The rapid growth of the crypto space is at loggerheads with China’s obstructive stance on cryptocurrencies and, increasingly, fintech in general. Indeed, the exodus of crypto companies is indicative of a larger challenge for HK’s fintech industry which seems to be losing some of its shine. This trend has been further exacerbated by very strict and somewhat onerous quarantine rules.
Hong Kong’s role as an international hub remains
It isn’t all bad news - Hong Kong possesses a highly stable, world-class regulatory regime with attractive sandboxes and initiatives to pioneer fintech development in emerging areas. No exchange controls or restrictions on capital inflows and outflows make Hong Kong one of the freest markets for fintech companies to grow and expand cross-border operations especially into mainland China.
These characteristics have served Hong Kong well and made it a critical bridge into mainland China. The government shouldn’t however lose sight of this competitive advantage. The current COVID-related restrictions do not seem to impact day-to-day life in HK too much, but have made it difficult for expats to keep in touch with family and travel for business. This has resulted, at least anecdotally, in many people leaving HK for other jurisdictions where the rules are less cumbersome.
Further, more support should be given to foreign companies looking towards Hong Kong as an inroad to China, but with a focus on those fintechs that have a specific value-proposition suited for either the HK or mainland markets. The Monetary Authority of Singapore’s hackathon problem statements are a good example of how a jurisdiction can narrow the focus. Too often fintechs seem to see HK as a place where any fintech can thrive, but in reality, it takes a specific value-proposition to be successful.
HK as the center of China DeFi?
China’s E-RMB experiment has put the country at the center of one of the most salient trends in the financial industry today: central bank digital currencies or CBDCs. Hong Kong’s role within the E-RMB framework is still somewhat unclear, but there is a very nascent opportunity for the city to play a critical role. Although the E-RMB will be ‘borderless’ insofar that you only need a digital wallet and you can exchange E-RMB, one could imagine that there will still need to be a cross-border element to the currency. HK’s work with the Bank of International Settlements (BIS) may be leading the way.
That being said, the mainland regulators’ intentions around crypto and Defi in Hong Kong are still a bit unclear. How this plays out will be critical for the future of the city’s role and if there will be any space for DeFi.
Creating an ecosystem
When it comes to funding, one area unique to Hong Kong is its density of family offices. A specialist team was set up at Invest Hong Kong to offer one-stop support service to family offices interested in establishing in the city. This focus on family offices is beneficial to expanding Hong Kong’s private capital funding pool – and thus, driving even more funding into the fintech ecosystem.
In addition, the Hong Kong Monetary Authority (HKMA) has unveiled a “FinTech 2025” strategy covering cross-boundary FinTech cooperation, Central Bank Digital Currency and funding support. The HKMA will nurture digital acceleration and new blockchain solutions by Hong Kong banks and work in tandem with the Hong Kong Growth Portfolio which reinforces the city’s unique commercial and innovation potential.
Certainly there are some near-term headwinds for Hong Kong that are making both existing players and potential entrants reconsider their Greater China strategy, but if the city doubles down on what made it so attractive in the first place, there is certainly still significant opportunity.