Home / Hong Kong’s Positive Crypto Regulations Leaves U.S. Looking Outdated and Hostile
5 min read

Hong Kong’s Positive Crypto Regulations Leaves U.S. Looking Outdated and Hostile

Last Updated June 23, 2023 1:10 PM
Omar Elorfaly
Last Updated June 23, 2023 1:10 PM

Key Takeaways

  • Hong Kong is taking extra steps to become the world’s DeFi hub
  • HKMA tests e-HKD in the mortgage market
  • US regulations lead the country to fall behind the market

The Hong Kong Monetary Authority (HKMA) has been proactively pushing  forward the potential for digital currencies as a primary form of trade. The country’s banking regulator has been nudging local financial institutions to find ways to accommodate the needs of crypto exchanges while meeting regularly to find ways to meet the needs of such clients.

The emerging tech hub’s country has been in talks with banks such as HSBC (HSBA.L) and Standard Chartered (STAN.L) to figure out how licensed crypto regulators can access banking services in the country with ease.

At the same time, the US government has proven to be hostile towards the crypto industry in its entirety, filing lawsuits against the biggest exchanges in the market and striking fear in the hearts of current and potential investors in the field. The regulating body, SEC has failed to establish clear regulations to improve clarity and transparency when it comes to digital assets.

Potential International Alliances

Hong Kong seemingly will spare no expense to ensure the success of its crypto-based financial system. The government is negotiating with mainland China crypto firms to build an international virtual asset center. Hong Kong chief executive John Lee is scheduled to hold 100 crypto-related events with stakeholders to provide room for deliberations. As a result, 10 companies whose founders are of Chinese origins including OKX, Bybit, and Huobi have disclosed or announced their plans to bid for licenses in Hong Kong,

Many of these firms have already exited Western markets like Canada and the UK, including Tron, a blockchain DAO ecosystem whose founder Justin Sun, is facing charges filed by the US SEC. Sun noted that the SEC’s charges lacked merit. During one of these crypto events, Sun commented that “I can’t believe that we are having such conferences on Chinese soil,” adding that Hopefully one day, we will have such events in Shanghai and Beijing.”

Many have expressed their concerns about the future of the crypto industry in Hong Kong. “If Hong Kong can suddenly say that it is crypto-friendly as if it’s a switch, that switch can be just as suddenly turned off should things get difficult,” reported the chairman of Hong Kong crypto exchange HashKey. But, he also added that the Hong Kong government “is very serious about building an international virtual asset centre[sic].”

e-HKD Pilot Programme

HKMA has launched the e-HKD Pilot Programme  which includes sixteen financial, payment, and technology who will participate in the test launch of the country’s digital currency. These firms will be the first to test the potential of e-HKD in the applications of full-fledged payments, programmable payments, offline payments, tokenized deposits, settlement of Web3 transactions, and settlement of tokenized assets.

In a paper  titled “e-HKD: Charting the Next Steps”, HKMA announced that it will be adopting a three-rail approach towards launching Central Bank Digital Currency (CBDC), e-HKD:

  • Rail 1 will focus on establishing firm technology and legal foundations for supporting the implementation of e-HKD.
  • Rail 2, which will operate simultaneously with Rail 1 will focus on use cases as well as application, implementation, and design issues relating to e-HKD.
  • Rail 3 will be about the launch of the CBDC, where HKMA will gather all the information garnered through Rail 1 & 2 to make a decision on the launch date of the digital currency. Moreover, it will dictate the practical use of e-HKD in both local and international markets. 

Chief Executive of the HKMA, Mr Eddie Yue noted that “While the HKMA has not yet made a decision on whether and when to introduce e-HKD, we are excited to kick-start the e-HKD Pilot Programme,” adding that “We are also pleased to have many experts in the academia joining forces with us on this CBDC journey. By fostering government-industry-academia collaboration in CBDC research, we aim to ensure the relevance of our research and development efforts, and enable the translation of such outcomes into viable business opportunities.”

US Falls Behind

In the meantime, crypto regulators in the US have been struggling to establish a clear set of rules that would ensure a stable and transparent crypto market. The US Securities and Exchange Commission has been at arms with the local crypto industry with a seeming “last man standing” approach.

The SEC has filed thirteen lawsuits against the world’s biggest crypto exchange platform, Binance, and its founder Changpeng Zhao for allegedly commingling customer funds and evasion of US regulars, among other charges. As a result, Binance.US has now halted all USD transactions on its platforms, as well as all OTC trades and trade pairs.

The SEC has also filed a lawsuit against the biggest US-based crypto exchange, Coinbase, citing illegal trading of unregistered securities. It’s important to note that Coinbase’s IPO (COIN) was approved by the SEC back in 2021. It’s also important to note that the government had actually used Coinbase to trade a large sum of crypto tokens it had seized from a prior bust on its platform.

Ripple, another US-based crypto exchange is also facing a lawsuit from the SEC with the same allegations Coinbase is facing. The case has been going on for over two years, with the latest updates including an affirmation from a previous SEC director that cryptocurrencies (namely Ethereum) start off as securities, but can transform into commodities as they achieve sufficient decentralization. Unsurprisingly, the SEC attempted to keep these documents sealed as they fight hard to establish that cryptocurrencies are securities, not commodities. 

For that reason, many investors and exchanges alike are precarious about entering the US crypto market as its volatility seems to be its only constant. Even local firms such as Andreessen Horowitz have taken steps to establish business overseas, fearing the collapse of the crypto market in the US.