With Hong Kong’s recent announcement that it will legalize retail trading of cryptocurrency, how should American crypto firms approach business operations in Asia?
Hong Kong’s new policy will allow retail investors to trade in cryptocurrencies and crypto exchange-traded funds. The move was made with the aim of rebuilding Hong Kong’s status as an international fintech hub. In a study conducted by blockchain specialist Chainalysis, Hong Kong’s overall global ranking for crypto adoption fell to 46 in 2022, down from 39 in 2021. Further, digital-token transaction volume in Hong Kong expanded by less than 10% in the year ending May 2022.
Up to 2018, big exchanges like Binance and FTX, lured by Hong Kong’s laissez-faire reputation, called Hong Kong home. That year, however, Hong Kong introduced a voluntary licensing program that restricted crypto platforms to clients with portfolios of at least HK$8 million (just over US$1 million). This made several crypto platforms wary of Hong Kong as a crypto-friendly jurisdiction. Binance and FTX left for friendlier climates in Singapore while crypto entrants to Hong Kong dried up. Only two firms, BC Group and HashKey, obtained permits in Hong Kong that year. Hong Kong’s reputation as a global fintech hub has gone downhill ever since.
The fundamental question for American and other Western crypto-related businesses is whether Hong Kong’s sector will be able to rise from the ashes and if so, does it provide an opportunity to gain a foothold in Asia?
It is unlikely that HK has the potential to regain its former glory as a crypto hotspot for American emerging technologies companies.
HK’s Mandatory Licensing Regime Is Still Very Restrictive
Under the new virtual asset service providers (VASP) regime (which takes effect from 1 March 2023), virtual assets (VAs) that fall within Hong Kong’s statutory definition of securities or futures contracts may only be traded on crypto exchanges operated by intermediaries licensed by the Securities and Futures Commission (SFC). Intermediaries that distribute, sell, broker, or advise on VAs must be licensed and comply with SFC’s regulations. Further, for the time being, only licensed VASPs will be permitted to provide their services to professional investors. This restriction has given rise to skepticism among people in Hong Kong who expect that the licensing regime will do little to facilitate trading. The general view is that even if consumers and small-scale investors can deal directly with retail users, their opportunities still will not be as attractive or as competitive as overseas platforms. In summary, the legal requirement to become an accredited or licensed VASP is still quite strict and it is not very clear how many American crypto firms would subject themselves to such rigorous licensing regulations.
More Favorable Jurisdictions
Other jurisdictions outside Hong Kong may be viewed more favorably by Western companies contemplating entry into the Asian market. Singapore, in particular, presents a highly lucrative base for crypto businesses, thanks to its stable economy and friendly business climate. Singapore has no capital gains tax and has steadily adopted policies that observers commend as crypto-friendly. For example, in January 2022, the Monetary Authority of Singapore (MAS) implemented consumer protection laws limiting the onslaught of advertisements touting digital assets on billboards and crypto ATMs. It seems unlikely that the new Hong Kong regime is robust enough to propel it to lead cryptocurrency adoption and investment in Asia.
Even Japan could provide more comfortable accommodations for Asia-bound American crypto companies, as Tokyo makes obtaining the required crypto business license from the Financial Services Agency (Kin’yū-chō) far less cumbersome than Hong Kong. In addition to these Asian jurisdictions, locations such as the British Virgin Islands, Switzerland, and Seychelles are friendly and receptive toward crypto and digital asset businesses.
In light of these alternatives, Hong Kong’s plan to woo crypto and digital asset businesses would seem to be a case of ‘too little, too late.’ It remains unclear if mainland Chinese investors will be able to trade tokens via Hong Kong.
American crypto firms seeking to establish a presence in Asia would probably do well to wait and see how Hong Kong’s new crypto regime unfolds. In the past, there have been issues related to the implementation of crypto-related laws in the city, especially regarding regulatory requirements and licensing. For now, it is clear that American crypto players hoping to benefit from Hong Kong’s new regime must apply to the SFC for recognition as VASPs. This in itself could be a monumental task, as the definition of VASP under Hong Kong law is ambiguous. In certain cases, American companies might find the licensing regime more relaxed in Japan. It is best to speak to a law firm specializing in emerging technologies, crypto, and digital assets to determine the optimal jurisdiction when it comes to establishing a presence in Asia. Gamma Law has a presence in both US and Asia and can advise on the best course available.
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