Bitcoin logo seen displayed on a smartphone with a Hongkong flag in the background.
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The crypto industry has had a rough year with the digital currency markets collapsing and businesses collapsing across the board.
Despite the volatility, Hong Kong is striving to become a virtual asset hub.
The city’s digital asset surge stands in stark contrast to the Chinese mainland, where Beijing has effectively banned trading and stampeded out crypto-related activities.
Hong Kong plans to introduce new rules in June, this will require crypto trading platforms to be licensed by the Securities and Futures Commission. The regulator has already launched a consultation on its proposal to regulate virtual asset trading platforms.
Compass for China?
Firms who spoke to CNBC said they hoped the central government could monitor Hong Kong’s crypto movements.
“If anything, China could look at the effect on Hong Kong of adhering to these rules, issuing new crypto-related products or blockchain-based solutions, and resuming business and that may result,” said Justin d’Anethan, Director of Institutional Sales at Amber Group.
Hashkey Capital CEO Deng Chao had similar sentiments and said Hong Kong’s potential crypto legalizations could serve as a compass for China.
“In the future, it could serve as a model for policy formulation in other regions [in China] if it’s successful,” he told CNBC in an email, and added that Web3 and crypto businesses could eventually adopt a more compliant approach to their day-to-day operations.
Web3 refers to the next generation of the Internet. Proponents say it will be more decentralized and reduce the power of big tech companies. Some proponents say cryptocurrencies are likely to be a key part of Web3.
In December, a former member of China’s central bank monetary policy committee, Huang Yiping, called on Beijing to review its blanket crypto ban.
Huang said there could be missed opportunities for the development of digital technology if crypto transactions are banned for a long time.
Still, caution remains over whether Hong Kong could eventually be China’s crypto north star.
“While there are talks that China might soften its stance on crypto, so far we really can’t see anything to indicate anything like that,” d’Anethan said.
Moreover, it will not be easy for retail investors wanting to jump on the Hong Kong crypto bandwagon.
Bitcoin ATMs, operated by Coinhero, in Hong Kong, China on Wednesday, December 21, 2022.
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“Hong Kong is going to impose a tough set of regulations on crypto trading platforms,” said Yuya Hasegawa, market analyst at Japanese crypto exchange Bitbank.
“That means it won’t be easy for newcomers to join us and start a business,” he said, adding he was unsure if the government’s plans to allow retail businesses to access virtual asset trading will necessarily generate a lot of growth for the industry and as a hub.
While Hong Kong harbors high crypto ambitions and boasts of a relatively lower tax policy for businesses, the city could still potentially find competition with other crypto hubs.
“Regulation is, of course, necessary for healthy growth, but to compete with other crypto hubs, there must also be an attractive tax policy for crypto projects,” Hasegawa said.
He pointed out that Hong Kong has a relatively weak corporate tax policy: Corporate tax rate for the first HK$2 million ($254,930) of taxable profit is 8.25%, while any profit above this amount is taxed at 16.5%.
But compared to other crypto hubs like Dubai, which charges a flat rate of 9%, and Switzerland – with an enterprise rate of 8.5%, “it’s still not that competitive,” a- he declared.
Countries jostle for global crypto position
Other players who were previously striving to become digital asset hubs have recently introduced legislation to regulate the industry. Observers say regulation is needed to create certainty for the crypto industry and increase consumer adoption.
Last month the The UK government has laid out a roadmap to regulate the cryptocurrency industry in line with that of traditional financial firms.
Last year, the European Union rolled out the Crypto-Asset Markets Act, which required stablecoins to maintain sufficient reserves to meet redemption requests in the event of large withdrawals.
The Bitcoin cryptocurrency logo at a store in Hong Kong on Thursday, February 10, 2022.
Paul Yeung | Bloomberg | Getty Images
Other jurisdictions like Dubai in the United Arab Emirates are looking to establish themselves as crypto-friendly places of business.
However, some countries, especially the United States, have taken a tougher stance on the cryptocurrency industry, especially after the collapse of leading cryptocurrency exchange FTX and the arrest of its founder Sam Bankman-Fried.
Crippling Crypto Climate
However, the recent drop in bitcoin prices has not dampened corporate hopes that crypto adoption will grow.
“For longer-term investors, the green light from regulators should highlight that crypto is gaining popularity regardless of temporary price movements or volatility in this still young asset class,” said d’ Anethan from Amber Group.
Crypto markets have rallied recently despite bitcoin falling below $20,000 towards the end of 2022. Bitcoin was trading at $27,834 as of 9:30 p.m. ET Sunday, according to Coinbase. That’s still nearly 60% off its November 2021 high of $68,990.
“Although virtual assets are relatively new, retail investors already have some knowledge and experience of the market after these years of study. When the climate improves, perhaps interest will also increase,” said Deng of HashKey.
– CNBC’s Arjun Kharpal contributed to this report.