Hong Kong’s Digital Assets Double Standard
Compared to Singapore, Asia’s other city-state financial hub, Hong Kong is moving too slowly on digital assets from a regulatory perspective. And that’s a detriment to the city’s future competitiveness.
Hong Kong Harbor; Source: Shutterstock
- Hong Kong became wealthy because its simple, clean, crisp regulations allowed for a business friendly environment with a strong rule of law. But that isn’t happening for digital assets
- The looming loss of autonomy to a more aggressive Beijing is chilling the city’s competitiveness in the space
As the world turns the page on Covid-19, Hong Kong’s monetary authorities are putting the city’s one key industry — finance — first and foremost.
Part of this involves allowing senior leadership in the financial industry to skip quarantine, which even the fully-vaccinated and multi-tested have to do. But those executives that are allowed to skip the 14- to 21-day sentence (depending on your vaccination status) are from a very specific section of the finance industry: large incumbent banks and money managers.
“Given that the digital asset and blockchain community generates ample jobs and opportunities for wealth generation in the space, it makes no sense to us that traditional bankers get to skip quarantine and others don’t,” said James Anderson, CEO of RioDeFi.
Just today, Sam Bankman Fried, CEO of FTX, took to Twitter and in a tweetstorm complained that he was delayed returning to Hong Kong.
According to Hong Kong laws, people like Anderson, from RioDeFi, and Bankman-Fried of FTX, are simply part of the wrong financial industry.
The traditional financial (tradfi) industry, which has laid off tens of thousands in Hong Kong, gets a pass for their people, but the digital assets industry, which is hiring at an equal pace of tradfi’s layoffs, has to contend with quarantine.
All of this comes down to a “double standard,” said Vincent Chok, CEO of First Digital Trust, a registered public trust company headquartered in Hong Kong. While Chok didn’t mention quarantine rules specifically, he has a long list of issues with the city’s financial regulators beginning with the inconsistencies in how different bodies treat crypto.
Public trust companies, like First Digital Trust, report to the Registrar of Companies. This regulator views crypto as a virtual property or a commodity, Chok explains, and the registrar gives trust companies a green light to hold it as an asset class.
But Hong Kong’s central bank, the Hong Kong Monetary Authority, while also viewing crypto as a virtual commodity, says it “does not qualify as a means of payment or electronic money” and declines to regulate it, making it difficult for banks to engage with digital assets.
Finally, the Securities and Futures Commission (SFC), Hong Kong’s market regulator, has a strict licensing regime which requires crypto exchanges to be regulated as securities brokers and exchanges and only open to accredited investors.
“There’s a definite bias going on,” Chok said, explaining that regulators are chalking all of this up to a need to comply with anti money laundering (AML) laws. After all, money laundering is a sensitive subject for authorities in Hong Kong. The city’s banks often find themselves at the center of epic money laundering cases involving drug cartels and Ponzi schemes.
“Banking still treats crypto as something that they really don’t want to touch in Hong Kong over money laundering concerns,” Chok said.
No rush to change
Slightly ironically for a City that’s known for its fast pace and a bureaucracy regarded as speedy and efficient, regulators are in no rush to change this, according to Chok.
While regulators are continually soliciting the opinion of the business community, they are also taking their “own sweet time” because they want to establish their own independence from US and other foreign regulators, he said.
Digital asset exchanges like FTX and BitMex have offices in Hong Kong but are legally registered elsewhere, noted Chok.
“Those companies make so much money, and if they wanted to be licensed or regulated in Hong Kong it hasn’t happened yet,” Chok said. “If they tried, I bet they would still be waiting for it, and their application wouldn’t be processed yet. So what do they do? Stop making money? Stop doing business? No, they have to continue to do it in areas where they are accepting of what they are doing in the digital assets space.”
“There’s already two regulators for AML in Hong Kong, the Company Registrar and the Customs and Excise Department. So now SFC is proposing to be another regulator on the AML for SFC and crypto virtual asset exchange service providers,” Chok said. “They’re putting their own set of rules when there are other AML policies and ordinances. They just wanted to put their own regulators into that space, which is hard because who do we actually look at for the actual proper AML guidelines?”
Operating in gray areas
Aside from overlapping, burdensome regulation, there is another elephant in the room: Beijing. While Hong Kong — at the moment — is legally an autonomous territory from China with its own rules and standards via the ‘One Country, Two Systems’ principle.
“The bigger brother in China is running crackdowns [on the cryptocurrency industry]. It shows how they feel about crypto,” Chok said. “In a way, it’s still independent in Hong Kong, but in another way they also have to respect their elder brother in China and their view on cryptocurrency.”
This doesn’t mean that the city will completely decline to embrace crypto. Hong Kong is a very entrepreneurial place, and Chok gives the example of Li Kai Shing rising from a shoemaker to one of Asia’s wealthiest men.
However, until regulators catch up the industry will operate in gray areas — but Chok doesn’t mean to imply that anyone is breaking the law. “Hong Kong was built in gray areas. It’s the way everybody has done it,” he said.
But Chok is far from losing hope.
“I do believe the future of Hong Kong will have to involve digital assets. That’s just the way that the world is heading,” he said. “And if they don’t do that, they’re going to lose out. They’re going to lose their position as the top financial center in Asia.”