October 29, 2024
By Anjali Kochhar
Investing in a volatile market, particularly cryptocurrencies, has become a more difficult chore for investors globally. However, Hong Kong, one of Asia’s most active financial cities, has emerged as a key player in this field, particularly as the city seeks to establish itself as a cryptocurrency and Web3 hub.
Hong Kong has always been a financial powerhouse, and the city’s recent moves in the crypto space signal its commitment to staying ahead in digital finance. The Hong Kong Securities and Futures Commission (SFC) has taken significant steps towards regulating crypto exchanges to provide a safer environment for both investors and institutions. As of late 2024, the SFC is set to approve more crypto exchanges before the year’s end. Currently, 11 platforms are undergoing rigorous on-site reviews to obtain necessary licenses. This effort is part of the SFC’s broader strategy to expand the city’s crypto market responsibly.
The approval of crypto exchanges like HKVAX, HashKey, and OSL earlier this year has reinforced Hong Kong’s position as a burgeoning crypto hub. This regulatory progress underscores the city’s ambition to attract global crypto investors and bolster the credibility of the crypto ecosystem. However, these ambitions come with challenges, notably the stringent regulatory framework that some argue may hinder the market’s potential growth. The SFC has been criticised for being overly cautious, particularly concerning issues around custody practices and cybercrime risk.
For Hong Kong’s crypto investors, the market remains highly volatile. The significant fluctuations in crypto prices often driven by global market trends, macroeconomic factors, and regulatory news continue to pose risks for even seasoned traders. According to The South China Morning Post, many investors have adopted a cautious approach, carefully weighing their portfolios to include less volatile assets alongside cryptocurrencies like Bitcoin and Ethereum.
One key factor shaping investor sentiment is the collapse of JPEX, a rogue crypto exchange that left over 2,600 investors with $200 million in losses. This incident shook investor confidence and highlighted the need for stronger regulatory measures to protect retail investors. Hong Kong’s SFC has since stepped up its efforts to scrutinise crypto exchanges more closely, with a particular focus on preventing mainland Chinese residents from accessing these services, which was one reason behind the withdrawal of applications by international exchanges such as OKX and Bybit.
Local investors have expressed concerns over the high risks associated with crypto trading, but they also recognise the significant potential for returns. A senior trader in Hong Kong commented in an interview with Economic Times India, stating, “Despite the volatility, we see the long-term value in holding major cryptocurrencies like Bitcoin. The key is balancing risk with traditional asset classes like equities”. This sentiment echoes the growing trend of diversified investment strategies where crypto assets are part of a broader portfolio aimed at mitigating risk.
Mr. Edul Patel, CEO of Mudrex, expressed optimism about Hong Kong’s growing role as a crypto hub, emphasising how recent ETF approvals for Bitcoin and Ethereum are driving institutional adoption. “Hong Kong’s openness to crypto regulation is paving the way for increased liquidity,” he noted.
Hong Kong’s regulatory environment for crypto is evolving rapidly. The SFC’s decision to approve more exchanges by the end of 2024 comes at a time when international markets are tightening regulations on crypto assets. The regulatory changes have sparked both optimism and concern among crypto investors. While some welcome the stricter measures as necessary for long-term growth, others believe that these regulations could stifle innovation and limit access to lucrative investment opportunities.
Christopher Hui, Hong Kong’s Secretary for Financial Services and the Treasury, emphasises Hong Kong’s “same activity, same risk, same regulation” principle. This approach aims to enhance investor protection through a strict licensing regime for virtual asset service providers (VASPs) and extend regulations to over-the-counter (OTC) venues to minimise risks. Hui believes this is essential to regulate crypto activities while fostering innovation
In April 2024, Hong Kong witnessed a milestone with the launch of the first spot Bitcoin and Ether ETFs, trading a combined volume of $11.2 million. These ETFs provide a more traditional investment vehicle for those who may be hesitant to invest directly in cryptocurrencies. As Bloomberg reported, Hong Kong’s ETFs are unique in that they offer in-kind subscription and redemption, providing flexibility for institutional investors. This development is seen as a strategic move to attract a broader range of investors, particularly from the U.S. and other markets that are still grappling with crypto regulations.
However, the city’s regulatory framework has not been without setbacks. Some exchanges have withdrawn their applications due to concerns over strict regulations. A key sticking point has been the SFC’s directive to prevent mainland Chinese residents from accessing Hong Kong-based crypto services. Despite these hurdles, the SFC remains determined to maintain a safe and secure trading environment, as evidenced by their commitment to finalising applications by year-end.
Industry experts in India and Hong Kong have weighed in on the developments in the crypto market. Speaking to The Hindu, a leading blockchain expert in India noted, “The volatility in the crypto market isn’t going away anytime soon, but Hong Kong’s regulatory stance offers a clear pathway for institutional investors to enter the space with more confidence”. This view is shared by investors and financial experts who believe that clear regulation, despite its challenges, could ultimately foster a more robust crypto ecosystem.
Hong Kong’s crypto market is poised for growth as the SFC moves to approve more exchanges and bolster investor confidence through stringent regulatory measures. While volatility remains a significant concern for investors, the launch of ETFs and the expansion of licensed exchanges are important steps toward stabilising the market.
Hong Kong’s efforts to balance innovation with regulation will be critical in determining the future of its crypto landscape. For investors, understanding the risks and rewards in this evolving market is key to navigating the challenges of a volatile but promising space.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
