoints on digital assets more aligned with crypto bulls. Indeed, the bulls gearing up for a long bull run. They note that Bitcoin rose 152% in 2023 and that 2024 is a “halving” year for the paramount cryptocurrency. Halving, which occurs every four years, reduces the rewards miners receive by 50%, ensuring that supply does not exceed 21 million. In the past, halving preceded a rise in Bitcoin’s price. Additionally, there is intense speculation that the U.S. SEC will approve the first ever Bitcoin ETF.
So will fostering a cryptocurrency hub revivify Hong Kong’s status as an international financial center? While any big bet on crypto is usually inherently risky, for Hong Kong, it is imperative to tap into greater financial innovation to secure its future as a global financial center. Even its storied capital markets have had a tough time recently with a dearth of Chinese consumer tech listings and a broader economic slowdown on the mainland.
Ultimately, crypto is a highly globalized industry, with founders and capital highly mobile and always seeking the friendliest jurisdictions. Establishing itself as a hub now, when crypto is still a fledgling industry, represents a chance for Hong Kong to become a key player in what digital asset enthusiasts often describe as “the future of money.”
To be sure, questions remain about how the crypto ban on the Chinese mainland could impact Hong Kong’s digital asset aspirations in the long run. Yet for now, the city should focus on ensuring that it can handle standard compliance and cybersecurity challenges to minimize the repeat of incidents such as the CoinEx and Mixin hacks in September in which US$70 million and US$200 million were stolen respectively.