Why Hong Kong could be crypto’s next ‘center of gravity’

Hong Kong’s rollout of its licensing program for crypto companies that cater to retail traders — which comes as the United States maintains its more guarded regulatory posture — may represent an inroad for the city, industry participants say.

Interest in setting up shop in Hong Kong for digital asset operators, including exchanges, appears to have been on the rise since local regulators laid out their licensing program earlier this year. 

HashKey, a crypto exchange based in Hong Kong that has customers throughout Asia, locked down Hong Kong’s first license for facilitating spot crypto trading with retail customers. Firms with strictly institutional dealings had already been permitted to obtain a separate approval from the Hong Kong Securities and Futures Commission. 

Galaxy Digital recently bolstered its presence in Hong Kong. Jason Urban, the firm’s global head of trading, told Blockworks that its “newfound openness to crypto is already attracting fresh talent and capital, giving the industry an opportunity to build operations in Asia further, using Hong Kong as a center of gravity.”

Galaxy, which maintains offices in several locations globally, recently brought on board a “new group of traders who work out of the city,” Urban said. 

Alvin Kan, Sei Labs’ head of Asia, told Blockworks that Asia is poised to become a “very capable growth area for the entire Web3 industry,” adding that the way “things are happening in the US” has added to the possibilities outside of the United States.

“Hong Kong has always been kind of a gateway to Asia,” Kan said. “If you look at the government, in terms of issuing licenses and so on, that is a signal to companies, saying, ‘Why don’t you come over and grow this Web3 industry?’”

HashKey’s Hong Kong efforts have been in the works for some time, with the exchange receiving approval to operate in the city near the end of last year — though it was limited to institutional customers.

Once a hotbed for activity — Wall Street banks like Goldman Sachs and JPMorgan for years maintained significant presences in the city — Hong Kong’s influence on and power within traditional finance has faded. But that could be an opportunity for crypto, traders say. 

Thousands of employees of investment banks relocated amid Hong Kong’s prolonged Covid-19 lockdown. Singapore has made strides since, becoming a destination for a number of hedge funds and some traditional finance market makers. 

The crypto ambitions of Hong Kong’s Securities and Futures Commission has since begun to come into focus. 

The process behind the retail licenses, however, has been somewhat opaque — with little indication of which company could be next to gain approval. CoinDesk reported, citing three anonymous sources, that obtaining a license could cost an exchange $15 million to $20 million.

The requirements are largely outlined in a June report from the commission, which imposes a number of requirements, including that registered firms hold custody of client assets in-house. Firms are also tasked with maintaining capital reserves in excess of their expenses. 

Asia “growth engine of Web3”

There are also a series of steps in the application process that aren’t entirely public. Representatives for HashKey and the Securities and Futures Commission did not return multiple requests for comment. 

Still, the city may have placed itself in a position to capitalize on companies seeking relief from regulatory crackdowns elsewhere — if not moving out of the US entirely, at least establishing a foothold outside its borders.

“Crypto is a global business and it’s our intention to continue to grow outside of the US at a much quicker pace than we were growing in the US,” Urban said. “The improving regulatory landscape is a major catalyst for this, but it’s also about opportunity. 

Though there may be bluster involved, a number of other well-known crypto companies have publicly said they would consider a move outside America. They argue that long-running industry feuds — with the SEC in particular — have shown next to no signs of abating. 

Coinbase CEO Brian Armstrong in April floated such a possibility. 

Matt Lason, chief investment officer of crypto hedge fund firm Globe 3 Capital, told Blockworks that the licensing is set up to allow “retail traders to have crypto options,” plus “on and off ramps,” adding that the latter is especially essential. 

It could add another example of the US falling behind a developed nation on its approach to crypto, he said. 

“It’s a very positive development and even more so with what’s been going on in the US with the SEC,” Lason said. “It just proves that it’s going to be very hard any time a government tries to contain crypto. It’s worldwide. It’s decentralized. If you don’t want it in the US, it’s going to be moved over to the UAE. It’s going to be moved over to Hong Kong. 

Hong Kong has also looked to strengthen its crypto credentials elsewhere. Its government set up a Web3 “task force” earlier this year designed to research and provide recommendations for “the sustainable and responsible development of Web3 in Hong Kong.”

Elsewhere, finance regulators in Hong Kong created a program for fund managers trading exclusively crypto investment products to register, paving the way for digital assets-focused alternative investment managers with institutional limited partners. 

“The key thing here is that Asia is going to be the growth engine of Web3, whether you’re a Web3 company, which is very heavily based in the US, or if you’re a [venture capitalist] over there, you have to look at Asia — whether it’s from a user perspective or capital flows or the investors set up here,” Sei’s Kan told Blockworks.

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