Following the crypto scandals that rocked the market last year and the potential contagion risks that followed, regulators globally have embarked on a relentless crackdown on the sector.
The US led the way with a slew of enforcement actions targeting the crypto sector. Besides levying fines against crypto firms, state and federal agencies ring-fenced crypto from the traditional financial system.
The Monetary of Singapore (MAS) outlined plans to curb retail investors’ access to crypto and ban the use of credit in crypto trading.
However, one bright spot in Asia seems to be bucking such a trend. The contrast in Hong Kong’s response is striking.
Instead of a crypto clampdown, Hong Kong responded with measured crypto-friendly policies that will allow retail trading in selected digital tokens.
According to a recent article by The Block, Hong Kong regulators went as far as to urge banks to provide critical banking services to licensed crypto firms.
This has prompted some firms such as crypto market data provider, Kaiko, to relocate its Asian headquarters from Singapore to Hong Kong.
Is Hong Kong finally embracing crypto or are these measures mere attempts at playing catchup to regain lost ground from Singapore following street protests and a national security law that diminished its status as a global financial hub?
On The Regulatory Front
While the new licensing regime introduced by the Hong Kong Securities and Futures Commission (SFC) is definitely a step forward, it is hardly groundbreaking.
This new licensing regime requires crypto firms to establish a presence in Hong Kong by 1 June this year and apply for licensing by June 2024. Licensed exchanges can offer retail trading in selected “large-cap tokens”.
The details are being worked out but this replaces a 2018 framework that limits crypto trading to accredited investors only (individuals with a portfolio no less than HKD 8M, or approximately USD 1M).
In addition, Hong Kong has also prioritized and paved the way for the legalization of stablecoins, which is crucial as it forms the backbone of the crypto industry.
In contrast, with the collapse of Three Arrows Capital and homegrown crypto exchange Hodlnaut, the Singapore government has taken a tougher stance on crypto trading platforms.
Besides repeatedly warning retail investors on the risks of crypto investing and banning crypto exchanges from marketing their services to the public, MAS has announced further measures to restrict retail users’ access to certain crypto offerings.
These measures include introducing customer suitability tests for crypto trading, preventing retail users from gaining access to leverage and credit facilities for crypto trading and prohibiting licensed crypto companies from lending out retail investors’ digital tokens.
These proposed measures by MAS can seem overreaching and are more reactionary than constructive, but it stems from the paternalistic approach of the Singapore government towards retail investors.
MAS remains committed to new policies that encourage institutional investments in blockchain and crypto.
According to the World Justice Project Rule of Law Index, Singapore has maintained its 17th position in the global rule of law rankings while Hong Kong slipped from 19th to 22nd place.
Hence, while many have lauded the Hong Kong government for providing greater regulatory clarity with the new crypto rules, concerns on the integrity and independence of its legal system remain.
Startup Ecosystem and Technology Infrastructure
Although clear, progressive crypto regulation and a strong rule of law forms the foundation for any crypto hub, the importance of a vibrant startup ecosystem that encourages innovation and solid technology infrastructure for digital assets cannot be understated.
To put things into perspective, according to a Startup Genome Report, Hong Kong’s Startup Ecosystem Value of USD 3.2B is approximately 4 times lower than that of Singapore.
Based on Startup Blink’s Global Startup Ecosystem Index 2022, Singapore was ranked first in Asia and seventh worldwide.
As a traditional financial hub, Hong Kong has a larger stock market and it leads Singapore in terms of capital fund raising. However, this may only appeal to later stage start-ups seeking to go public.
For new scrappy crypto startups experimenting on new real use cases that require incubation, Singapore is more cost-effective and provides greater access to government funding.
Another prerequisite of a crypto hub is that it needs to encourage an entrepreneurial mindset, where creative communities with technical expertise can flourish and push the boundaries in blockchain technology.
In this respect, both Singapore and Hong Kong need to work on fostering such crypto entrepreneurship. The risk averse culture in both cities is deep-rooted and needs to be addressed.
It is also important to note that institutions continue to be the key driver of mainstream crypto adoption, it is crucial for any aspiring crypto hub to ensure the sustained development of key digital asset infrastructure.
These key digital asset infrastructure include solutions for institutions to achieve distributed key management, secure digital asset custody and fund segregation.
Last but not least, a crypto hub’s geographical location and political situation can have far-reaching effects on the development of its crypto ecosystem.
With the deterioration of US-China ties, the ongoing war in Ukraine, Taiwan and China Cross-Strait tensions and escalating territorial disputes in the South China Sea, the world is fraught with geopolitical uncertainty and risks.
However, one country dubbed Asia’s Switzerland shines as a beacon of stability. This country is none other than Singapore.
While Hong Kong benefits from having Mainland China as its hinterland, Singapore has a more stable socio-economic and political environment.
Political and social upheaval has gripped Hong Kong in recent years. The 2019 Hong Kong Extradition bill sparked widespread protests that led to the eventual introduction of the National Security Law.
An exodus of locals and expatriates ensued due to concerns on the erosion of social and political freedoms in the territory.
According to a Financial Times article, Chinese companies prefer Singapore over Hong Kong as a base for their businesses to hedge against intensifying geopolitical tensions globally.
Geopolitical stability is essential for crypto ecosystems to flourish and Singapore certainly has an edge over Hong Kong in this regard.
As the rest of the world works on the building blocks of Web 3, it is not surprising that China wants a slice of the action.
Hong Kong serves as the perfect testbed for China’s policymakers to test out the potential of blockchain.
While the new crypto regulations introduced in Hong Kong is a step in the right direction, the startup ecosystem is comparatively lacklustre and significant geopolitical risks remain.
Crypto is also a relatively nascent industry and regulators in both Hong Kong and Singapore need to strike a balance between adequate regulation, attracting capital inflows and rewarding genuine innovation.
It remains to be seen as to whether Hong Kong can outpace Singapore to become Asia’s preeminent crypto hub.
“[Editor’s Note: This article does not represent financial advice. Please do your research before investing.]
Featured Image Credit: ChainDebrief
This article was written by Clarence Lee and edited by Yusoff Kim