After a series of decisions in favour of the sector (validation of spot ETFs), Hong Kong once again seems to be taking a stop-and-go approach to cryptos, particularly with regard to regulation. This lack of clarity is worrying some local players.

In Asia, there is probably no place as iconic as Hong Kong.

Installed on a lush island opposite Shenzhen (mainland China), the city is as futuristic as it is dynamic, with its imposing skyscrapers displaying all the world's financial elite.

Hong Kong is home to all the world's major banks and funds: Citi, JP Morgan, Société Générale and so on. And even though China has clearly regained control of the island, especially since the 2019 protests and the 2020 Covid, Hong Kong remains a key financial centre.

In recent years, there has also been a whole crypto ecosystem that now includes several types of player:

Individuals - particularly Western and Chinese - who have made their fortunes in crypto; Hong Kong has welcomed several thousand investors in recent years who were unable to sell their cryptos where they lived or who simply wanted to take advantage of virtually unbeatable taxation; in Hong Kong, there is no tax on capital. "We have clients from Asia, but also from Europe and the United States", confirms a banker based there.

Crypto entrepreneurs; these crypto entrepreneurs have not necessarily made a fortune, but they have settled in Hong Kong both for "the mentality", as some have told me - the Hong Kongers work a lot - and for the quality of the ecosystem. In Hong Kong, you can set up a company in a matter of minutes and there are plenty of investors (individuals and funds) to finance projects.

Exchange platforms that have teams on site. While Hong Kong's crypto regulations are not the most favourable (more on this below), being based in Hong Kong allows a company to spread its wings throughout the region; direct commercial access to more than 15 Asian countries.

Crypto funds. In addition to traditional funds, Hong Kong has seen an increase in the number of funds specialising in cryptos and tokens, such as Animoca Brands, which has invested in more than 300 Web3 companies.

Overall, the Hong Kong ecosystem remains small - a few thousand people (out of 7.5 million) - but it benefits from the fact that Hong Kong is a major financial centre and the regulator wants to continue to attract talent and capital.

ETFs: a complicated start

It was in particular to remain a leading financial centre that the island validated the Bitcoin and Ethereum Spot ETFs last spring. "The regulator had been looking at the subject for some time and then the decision by the US regulator (SEC, editor's note) to accept Bitcoin Spot ETFs accelerated everything," confirms a Hong Kong-based banker.

Launched last April, Hong Kong's ETFs have nevertheless got off to a slow start. Over the last four months, they have only attracted $300 million in investment, 100 times less than in the US, where Bitcoin Spot ETFs are already worth more than $30 billion!"

"There was a big launch in the US and things will gradually develop in Hong Kong," wants to believe David Lawant, head of research at US fund FalconX.

The problem is that the mainland Chinese don't have access to these products (officially the Chinese can't invest in cryptos), and the Americans are already well provided for with their own ETFs. "I don't see how volumes could really take off," explains a local banker, who also cites the case of Europe where ETPs, despite already being available for years, have not taken off. "There is not enough demand, at least for the time being", confirms a market maker present in Hong Kong.

The subject of regulation

This lack of dynamism stems largely from regulation, which is still ambivalent about cryptos.

The bulk of the regulation has been put in place from 2022. This notably concerns platforms, which are to be the main gateway to cryptos. "It was very good to do this, and it attracted a lot of players who found themselves stuck in mainland China, but things are slower than expected," rewinds a locally-based crypto investor.

In fact, only 2 platforms have obtained their licences: Hashkey and OSL Digital Securities.

"It's probably the most complicated licence on the planet to obtain," they explain on the side of Hashkey, which has local offices.

To justify this policy, the Hong Kong regulator has for months been highlighting the need to bring crypto into line with traditional finance. "Our requirements are equivalent to those we have for banks and other brokers", they explain on the regulator's side, without giving many more details.

In the meantime, several platforms, and not the least, have given up in advance on applying for the licence - like Binance for example - or have finally thrown in the towel in the image of OKX, which has nevertheless invested heavily locally.

According to our information, the world's 5th-largest platform has spent nearly $20 million over the past 18 months on application fees.

Interviewed, several local players are worried about the consequences of this policy. "The regulator is sending out too negative a message", explained one of them.

This analysis does not constitute investment advice. It has been written without taking into account your personal circumstances, including your financial situation, risk profile and investment objectives.

Before investing in any product, investors should fully understand the risks involved and consult their own legal, tax, financial and accounting advisors.