• Investors in Hong Kong seeking to hedge against an uncertain political climate are increasingly turning to digital assets
  • Demand is particularly strong amongst family offices and hedge funds
  • Financial regulators in Hong Kong and Singapore were the first to provide legal frameworks to allow for institutional investment in cryptocurrency

While the Office of the Comptroller of the Currency announcement that banks could act as custodians for crypto made shockwaves in the US, it was last year’s news in Hong Kong. And the new bills snaking their way through Congress to provide regulatory clarity on crypto exchanges? That’s something that happened months ago in the City. 

The result of this aggressive push towards licensing and regulation of crypto by Hong Kong’s Securities and Futures Commission, the region’s financial regulator, has resulted in “record” institutional inquiries and investment into crypto, according to OSL, a Hong Kong Exchange-listed digital asset trading platform and software provider. 

“Demand is coming from all of these types of counterparties but we’ve seen particular growth in interest from family offices, traditional hedge funds, and asset managers,” OSL’s Dan Simon told Blockworks.

“Within Hong Kong and Singapore demand has particularly increased from hedge funds and family offices in the last few months as regulatory approval has occurred in tandem at the same time that Bitcoin has doubled in price and market capitalization.”

OSL was one of the first firms to be licensed under the SFC’s virtual asset trading platform regulations, being awarded two license types: Type 1 (dealing in securities) and Type 7 for automated trading service (ATS). 

“We see regulatory approval as a continued driver of volume and customer growth, as institutions want to transact with a regulated entity that has unparalleled standards of security, performance and compliance,” added OSL’s Simon.

“Clients of a Hong Kong-licensed digital asset trading platform will enjoy all the protections and safeguards they have become accustomed to in traditional finance, and can also take comfort in additional protections under the new regime that have been tailored-made for the new asset class.”

Elsewhere in Singapore, OSL will be providing the underlying software stack for DBS’, one of the largest banks in Asia, crypto trading desk. 

According to reports, DBS’ crypto desk started trading in December of last year. Reportedly, the desk will begin by trading fiat-crypto currency pairs before moving on to security token offerings.  

“We expect to see continued accelerated and direct institutional investment into digital assets as well as ‘picks and shovels’ infrastructure companies such as OSL. This institutionalisation of the ecosystem will be key to laying the platform for widespread mainstream adoption in the future,” said Simon.

The ‘Network Effect’ of Digital Asset-Friendly Regulation

The SFC’s framework for trading platforms paved the way for authorized funds holding crypto to gain access to Hong Kong-based institutional investors. 

One example of this is Arrano Capital, a fund set up in April 2020 by Venture Smart Asia under the SFC’s rulebook, that’s hoping to raise $100 million.  Avaneesh Acquilla of Arrano Capital has been quoted as saying. “We decided to launch this fund to address market demand from professional investors who are increasingly focused on bitcoin as an alternative store of value.”

The Dark Side of Hong Kong’s Demand for Crypto

For a better part of the twentieth century, and most of the first two decades of the twenty-first, brand Hong Kong has effectively become synonymous with Asia’s premiere trading desks.

Backed by a common law structure, that would be familiar to most in the West, from its history in the Commonwealth traders in Hong Kong provided liquidity and exposure to deals connecting the east and west in everything from currency swaps, equities, to commercial goods from mainland China. The City’s deep pools of liquidity make for an active market trading Chinese Renminbi for Dollars; the Hong Kong Dollar itself is liquid because there are enough USD in its banks to cover redeemability at the established peg.  

But during the last few years the Constitution that upholds Hong Kong’s political and financial autonomy from the mainland has been eroded.

This came to a crescendo in 2019 when the city was rocked with daily protests over an ambiguous extradition law that would allow citizens to be sent to mainland China for a variety of reasons including deemed to be vague. As a follow-up to this, Beijing pushed a National Security Law on the City that would criminalize “secession” “subversion” and “collusion with foreign forces” with loosely defined definitions that critics feared would create a dragnet. 

And perhaps those fears were justified. After passing this law, authorities in Hong Kong began freezing bank accounts of those said to be involved with the protests. For every institutional fund getting set up to provide a hedge for institutional traders, there are OTC traders grabbing some crypto for themselves. According to Useful Tulips, an aggregator of OTC trading volume, LocalBitcoins and Pafxul volume has been steady with throughout the year as investors big and small seek shelter from the coming storm. 

  • Blockworks
    Reporter
    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.