Could Hong Kong’s slow approach to crypto regulation hinder digital asset growth?

Hong Kong-based First Digital Trust has expressed hope that the city will speed up regulation of the digital assets sector.

Aiming to position itself as a global cryptocurrency hub, Hong Kong currently has only two fully licensed virtual asset trading platforms, Hash Blockchain and OSL Digital Securities. Many other crypto exchanges are still waiting for full operating licenses in the city.

“It's understandable that (Hong Kong's) current regulatory approach to business is more conservative and slower than some other jurisdictions,” First Digital CEO Vincent Chock said in an exclusive interview. However, he pointed out that

“We hope to see the regulation move quickly to ensure it does not lag behind the industry's rapid pace of growth.”

In the year From June 1, it became a criminal offense to operate an unlicensed virtual asset trading platform (VATP) in Hong Kong. Meanwhile, the Hong Kong Securities and Futures Commission has published a “warning list” naming “suspicious virtual asset trading platforms” or unlicensed entities operating in Hong Kong. The SFC said these entities may be targeting Hong Kong investors.

Related: Hong Kong Accepts Crypto License Application Late

Does Hong Kong look like Dubai?

On July 17, the Financial Services and Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) published their findings on local stablecoin regulation.

A week later, on July 24, Jingdong Coinlink Technology Hong Kong Limited, a subsidiary of JD Technology Group, announced plans to issue a 1:1 stablecoin pegged to the Hong Kong dollar (HKD). The HKMA recognizes the company as a participant in the sandboxing program.

Meanwhile, Dubai has taken a leading role and made significant progress in the stablecoin sector. In the year On August 21, Tether, the largest stablecoin provider, revealed plans to launch a new stablecoin with the United Arab Emirates dirham (AED) in partnership with the United Arab Emirates' Phoenix Group and Green Acorn Investments.

Additionally, in October 2023, a former MIT alumni and SoftBank executive introduced a stablecoin backed by the dirham. The DRAM stablecoin is listed on decentralized finance protocols Uniswap and PancakeSwap.

Lenders are in no rush to offer crypto protection services.

Chock doesn't expect banks to rush to offer digital asset protection services anytime soon. “There's a liability beyond their risk appetite,” he said.

What's more, Chock says, a number of companies with established trust structures that offer crypto custody services have stepped in to fill this gap.

However, the United Arab Emirates recently allowed Standard Chartered to start offering crypto security services. On September 10, the bank announced that it will launch its digital asset protection service in Bitcoin (BTC) and Ether (ETH).

Asking Dubai's crypto tycoons how they got rich. Source: YouTube

The bank launched the regulatory service in partnership with Brevan Howard Digital, the cryptocurrency division of hedge fund Brevan Howard.

Hong Kong raises the bar with Web3 integration in the financial system

While the licensing system for digital asset trading services may be slow, the city is scoring in other Web3 areas, including applications in central bank digital currencies (CBDCs) and tokenization of real-world assets.

It is interesting to note that BTC and ETH exchange-traded funds in Hong Kong allow a unique ‘in-kind' subscription method, which is direct subscription and redemption using BTC and ETH. This innovative structure offers investors a flexible and easy investment process,” Chok said.

“The Hong Kong Trust and Company Service Provider license allows trust structures to hold digital assets, which is a convenient and unique feature compared to other jurisdictions. This strong regime not only paves the way for protection services but also related sophisticated services like inheritance management.

Initiatives such as the HKMA's Project Ensemble regulatory sandbox are paving the way for interbank settlement using real-world asset tokens and tokenized funds.

In the year On August 28, HKMA introduced Project Collection Sandbox. This initiative explores the tokenization of real-world assets and interbank settlements using a wholesale central bank digital currency (wCBDC). HKMA stated that the project aims to explore the technical interoperability of tokenized assets, token deposits and wCBDC.

Related: Hong Kong Begins Phase 2 of CBDC Pilot

Project Collection represents the culmination of several earlier initiatives. These include token deposit settlement trials with HSBC using Ant Group's technology, as well as HKMA's pilot e-HKD CBDC settlement trials for transactions between HSBC and Hang Seng Bank.

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