Hong Kong has been a key financial centre in Asia and around the world, but it faces fierce competition from Singapore. In recent years, Singapore has emerged as a major fintech hub and has attracted multinational and Chinese companies, as well as high-net-worth individuals to set up family offices. 

In the Global Financial Centers Index, Singapore was ranked as the top financial centre in Asia and the third globally, while Hong Kong was ranked fourth globally and second in Asia. To revitalise its status as a global financial centre, Hong Kong needs to focus on emerging areas of financial services such as green finance and cryptocurrency. 

Asia’s two financial city-states are at contrasting odds at the moment. Regulators in Singapore have declared sustainability and ESG an important focal area for firms there, while simultaneously restricting cryptocurrency platforms from advertising their services to the general public for various reasons.

The implications have been far-ranging, with some crypto companies reevaluating their customer strategies, some reverting to institutional business models to stay relevant, and regional crypto mainstays like Binance and Luno opting to withdraw their license applications in Singapore altogether

Meanwhile, Hong Kong is still building up its name for sustainable finance, but it is a known crypto-asset hub, with a declared interest in reviving that status as it looks to entice companies (and investors) operating within the Web3 space.

In late February, Hong Kong’s Securities and Futures Commission (SFC) proposed new rules for virtual asset trading platforms, seeking public comment until March 31. The SFC is planning to implement a new licensing regime for crypto service providers from June 1, 2023 and is considering allowing licensed platforms to serve retail investors.

Hong Kong’s advantage in the crypto market

Hong Kong has the potential to become a dominant global hub for cryptocurrencies, given its strategic location and connectivity with mainland China.

However, to achieve this, Hong Kong needs to embrace retail investing in addition to institutional investors. According to CoinDesk, the crypto community is optimistic about Hong Kong’s potential, but uncertainty remains about whether the city will take the necessary steps.

The Special Administrative Region has among the toughest standards for crypto regulations worldwide, as the Securities and Futures Commission (SFC) wants the crypto industry in Hong Kong to be governed by the same compliance standards as applied to traditional financial firms.

Therefore, virtual asset service providers wanting a licence of operation in Hong Kong will have to undergo rigorous anti-money laundering (AML) and investor protection guidelines. Unlike many other jurisdictions, Hong Kong did not face the same level of public scrutiny following the collapse of virtual asset exchange FTX, as regulators elsewhere drew flak for failing to protect retail investors.

So the recent amendments to the island state’s AML and terrorist financing rules make it one of the first territories to subject crypto exchanges and service providers to strict AML and investor protection requirements, which the Hong Kong Monetary Authority is looking into.

In a policy proposal titled ‘Policy Declaration on the Development of Virtual Assets” and published in October 2022, the Hong Kong government outlined a risk-based regulatory framework that seeks to provide a solid foundation for crypto asset regulation while also protecting investor interests.

Hong Kong has a booming number of cryptocurrency users, with nearly half (43%) of the population estimated to have invested or traded in cryptocurrencies, according to a survey conducted by the City University of Hong Kong. The same survey found that Bitcoin was the most popular cryptocurrency among Hong Kong investors, followed by Ethereum and Ripple.

Financial regulations for VASPs in Hong Kong

Hong Kong has been working on improving its regulatory framework for cryptocurrencies and digital assets to be more attractive for a few years now. In 2019, the Securities and Futures Commission (SFC) issued guidelines for virtual asset fund managers and intermediaries. The guidelines set out regulatory standards and requirements for intermediaries involved in the distribution and trading of virtual assets.

To protect investors and maintain the integrity of the financial system, the SFC in Hong Kong has set strict licensing requirements for virtual asset service providers (VASPs) that include cryptocurrency exchanges, custodians, and trading platforms. 

VASPs must maintain adequate financial and operational resources, have transparent internal controls, ensure the security of customer assets, and have measures to prevent money laundering and terrorist financing. VASPs must also appoint a responsible officer who is a Hong Kong resident and holds relevant qualifications or experience in the financial industry.

Speaking at the Hong Kong WOW Summit, crypto venture firm Token Bay Capital founder and SFC Fintech Advisory Group member, Lucy Gazmararian, agreed that while compliance standards for VASPs are set “incredibly high” and might pose issues for the Hong Kong crypto industry in the short term, those measures are in place for a “good reason”.

“The issue is that crypto businesses are often in the startup phase,” she explained. “Many have funding but not huge amounts, not hundreds of millions.”

“To comply with the framework does incur significant costs,” she added, citing the stringent conditions imposed upon VASPs.

Impact on investors

But with Hong Kong’s renewed vision to establish itself as a Web3.0 hub and reestablish itself as a global financial beacon, regulators are seriously considering opening the door to retail investors while maintaining strict compliance requirements. 

The CEO of Hong Kong’s SFC, Julia Leung, even acknowledged that “Cryptocurrency platforms are part of the entire Web 3.0 ecosystem, and we strongly support the development of the entire Internet ecosystem.

But she added that “These virtual currency platforms must protect the safety of all investors from the perspective of investor protection.”

Hong Kong’s latest rules and regulations governing cryptocurrencies, digital assets, and VASPs are a positive step towards greater transparency and protection for investors. The licensed VASPs are subject to strict regulatory requirements, which should reduce the risk of fraud and other illegal activities. Investors will also have access to more transparent and reliable information about VASPs, which should help them make more informed investment decisions.

To maintain its position as a global financial centre, Hong Kong needs to focus on emerging areas of financial services – of which cryptocurrency and virtual assets are the most promising, especially if the ecosystem is opened up to retail investors.

More than 80 companies with interests in digital assets, including foremost crypto exchange Binance and DBS Bank Hong Kong, have expressed interest to apply for crypto licenses once they have a clearer understanding of the framework.

In light of the recent challenges overshadowing the industry, Hong Kong’s rigid rules and proposed guidelines to govern the crypto sphere for institutional and retail investors alike could prove to be a huge advantage.