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Unlike mainland China, which completely banned cryptocurrencies, Hong Kong is still open to new financial technology. As of June 1st, the former British colony could become a new crypto hub in East Asia. 

New Retail Rules in Hong Kong

Following February’s launch of the consultation process, Hong Kong’s Securities and Futures Commission (SFC) received 152 submissions from industry professionals, corporations, and market participants. The agency delivered overall positive guidelines for Virtual Asset Service Providers (VASPs):

• They must run client checks so that retail traders from mainland China are refused.
• They must set exposure limits for retail traders.
• Listed tokens must be included in two major indexes as tokens with high liquidity with at least one year under their belt.
• Unlicensed platforms (DeFi protocols) are not permitted to advertise, including from social media influencers.

In addition to these retail trading conditions, all other basic requirements apply segregation of client assets, cybersecurity standards for both the platform and asset custody and avoidance of conflicts of interest. 

Overall, Hong Kong’s treasury chief Christopher Hui sees digital assets as too positive to adopt the mainland China approach.

“So for these positive elements to be harnessed, these activities have to be allowed in a regulated way.”

- Christopher Hui in AFP interview

As for DeFi protocols will be regulated under the Securities and Futures Ordinance, expected to comply with Type 7 license as either securities or futures.

Crypto Companies Already Rushing In

Suppose they fail to apply for new operating licenses under the noted conditions. In that case, existing crypto trading platforms and exchanges will have to shut down as the new regime overrides the existing one. Expectedly, the effective reversal of restrictions on retail trading has sparked major applications inflow.

Huobi announced its plan on May 26th to launch Huobi HK, aiming to shape Hong Kong’s Web3 hub. The company cited its contributions to Hong Kong Web3 Carnival this year as the first Web3 ecosystem fund.

According to Monday’s announcement from Huobi Global, spot trading and asset custody services are ready to be deployed. Huobi HK will undergo independent audits in the next six months to secure future licensing.

Even larger than Huobi, OKX is ranked sixth by global crypto trading volume. To comply with the new Hong Kong regime, the exchange will upgrade its OKX app, offering 16 top cryptos for spot trading. Another exchange, CoinEx, as native to Hong Kong, will launch BitHK. More notably, Gate.io and BitMEX have also announced HK VASP applications.

Hong Kong’s largest digital bank, ZA Bank, will have a broader approach. In partnership with Venture Smart Financial Holdings (VSFG), Boston Consulting Group (BSG), HKT Payments Limited, paywith.glass, and others, ZA Bank will be a part of Hong Kong’s e-HKD Pilot Programme initiative. 

This program is at the core of Hong Kong’s FinTech and Web3 transformation by fostering a tight relationship between the government, businesses, and academia. This includes the exploration of a retail CBDC. Interestingly, ZA Bank is a subsidiary of the Chinese state-owned Greenland company. 

The latter also applied for the new HK VASP license, which is a big tell that China fully endorses Hong Kong’s venture into retail crypto, but at a smaller and more manageable scale. 

Are Smaller, Capital-Dense Digital Hubs the Future?

As Operation Chokepoint 2.0 makes America’s digital asset future uncertain, small nations are forging ahead. Hong Kong’s central bank representatives met with their United Arab Emirates (UAE) counterparts on Monday in Abu Dhabi.

The two central banks, CBUAE and HKMA, are coordinating to level up financial market connectivity. This includes synchronicity on virtual asset regulations of virtual assets, alongside sharing of FinTech initiatives. In practice, the goal is to make cross-border trade settlements as frictionless as possible to draw substantial UAE capital into Hong Kong.

“We look forward to continued collaboration with the CBUAE and to more exchange between the Hong Kong and the UAE financial sectors, and would welcome the UAE stakeholders’ visit to Hong Kong in the near future.”

- Eddie Yue, Chief Executive of the HKMA

Dubai, UAE’s popular exercise in futurism, has already established itself as a burgeoning crypto startup hub. Following launching a VASP regime similar to Hong Kong’s in March 2022, Dubai attracted over 500 crypto startups, increasing annual company registrations by +23% in 2022 compared to 2021. 

However, the Dubai Multi Commodities Centre (DMCC) zone is far more generous than Hong Kong. Alongside significant tax breaks, it offers networking opportunities and cutting-edge financial infrastructure bolstered by ever-growing physical infrastructure with a near-zero crime rate.

Interestingly, UAE was also a part of China and Hong Kong’s CBDC bridge pilot project in October 2022. A similar FedNow service will launch within a less inclusive virtual asset environment in July.

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