Hong Kong is bringing back retail crypto trading. Will China be next?

While crypto trading and mining is still banned on the mainland, Hong Kong, which is a special administrative region of China, has cautiously reopened to the nascent asset class. 

Last week, the Hong Kong Securities and Futures Commission announced it was going forward with a plan to allow individual investors to buy and sell cryptocurrencies with high market caps, like Bitcoin and Ether, as it begins a new licensing system June 1. As of Thursday, it will be against the law for any unlicensed exchanges to market to Hong Kong investors, Bloomberg reported, citing Keith Choy, the interim head of intermediaries at the SFC.

Just two exchanges, OSL Digital Securities Limited and Hash Blockchain Limited, have been licensed so far, according to the SFC’s website, but several others, including Huobi and OKX, have said they plan to apply for licenses.

Over the weekend, Beijing added to the speculation of a crypto renaissance in the country after the Beijing Municipal Science and Technology Commission and the Zhongguancun Science and Technology Park Management Committee released a white paper on Web3 technologies, according to local media. The report seemed to affirm at least some commitment to supporting blockchain-related companies ahead of the implementation of Hong Kong’s new policy. Changpeng “CZ” Zhao, CEO of the world’s largest crypto exchange, Binance, posted a copy of the white paper on Twitter, noting the “interesting timing.”

Interesting timing on this Web 3.0 white paper from the Beijing government tech committee with the June 1st anticipation in Hong Kong. pic.twitter.com/0Ts1UB0jnL

— CZ ???? Binance (@cz_binance) May 27, 2023

And on Monday, two new Hong Kong-based industry associations, Hong Kong Licensed Virtual Assets Association and Web3 Harbour, also launched with “a shared commitment to the long-term growth and development of the virtual asset economy and decentralized internet,” according to a press release. 

The shift in Hong Kong’s attitude toward digital currencies follows similar actions by governments in Dubai and Singapore. But Hong Kong’s new approach could have a bigger impact, experts say, because of the potential for China, the world’s second-biggest economy, to embrace crypto as the U.S. grows increasingly hostile toward the sector.

Mark Connors, head of research at 3iQ, said China is likely being pulled toward crypto rather than pushing on its own because it needs new revenue streams to help service its debts. Reopening to crypto trading would give it that opportunity, but it would also increase the overall variability and volatility because more retail traders means more liquidity, he said.

He added that China, which is known for tight controls over its economy, might introduce its own crypto exchange, which although unusual could still be a net positive.

“Even if it was state controlled,” Connors added, “you would have a liquidity provider for the world’s largest populated state.”

How China’s government will coexist with decentralized blockchains remains to be seen.

“This is almost an exercise in democracy,” Connors continued, “where you have a non-state commodity being shared, and you can’t really control its flow like you can with pipelines and shipping lanes.”

The change in tone from Hong Kong is welcome news to entrepreneurs and business leaders who are interested in getting a foothold in China. Leo Mizuhara, CEO of Hashnote, an institutional management platform for digital assets, said he’s looked to expand his company’s reach in Asia partly because of the large market opportunity but also because of U.S. regulators’ increasing hostility.

Even though Mizuhara said he worries about the risks of doing business in China, such as submitting to strict capital controls or ceding some of the company’s intellectual property to the government, he’ll still strongly consider it.

“It’s very difficult to run a business with the level of uncertainty that is currently in the U.S.,” Mizuhara said. “It’s almost irresponsible of us not to have a little bit of that diversification.”

Increased enforcement actions by regulators, mainly the Securities and Exchange Commission, have left crypto companies unsure of where they stand, even those offering an olive branch to regulators. Coinbase, the biggest U.S.-based exchange and arguably one of the most compliant companies in the industry, sued the SEC in April after it was hit with a Wells Notice, which signals the agency is planning legal action against an individual or company. 

In a MarketWatch opinion piece published on Wednesday by Coinbase CEO Brian Armstrong, he said regulators and policymakers writing off crypto as just another unstable asset benefits China and it “risks America’s time-honored role as the global financial leader and an innovation hub.”

Although most of Hashnote’s employees are split between Chicago and New York City, Mizuhara said he’s considering moving the company’s headquarters to another country.

“I have literally been laughed at when I tell people that our business is in the U.S.,” he said.