Does Hong Kong’s slow approach to crypto regulation risk stifling digital asset growth?

Hong Kong-based First Digital Trust expressed hopes that the city will accelerate the regulation of the digital assets sector.

Hong Kong, aiming to position itself as a global hub for cryptocurrency, currently has only two fully licensed virtual asset trading platforms: Hash Blockchain and OSL Digital Securities. Many other crypto exchanges are still awaiting full operational licenses in the city.

“It is understandable its (Hong Kong’s) current approach to regulation in trading is more conservative and slower than some other jurisdictions since it prioritizes the protection of investors,” Vincent Chok, CEO of First Digital, told Cointelegraph in an exclusive interview. However, he pointed out:

“We hope to see regulation move faster to ensure it does not fall behind the industry’s fast pace of development.”

As of June 1, operating an unlicensed virtual asset trading platform (VATP) in Hong Kong became a criminal offense. Meanwhile, Hong Kong’s Securities and Futures Commission published an “alert list” that names “suspicious virtual asset trading platforms” or unlicensed entities operating in Hong Kong. SFC said these entities could be targeting Hong Kong investors.

Will Hong Kong emulate Dubai?

On July 17, the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) published their findings on local stablecoin regulation.

A week later, on July 24, Jingdong Coinlink Technology Hong Kong Limited, a JD Technology Group subsidiary, announced plans to issue a 1:1 stablecoin pegged to the Hong Kong dollar (HKD). The HKMA recognizes the company as a participant in the sandbox program.

Meanwhile, Dubai has taken a leading role and made significant global progress in the stablecoin sector. On Aug. 21, Tether, the largest stablecoin provider, revealed plans to launch a new stablecoin pegged to the United Arab Emirates dirham (AED) in partnership with UAE-based Phoenix Group and Green Acorn Investments.

Additionally, in October 2023, a former MIT alumnus and SoftBank executive introduced a dirham-backed stablecoin. The DRAM stablecoin was listed on decentralized finance protocols Uniswap and PancakeSwap.

Lenders not in a rush to offer crypto custody services

Chok also does not expect banks to rush to offer digital asset custody services anytime soon. “There is simply more liability beyond their risk appetite,” he said.

Moreover, according to Chok, several companies with established trust structures offering crypto custody services have already stepped in to fill this gap.

However, the United Arab Emirates recently allowed Standard Chartered to start offering crypto custody services. On Sept. 10, the bank said it would start its digital asset custody service with Bitcoin and Ether.

The bank has initiated its custody services in partnership with Brevan Howard Digital, the cryptocurrency division of the hedge fund Brevan Howard.

Hong Kong raising the bar with Web3 integration in the financial system

While the licensing regime for digital asset trading services may be slow, the city is scoring in other areas of Web3, including applications in central bank digital currencies (CBDCs), and tokenization of real-world assets.

“It is interesting to note that BTC and ETH exchange-traded-funds in Hong Kong allow for a unique ‘in-kind’ subscription mechanism which allows for direct subscription and redemption using BTC and ETH. This innovative structure offers a flexible and simple investment process for investors,” Chok said. Elaborating, he said:

“Hong Kong’s Trust and Company Service Provider licensing also allows for trust structures to hold digital assets, which is a favorable and unique feature compared to other jurisdictions. This robust regime not only paves the way for custody services but also sophisticated services associated with it such as legacy management.”

Initiatives, such as the HKMA’s Project Ensemble regulatory sandbox, are paving the way for the tokenization of real-world assets and interbank settlement using tokenized money.

On Aug. 28, the HKMA introduced the Project Ensemble sandbox. This initiative explores the tokenization of real-world assets and interbank settlements using a wholesale central bank digital currency (wCBDC). The HKMA stated that the project aims to investigate the technical interoperability of tokenized assets, tokenized deposits, and a wCBDC.

Project Ensemble represents the culmination of several earlier initiatives. These include trials of tokenized deposit settlements with HSBC using Ant Group technology, as well as settlement experiments involving the HKMA’s pilot e-HKD CBDC for transactions between HSBC and Hang Seng Bank.

Source: https://cointelegraph.com/news/hong-kong-speed-crypto-regulation