Hong Kong’s financial regulators and at least some in the industry seem to believe that the city’s future as a financial hub depends on its embrace of cryptocurrency. For the past two years, Hong Kong has been relentlessly pitching itself as a digital assets hub in an effort to regain ground lost to Singapore and mainland China. The city-state has emerged as a larger and more important fintech hub, while mainland Chinese stock exchanges are attracting companies to list that might have once chosen to go public in Hong Kong. While it can be argued that Hong Kong would be better served by focusing less on an industry that remains problematic in many respects, its big bet on crypto might end up paying off big.

In the alternate reality inhabited by crypto bros, most jurisdictions are always on the cusp of a full-throated embrace of digital assets. Case in point: in late August, Tron founder Justin Sun wrote on X, “China unbans crypto. What’s the best meme for this?” Regardless of Sun’s true intentions in this post, Beijing is not only “unbanning” crypto, it is tightening oversight of the industry.

It was inevitable that Hong Kong’s much-hyped cryptocurrency initiative would run into some serious challenges. We are not surprised to learn that the city’s regulators are not satisfied with the compliance level at some “deemed to be licensed” exchanges operating in the city. While demand for digital assets remains strong in many markets, and Hong Kong has a strong foundation as a financial services hub on which it can build, the crypto sector itself remains immature and prone to malfeasance while there is no global consensus on how to manage digital asset flows.

Cryptocurrency crime committed by the Democratic People’s Republic of Korea (DPRK) has become so pervasive that it requires a stronger international effort to bring under control. With that in mind, the U.S. Department of State and the Ministry of Foreign Affairs of the Republic of Korea (ROK) co-hosted an event about the issue in New York City on August 27.

Hong Kong seems determined to become a major hub for digital assets and adopting a stablecoin regime is a key part of that policy. However, crypto bros hoping for a highly permissive regime appear to be out of luck. The city’s stablecoin regulations have changed very little from the ones proposed in December 2023. They require issuers of fiat currency-backed tokens to obtain a license from the Hong Kong Monetary Authority (HKMA), that stablecoins be fully backed by reserve assets “at any given point in time” and that issuers publish monthly confirmation of those assets from an independent auditor.

JPMorgan estimates that global corporates move nearly US$23.5 trillion across countries each year, equivalent to roughly 25% of global GDP. Since they rely on what the bank calls “sub-optimal wholesale cross-border payment processes,” annual transaction costs for the companies have reached US$120 billion. This is where atomic settlement comes in – and where the ambitious blockchain firm Partior – which was founded by JPMorgan, DBS and Temasek sees a large market opportunity.

Taiwan’s Financial Supervisory Commission (FSC) has historically taken a hands-off approach to cryptocurrency focused on segregating the local digital assets ecosystem from the banking system – which it wants to protect from volatility and risk. As long as banks stay away from digital assets, the FSC is willing to let local crypto exchanges operate with a high degree of autonomy provided they pay their taxes and keep on the straight and narrow. However, Taiwan has since the collapse of FTX been dealing with a surge in crypto-related crime, both money laundering and fraud. Criminals are exploiting unsuspecting investors and taking advantage of limited knowledge of digital assets among the general public, lawmakers and regulators.

South Korea has long had an enthusiastic cryptocurrency investing community. According to the Korea Financial Intelligence Unit (KoFIU), by mid-2024 Korea will have about 6 million crypto investors, equivalent to 11.5% of the population. At the same time, crypto related crime is rising in Korea. While the most infamous example remains Do Kwon’s multi-billion-dollar TerraUSD-Luna fraud, other, smaller scale scams are proliferating, necessitating new regulation to protect investors and both deter and penalize crime. According to the FoFIU, Korean digital asset exchanges flagged 49% more suspicious transactions in 2023 compared to 2022.

The March 7 launch of Hong Kong’s wholesale CBDC project was memorable. Firstly, the enthusiasm of the city’s financial regulators for this project is strong. While painting in broad brushstrokes, they outlined some lofty objectives for the digital HKD. The project aims to develop an interoperable platform that will improve efficiency, transparency and financial inclusion in the monetary and financial systems. “We’re calling it Project Ensemble” internally, to conjure a group of items working together, Hong Kong Monetary Authority (HKMA) deputy chief executive Howard Lee said at a press conference. “We hope it will play beautifully, like music.

Undertaking cross-border payments involving central bank digital currencies (CBDCs) is a complicated endeavor, and despite some media hype in the summer of 2023, the mBridge project of the Bank of International Settlements (BIS) and the central banks of mainland China, Hong Kong, Thailand and the United Arab Emirates (UAE) did not launch late last year. Many questions remain about the ultimate utility of using CBDCs in cross-border payments as well as any attempt to directly challenge the US dollar in global financial flows.