The country has traditionally served as "a gate to China" — the local trade center, backed by a transparent English-style legal system and an outspokenly pro-business government strategy. Could the harbor, home to seven million people, take on this role in the cryptocurrency community, acting as a proxy for mainland China's crypto experiments?
In his Oct. 26 blog post, Arthur Hayes, the former CEO of BitMEX, expressed an interest in such inquiries. Hayes sees Hong Kong's announcement about introducing a bill to regulate cryptocurrency as a sign that China is easing its way back into the market. The viewpoint was quickly replicated in a variety of industrial and popular media outlets.
Elizabeth Wong, the head of the Hong Kong Securities and Futures Commission's (SFC) fintech unit, announced in late October that the country’s regulatory landscape would be liberalized by allowing retail investors to invest directly in virtual assets.
Until recently, the SFC only granted access to centralized crypto exchanges to individual people with a portfolio worth at least $1 million (roughly 7% of the city's population). Wong added that the regulator is also considering allowing retail investors to buy crypto-related exchange-traded funds.
On Oct. 31, Financial Secretary Paul Chan assured attendees at the city's FinTech Week 2022 that the digitalization of financial services is a top priority for his team. Eddie Yue, CEO of the Hong Kong Monetary Authority (HKMA), Chan's colleague, pledged "radical open-mindedness" to the advancements.
The HKMA, he claims, is in the process of creating a regulatory regime for stablecoins and has already introduced an approach to banks regarding cryptocurrency or decentralized finance-related services.
The Hayes account
Hayes argued, combining two plot lines; one that traces all of the most important crypto innovations to China and the other that highlights Hong Kong's historical role as an entry point to communist China.
"Hong Kong's friendly reorientation toward cryptocurrency heralds China's reassertion in the crypto capital markets."
According to Hayes, the country’s authorities cannot deviate too far from Beijing in their decisions, so opening up the cryptocurrency market in the midst of the Mainland crackdown cannot be considered an autonomous act.
Beijing's benevolence toward such a U-turn stems from Hong Kong's fear of losing its status as the primary Asian financial center. It certainly faltered during the COVID-19 pandemic, when the hardline lockdown policy implemented in China and Hong Kong caused a wave of investment to flee to Singapore, a neighboring competitor that had eased its restrictions much earlier.
Another major reason for China's possible support for Hong Kong's crypto liberalization is the former's problem with a massive US dollar trade surplus. Historically, like almost every other country in the world, China has stored its dollar income in assets such as US Treasury bonds.
David Lesperance, the founder of Lesperance & Associates law firm, who has been dealing with Hong Kong and China-based clients for more than 30 years, told Cointelegraph he doubted the Chinese government's interest in opening up to cryptocurrency.
"Rather, they want complete control over their population, including those in Hong Kong. Actions such as social credit scoring, face recognition, household registration, exit bans, zero COVID-19, and so on demonstrate this."
Aside from cryptocurrency, recent years have seen China tighten its political, cultural, and economic control over Hong Kong, with the 2020 national security law removing previous civil liberties, a change in school curricula emphasizing the Chinese history of the region, and the continuing integration of Mainland companies into the island's juridical space.
These indications of a shrinking distance between the Mainland and Hong Kong may pique the interest of global regulators. As one banker recently told CNN, "the worst scenario is that the West treats Hong Kong the same as Mainland China, and then it suffers the same kind of sanctions."
Among the digital currencies issued by the central banks of China, Hong Kong, Thailand, and the United Arab Emirates, the digital yuan was the most actively transacted currency in a recent six-week m-Bridge pilot of cross-border payments. Following the experiment, state-owned Chinese media noted that "Hong Kong is poised to be a vibrant center for e-use CNY's in international trade."
Lesperance emphasized that the introduction of e-CNY and the continued restrictions on the rest of the cryptocurrency, even for domestic miners, confirms Beijing's desire to control the financial sphere in the first place.
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