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Building a Regulatory Framework for Cryptocurrencies in Hong Kong
Hong Kong, a global financial hub, is vying to become a leading center for cryptocurrency trading and investment. However, crafting a regulatory framework that balances investor protections with a welcoming environment for businesses and new capital is a complex challenge. Hong Kong’s common-law framework for traditional finance has made its economy one of the most open and free in the world, earning it the title of "freest economy" in the world, according to a recent report from a Canadian think tank.
Duncan Chiu, a member of Hong Kong’s Legislative Council and chair of its Technology and Innovation committee, believes that Hong Kong’s initial caution in regulating cryptocurrencies comes with advantages. "Being a late mover is a good thing sometimes because you have a clear picture," he said in a recent interview with CoinDesk. For example, the Monetary Authority of Singapore (MAS), the city-state’s main financial regulator, initially regulated cryptocurrencies under its Payment Services Act, treating them inaccurately as a payment tool rather than an asset class. Japan did the same, forcing later revisions in 2024 as DeFi and tokenization gained traction.
Chiu pointed out that Hong Kong started late, but there were clearer patterns of how these products were being used. The original Bitcoin white paper labeled the asset class as electronic cash, while the market reality is that it has become a commodity – a view shared by the U.S. Commodity and Futures Trading Commission.
Building Regulatory Alignment
One of the key issues Chiu would like to work on in the LegCo is building a clear classification for different types of digital assets, such as cryptocurrencies and stablecoins, while working with global regulators to ensure alignment. "We need clear definitions and segmentation," Chiu explained. "Some assets should be regulated like securities, while others should remain unregulated, like memecoins."
According to Chiu, memecoins should be treated as collectibles, much like Pokémon cards or stamps. "Memecoins don’t have functionality behind them – they don’t use smart contracts," he said. "They’re just collectible items, so I see no reason to regulate them like financial products."
A Dedicated Crypto Regulator?
Some jurisdictions, such as Dubai, have created their own separate regulator for virtual assets. When asked if Hong Kong should take the same path, Chiu recalled that in his early years in the LegCo, he had initially supported the creation of a digital version of the Securities and Futures Commission (SFC), the territory’s markets regulator, called the "eSFC." However, Hong Kong’s government has instead chosen to keep crypto oversight under existing financial regulators. The SFC has a dedicated digital asset team, while the Hong Kong Monetary Authority (HKMA) oversees stablecoins. Chiu is satisfied with this arrangement, especially as the SFC expands its headcount even as the government calls for austerity elsewhere.
LegCo’s Crypto Priorities
Chiu sees establishing OTC trading and custodian regulations as the next major priorities for the LegCo, with building rules around crypto derivatives and leveraged trading left to the SFC and crypto exchanges, rather than passing new laws. Chiu considers crypto regulation a top-five priority, with others being around Hong Kong’s economic recovery and public safety issues. However, not all LegCo members share this same urgency regarding crypto regulation, with some wanting to focus on building more stringent investor protection mechanisms first, to avoid another FTX or JPEX failure.
However, there is only so much legislative bandwidth available. Hong Kong’s job market is weak, and the real estate sector is on the precipice of a painful correction. Hong Kong is also caught between the U.S. and Mainland China in Donald Trump’s next trade war, making an economic recovery challenging for the territory.
Conclusion
In conclusion, Hong Kong’s regulatory approach to cryptocurrencies is crucial in balancing investor protections with a welcoming environment for businesses and new capital. The territory’s common-law framework has made it an attractive location for global finance, and its regulatory body, the SFC, has a dedicated digital asset team. However, the LegCo still faces challenges in establishing a clear classification for different types of digital assets and ensuring regulatory alignment with global counterparts. With the territory’s economic recovery and public safety issues also on the agenda, it remains to be seen how Hong Kong will navigate the complex landscape of cryptocurrency regulation.
FAQs
Q: What is the current regulatory approach to cryptocurrencies in Hong Kong?
A: Hong Kong’s regulatory approach is focused on balancing investor protections with a welcoming environment for businesses and new capital.
Q: What is the role of the SFC in regulating cryptocurrencies?
A: The SFC has a dedicated digital asset team and oversees the regulation of cryptocurrencies, while the Hong Kong Monetary Authority (HKMA) oversees stablecoins.
Q: Is Hong Kong considering creating a dedicated crypto regulator?
A: No, Hong Kong has chosen to keep crypto oversight under existing financial regulators, rather than creating a separate regulator.
Q: What are the next major priorities for the LegCo in terms of crypto regulation?
A: Establishing OTC trading and custodian regulations are the next major priorities for the LegCo, with building rules around crypto derivatives and leveraged trading left to the SFC and crypto exchanges.
