Due to limited transparency, it is hard to know why Beijing has decided to let Hong Kong experiment with decentralized digital currencies. It represents a sharp turn away from the draconian crypto bans Beijing began imposing on the mainland in late 2017. We know that Chinese President Xi Jinping believes blockchain technology can play a crucial role in China’s economic future, and given blockchain’s link to crypto, perhaps, given Hong Kong’s autonomy under one country, two systems, the erstwhile British Crown Colony can serve as an experimental zone for decentralized virtual currencies in the broader PRC.
In some respects, this move by Hong Kong is a high-stakes gamble. It is a bet that crypto’s recent travails are ephemeral, that the many kinks in the industry will be ironed out in good time, and that ultimately, the market will recover and soar to unprecedented new highs. It is a bet that crypto will become an integral part of mainstream financial services one day.
To that end, Hong Kong is busy rolling out the red carpet for the beleaguered crypto industry. The month of April will see Hong Kong host more than 100 crypto-related conferences and other events. At least 10 firms with Chinese founders including OKX, Bybit, Huobi have announced or are planning to announce their bid for licenses in Hong Kong.
At the same time, banks in Hong Kong, including the local unit of a big Chinese state-owned lender, are taking on crypto companies as new customers. Banks have opened deposit accounts for crypto businesses that can be used to support their day-to-day operations, such as paying salaries to employees. Some are even providing crypto trade-settlement services that other lenders have steered clear of because of the potential risks involved.
For its part, leading Hong Kong virtual bank ZA Bank recently said that it would offer token-to-fiat currency conversions over licensed exchanges as well as act as a settlement bank for clients to allow withdrawals in Hong Kong, China and U.S. currencies after they deposit crypto tokens with exchanges.
While these developments are all well and good, we would stay that crypto firms should proceed with caution. The overall message from China’s top leadership remains cautious about technology firms that do not contribute to the so-called “real economy.” Beijing prizes “hard tech” like semiconductors, artificial intelligence and new-energy vehicles.
To the extent that crypto is primarily a speculative asset class, its utility to Beijing is limited. Payments are another story, so we will just have to wait and see.