In the first week of November, Xiao told The South China Morning Post in an interview: “If the US Congress and the [incoming] president make crypto policies clear, constantly legislate and promote the industry, it would certainly be a driving force” for Beijing to accept digital assets.
Xiao seems to be basing this argument on several factors. First, he believes there is strong demand for stablecoins in China. Xiao told SCMP that HashKey recently did a survey at mainland manufacturing and trade hub Yiwu, where it was found that almost all merchants received inquiries from buyers on whether they could make payments using popular US-dollar-based stablecoins, such as USDT and USDC.
Second, HashKey’s core business model assumes adoption of cryptocurrency in mainland China at some point. Xiao emphasizes how his company has maintained its base in Hong Kong rather than Dubai or Singapore – which many investors generally see as being more predictable from a regulatory standpoint than Hong Kong and more internationally oriented. “Only by staying in Hong Kong can we serve mainland China when that market opens up,” he told SCMP. “We firmly believe that day will come.”
It is unclear how Xiao has come to that conclusion. China initiated a harsh crackdown on cryptocurrency in 2017 because the Chinese authorities believed it offered no real benefits to the Chinese financial system while elevating risk. Chinese citizens at the time were using crypto to evade capital controls that Beijing sees as essential to preventing large-scale capital flight. Since then, Beijing has not once eased its crypto restrictions – it has only gradually tightened them.
Permitting Hong Kong to experiment with crypto does not signify impending liberalization on the mainland. After all, Hong Kong operates under the one country, two systems governance model that allows it to maintain an open financial system different from the mainland’s.
While we expect that Hong Kong will redouble its efforts to become a crypto hub – largely out of necessity as it has lost ground to Singapore in many other respects in recent years – the mainland will not necessarily follow suit. At its essence, cryptocurrency is something that supports decentralization and anonymity – two things that the Chinese government does not want to promote in its financial system.
Further, Beijing has been tightening its crypto controls in recent months – not loosening them. In an August judicial review, the Supreme People’s Court and the Supreme People’s Procuratorate said that cryptocurrencies, online game coins and tipping during live streaming would be considered money laundering in China.
This is a significant step, marking the first instance of Beijing revising its laws to target the use of cryptocurrencies. China’s top judicial bodies said that the transfer and conversion of criminal proceeds and their benefits through digital asset transactions and financial asset exchanges would be covered under regulations that prohibit “covering up and concealing the source and nature of criminal proceeds and their benefits by other means.”