On June 27, Hong Kong’s Securities and Futures Commission (SFC) declared in their annual report that they will “keep a close watch” on crypto and Initial Coin Offerings (ICO). According to the watchdog, the new technology “comes with risks,” which is why they plan to “intervene when appropriate.”

Indeed, the SFC has stepped in with more definite regulatory policies this year, taking action against local crypto exchanges, ICOs and warning the public about potential risks related to investments in the crypto market. Meanwhile, Hong Kong continues to nurture financial, cross-border initiatives powered by blockchain, steadily gaining a reputation for being an important international blockchain hub.

Brief history of crypto regulation in Hong Kong

Hong Kong, being an autonomous territory of China, has a separate political system from the rest of the country, which has its effect on the local economy as well. Therefore, the city does not inherit the Chinese approach towards crypto, and the infamous ICO blanket ban in September 2017 bypassed Hong Kong. As a result, many crypto-related businesses chose to move to the more crypto-friendly Hong Kong soon after the crackdown. For instance, when Chinese authorities turned their concerns regarding ICOs into action, the major Chinese Bitcoin conference BitKan decided to move to Hong Kong from Beijing, and the world’s largest exchange, Binance, opened offices in the special administrative territory as well — although it opted for having a multinational presence in the end.

Around the same time, in September 2017, the government of Hong Kong showed its support for blockchain, outlining its considerably more positive position towards crypto in comparison to mainland China. Charles d’Haussy, the fintech lead at state economic agency InvestHK, argued:

“Blockchain is a very high priority for us. There is hype, and there is the fast grab of money with ICOs in some cases. But what we are looking at building here in Hong Kong is an infrastructure for new businesses and existing businesses, to make sure the technology and innovations remain a key enabler for financial sector growth.”

Cross-border blockchain initiatives

At that point, the Hong Kong Monetary Authority (HKMA), an agency which plays the role of the central bank in the region, had already partnered with its Singapore counterpart to run a blockchain-powered project to maximize trade and financing between the two global financial centers. By November 2017, around 20 banks from both countries enrolled in the project, wishing to ease the cross-border trading process.

Around the same time, in November, 2017, the government of Hong Kong announced its plan to create a blockchain-based trade financing system as part of China’s Belt and Road Initiative — a national program launched by Chinese President Xi Jinping in 2013 to boost trade links between China and its global partners. Thus, Hong Kong’s Secretary for Financial Services and the Treasury, James Henry Lau, claimed that the technology could significantly reduce the input of human resources and time that trade finance normally requires, and “reduce chances of fraud.”

“Trade along the Belt and Road is mostly conducted by small and medium-sized enterprises, so blockchain’s distributed ledger technology could help by cutting out the need for a central organization and middlemen.”

Blockchain has enjoyed more presence in the country, as on June 25, Alibaba subsidiary Ant Financial (formerly known as AliPay) tested its first blockchain remittances, sending a funds transfer between its AliPayHK app in Hong Kong and Filipino payment app GCash, its joint project with local telecoms company Globe Telecom. The transaction took just three seconds. Ant Financial’s CEO Jack Ma commented:

“Using blockchain to achieve cross-border remittances is one of my most concerned projects in the past six months. Starting from Hong Kong, this service (AlipayHK) will be brought to the rest of the world in the future.”

On June 26, just one day after, the HKMA signed a fintech collaboration agreement with the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) — the UAE capital’s watchdog for the financial market — “to start a dialogue on the opportunity to build a cross-border trade finance network using distributed ledger technology (DLT),” further cementing its interest in establishing blockchain-based international trade networks and gradually moving towards becoming a blockchain haven.

ICOs and exchanges under the SFC’s control

Around the time when the Chinese authorities implemented a blanket ban on ICOs, Hong Kong regulators showed a more cautious approach. In September 2017, the Securities and Futures Commission (SFC), Hong Kong’s financial regulator, issued a public warning about potential dangers of crypto investments, pointing out that ICOs might be considered as ‘securities.’ That means that they have to be registered with the watchdog prior to publically seeking investments. Similar sentiment has been shown by the U.S. Securities and Exchange Commission (SEC), whose commissioner Robert Jackson has previously argued that he hasn’t yet seen an ICO that wasn’t a security, and therefore needs to be registered with the SEC before being sold to U.S. investors.

In February 2018, the SFC issued a second public warning on the potential risks of dealing with crypto exchanges and investing in ICOs, urging investors to do their due diligence and mentioned securities yet again. The SFC vowed to keep “policing” cryptocurrency and ICO markets. Its CEO Ashley Alder stated that following a vetting of exchanges and ICO providers for compliance, “market professionals” should also play their role in ensuring the legality of token issuance and exchange.

Similarly, Julia Leung, the SFC's Executive Director of Intermediaries, argued:

"If investors cannot fully understand the risks of cryptocurrencies and ICOs or they are not prepared for a significant loss, they should not invest."

This time, however, the SFC hinted towards taking more definite action. Namely, the watchdog claimed it had sent warning letters to seven crypto exchanges either based in Hong Kong or connected to the city, stating that they should not trade virtual currencies without a licence. In response, according to the regulator, the majority of those platforms either confirmed that they did not provide such services or "took immediate rectification measures," i.e., removing certain coins from their exchanges.

Furthermore, in March, the SFC took hardline regulatory action. The agency halted Black Cell Technology’s ICO, arguing that the offering was an unregistered Collective Investment Scheme (CIS). According to the SFC, the Black Cell’s ICO scheme — telling investors that their investments would finance the development of the mobile app and give token holders the rights to equity shares of the company — constituted a CIS and thus a “security,” meaning that it had to be registered with the regulator prior to being sold. Black Cell was also ordered to refund its Hong Kong investors of their investments in the token.

On April 13, Julia Leung, the SFC's Executive Director of Intermediaries, continued criticizing the nature of ICOs, declaring that the type of fundraising they implement is better suited to venture capital funds.

Leung stressed that although the SFC in its role as a securities regulator considers technologies like blockchain to be beneficial, she also noted that embracing this new technology requires certain knowledge that casual users normally lack:

“[Because of] the highly technical content and opacity of some of these [blockchain] projects, it is hard for an average investor to pick winners, a job more suited for professional investors such as venture capital funds.”

Leung went on to say that, in reality, many ICOs are “dubious, if not downright frauds [...] [that] escape the scrutiny of the police or securities regulators because of their cross-border nature and the way the crypto assets are structured to fall outside any regulator’s perimeter,” referencing security breaches of crypto exchanges in Japan and South Korea as a “sharp reminder of the risks” of crypto trading.

Hong Kong’s general attitude towards cryptocurrencies: Not that dangerous, not that interesting

On April 30, the Hong Kong Financial Services and Treasury (FSTB) released a report on the status of money laundering (ML) and terrorism financing (TF) which concluded that virtual currencies are not particularly involved in either type of financial crime, giving it a “medium-low” level of risk.

The document also mentioned that the FSTB, Hong Kong financial regulators and law enforcement agencies are working together to look into the risks associated with ICOs and cryptocurrencies in general:

“While we have not found substantial risks in these newly developing payment methods or commodities, this is a rapidly developing area requiring continued monitoring.”

The FTSB also argued that, because Hong Kong “is one of the world’s freest economies with a vibrant foreign currency exchange market and no capital controls [...] VCs are therefore not as attractive as in economies where people may try to circumvent currency controls or seek refuge from a high inflation rate.”

“The exchange of Bitcoin in person is not popular [...] Domestically, the use of Bitcoin remains at a negligible level.”

The HKMA seemed to lose its interest in the technology as well, dropping its plan to release a central bank digital currency (CBDC). On May 30, Joseph Chan, the Acting Secretary for Financial Services and the Treasury in the Legislative Council, stated that while HKMA is monitoring cryptocurrency development globally, they have “no plan to issue CBDC at this stage.”

According to Chan, the Committee on Payments and Market Infrastructures (CPMI) — made up of members from the People’s Bank of China (PBoC) and the HKMA — and the Markets Committee (MC) of the Bank for International Settlements had jointly been studying the effects of CBDC and found out that “currently proposed implementations of CBDC for wholesale payments look broadly similar to, and not clearly superior to, existing infrastructures.”

“CBDC that could be made widely available to the general public and serve as an alternative safe, robust and convenient payment instrument raises important questions and challenges that would need to be addressed.”

Home to mining giants

Although the prospects of holding ICOs in Hong Kong has become more blurry due to the abovementioned SFC’s sentiments, Hong Kong’s stock exchange seems to attract mining players as large as Canaan Creative and Bitmain, who have expressed their interest in holding an Initial Public Offering (IPO) there.

On May 16, Bloomberg reported that Chinese Bitcoin mining hardware manufacturer Canaan Creative, who holds around 15 percent of the Bitcoin chips and hardware equipment market and “a quarter of the world’s Bitcoin blockchain computing power,” confirmed that it was planning an IPO on the Hong Kong stock exchange. Reportedly, Canaan could raise up to $1 billion, creating further competition for mining giant Bitmain.

Nevertheless, its rival, who controls around 75 percent of the Bitcoin mining chip market, might hold a Hong Kong IPO as well. On June 7, Bitmain’s CEO Jihan Wu claimed he is “open” to conducting an overseas IPO, with major backers appearing on the filing being Morgan Stanley, Deutsche Bank AG, Credit Suisse Group AG and CMB International Capital Ltd.