introduction
The two major centers of the crypto market in Asia are Hong Kong and Singapore, because of the inseparable relationship with China and the relatively independent governance environment, Hong Kong is not only the center of the Chinese circle in the crypto market, but also the vane of regulatory standardization, and the strongest hub for information exchange.
With the boom in the crypto market in the last cycle, more and more people are eyeing the crypto space in the Asia-Pacific region where Hong Kong radiates, and many institutional and individual investors are eager to try it, and Hong Kong's policies are uncertain around 2021, which has also led to a large number of capital and institutions migrating to crypto-friendly regions such as Singapore, Dubai, and the United States. With the official announcement of the Hong Kong government's openness and tolerance of the crypto market in 2022, many capitals have begun to return one after another, and the entire market situation has become more and more prosperous.
In terms of cultural relations, Hong Kong is closely connected with Macau and Taiwan, but in fact, Southeast Asia, South Asia and even the whole of Asia are within the radiation range of Hong Kong, so Hong Kong's connectivity and influence occupy an extremely important position in the crypto market.
1. Macroeconomic indicators and current situation
1.1 Geographical location and population size
Hong Kong was once a British colony and is now a Special Administrative Region of China. Geographically located in the south of China, east of the Pearl River Estuary, west of Macao across the sea, north of Shenzhen and south of Zhuhai Wanshan Islands, the regional scope includes Hong Kong Island, Kowloon, the New Territories and the surrounding 262 islands, with a land area of 1113.76 square kilometers, a sea area of 1641.21 square kilometers, and a total area of 2754.97 square kilometers.
As of the end of 2023, Hong Kong has a total population of 7,503,100, one of the most densely populated regions in the world, the world's highest life expectancy, and the world's fourth largest human development index. The majority of Hong Kong's population is of Chinese nationality. According to 2017 statistics, Chinese accounted for about 91.4% of Hong Kong's population. Other nationalities mainly include the Philippines (about 190,000, 2.6%), Indonesia (about 170,000, 2.3%) and India (about 33,000, 0.4%).
1.2 Economic structure and characteristics
Hong Kong is ranked 3rd among the world's first-tier cities by GaWC, and its economy is a free market economy system that is highly dependent on international trade, and as the economy with the highest degree of service dominance in the world, financial services, trade and logistics, professional services and other business support services, and tourism are the four traditional major industries of Hong Kong's economy.
As one of the most important financial centers and commercial ports in the world, Hong Kong is characterized by low taxes, minimal government market intervention and a mature international financial market, and is known as the "Port of Newlen" together with New York and London, and is the world's third largest financial center, as well as an important international trade, shipping center and international innovation and technology center in the world, Hong Kong International Airport is the airport with the largest international cargo volume in 2022, and the port of Hong Kong ranks ninth in terms of global container throughput.
In addition, Hong Kong has a very high concentration of wealth and a large wage gap, with 90% of earners receiving 41% of all income. There is one billionaire per 109,657 people in Hong Kong, the second highest number of billionaires in the world, the largest number of billionaires in Asia, and the highest concentration of ultra-high-net-worth individuals in the world. Despite government efforts to close the widening gap, the median income of the top 10 percent is 44 times higher than that of the bottom 10 percent.
1.3 Latest annual GDP up 3.2%
Hong Kong is the 35th largest economy in the world, with a gross domestic product (GDP) of US$359.84 billion in 2022, according to official World Bank data. Hong Kong's GDP is worth 0.15% of the global economy.
In 2023, Hong Kong's GDP increased by 4.3% in real terms in the fourth quarter of 2023 and by 3.2% in real terms compared with 2022, supported by a strong rebound in service exports and fixed investment and a significant growth in private consumption, based on the preliminary figures of GDP by economic activity in QoQ volume calculation for the fourth quarter and the whole year released by the Census and Statistics Department of the HKSAR Government.
1.4 Inflation rose slightly but was lower than expected
In February 2024, Hong Kong's annual inflation rate rose to 2.1%, slightly below market expectations of 2.2%. Prices of food (2.2 per cent), housing (3 per cent), transport (2.3 per cent) and other services (3.6 per cent) increased, while prices of clothing and footwear (1.3 per cent) and other goods (1 per cent) slowed. The cost of electricity, gas and water (-7.8%) and durable goods (-1.4%) continued to fall. Core inflation also increased to 1.2% from 0.8% previously.
The Hong Kong government said that the underlying consumer price inflation rate remained moderate in the first two months of this year. While the prices of eating out and takeaway continued to rise at a relatively rapid pace, the prices of basic food items decreased year-on-year, and the prices of energy-related items fell further, while the price pressures on other major components remained largely contained. While domestic costs may face some upward pressure as the economy continues to grow, external price pressures should ease further.
1.5 Legal tender in Hong Kong
The Hong Kong dollar (HKD) is the legal tender of Hong Kong, formerly known as "Hong Kong Dollar" (unit: Yuan), also known as "Hong Kong Dollar" or "Hong Kong Paper", the currency and fund code is HKD, and the symbol is HK$. Hong Kong dollars are issued and regulated by the Hong Kong Monetary Authority (HKMA). The currency is pegged to the US dollar (USD) and floats in a narrow range, and the Hong Kong dollar is widely used in daily transactions in Hong Kong, but it is also accepted in neighboring Macau.
2. The current situation and characteristics of the crypto market
As a special administrative region of China, Hong Kong has autonomy in many aspects of its policies, including the regulation of cryptocurrencies. Unlike China's total ban on cryptocurrencies, cryptocurrencies are allowed in Hong Kong, and from 2023 onwards, the crypto industry is explicitly encouraged to settle and develop in Hong Kong, but the requirements must be under regulatory compliance conditions.
At the same time, Hong Kong's unique cryptocurrency market offers a variety of use cases that are suitable not only for local users but also for foreigners. According to professional analysis, based on Hong Kong's relatively independent judicial environment and role in the world economy, this may indicate that the Chinese government is reversing the direction of digital assets, or at least being more open to cryptocurrency initiatives.
2.1 Ranked 5th in the world in cryptocurrency adoption
In a cryptocurrency adoption report by Finder, Hong Kong has the highest cryptocurrency adoption rate in the Asian region, ranking in the top 5 in the world. Among them, the cryptocurrency adoption rate in 2022 was 16%, and searches for cryptocurrencies increased by 209%, while 7.6 cryptocurrency-related articles were published per 100,000 people, and cryptocurrency ATMs increased by 152%.
2.2 Ranked 5th in East Asia in terms of cryptocurrency acceptance
According to a report by Chainalysis, Hong Kong is a very active cryptocurrency market in terms of raw trading volume, with an estimated $64 billion in cryptocurrencies received between July 2022 and June 2023. Although Hong Kong's population accounts for 0.5% of Chinese mainland, it is more impressive compared to China's $864 in the same period.
Importantly, Hong Kong's population base and industrial structure are more about replicating the model and framework of its role as a global TOP3 financial center in the crypto field, which is similar to Singapore and London, but is significantly different from Dubai, Turkey and even the United States.
2.3 OTC transactions are growing substantially
Judging from the data of tourists visiting Hong Kong, as the new crown epidemic recedes, from the beginning of 2023, the number of tourists visiting Hong Kong has begun to increase rapidly, with China accounting for about 80%. Coupled with the good business environment and living environment created by the government for the crypto industry, according to the data of Hong Kong crypto physical stores and feedback from practitioners, OTC transactions increased by about 25% in the first half of 2023, and are expected to continue to grow significantly in 2-5 years.
2.4 The proportion of large institutional transactions is TOP1
In terms of the size of transfers, large institutional transactions accounted for a larger share of transaction volume, with Hong Kong ranking first with 46.8% for transfers greater than $10 million, higher than the global average of 45.7%, and retail transfers slightly lower than the global average. Much of this is driven by Hong Kong's very active OTC market, with over-the-counter or over-the-counter (OTC') desks typically providing a large number of transfers for institutional investors and high-net-worth individuals.
2.5 The proportion of DEX transactions far exceeds the global average
Compared to the rest of East Asia, Hong Kong shows a unique segmentation of the most commonly used types of crypto platforms, especially in terms of DEX, with a very high share of DEXs, surpassing Taiwan by 2 percentage points and outperforming the global average by about 14 percentage points, mainly due to the higher proportion of OTC transactions in them.
3. Encrypt user characteristics
In Hong Kong, the exact number of cryptocurrency owners is difficult to determine, but it is certain that there are a growing number of individuals and businesses that are involved in cryptocurrency trading, investment, and blockchain technology development.
3.1 75% of users are looking for short-term gains
According to the 2023 Retail Investor Study conducted by the Investment Committee, 75% of virtual asset investors surveyed pursue short-term gains. In addition, 74% of crypto investors believe in the enduring trend of virtual assets, while 73% are worried about missing out on lucrative opportunities.
In other words, despite the good financial literacy of investors, their financial behaviour needs to be strengthened, and the disconnect between knowledge and practical application highlights the importance of an integrated investment strategy approach.
3.2 BTC holding rate of 18% is the highest in the world
In a Finder crypto adoption report, the top 5 are all in Asia, with Hong Kong residents owning crypto assets at 26%, a figure that is not surprising given Hong Kong's status as a global financial hub, in fact, Hong Kong has the highest percentage of Bitcoin (18%), ranking second overall, behind Vietnam (20%).
3.3 Gen Z is the main group of crypto users
In terms of age groups, 18–24-year-olds are most likely to own cryptocurrency at 35%, followed by 35% of 35–44-year-olds, 28% of 25–34-year-olds, up to 23% of those over 65, 19% of 55–64-year-olds, and 16% of 45–54-year-olds.
Hong Kong's crypto users are mainly concentrated in Gen Z and have a high ownership rate, which is consistent with a study by the University of Hong Kong on Gen Z's investment preferences. Compared with older age groups, Gen Z in Hong Kong is more aware of the importance of financial management, with higher deposit rates in banks and higher investment and holding ratios in crypto assets.
3.4 The proportion of male users in crypto users is higher
In terms of gender, Hong Kong is in line with the global trend, with more men than women in the crypto user population, with 30% of men holding cryptocurrencies in Hong Kong compared to 23% of women. The main reasons are that men's incomes are relatively higher, as well as men's greater interest in crypto and Web3.
4. The current status of CEX in Hong Kong
According to Hong Kong's Securities and Futures Commission regulations, cryptocurrency platforms operating in Hong Kong must submit an application for a license by the end of March or they will be required to cease operations.
4.1 CEXs that have been authorized to trade with a trading license
Since the official launch of its licensing system in 2023, the Hong Kong Securities and Futures Commission website shows that only two companies in Hong Kong, OSL and HashKey, have been authorized for cryptocurrency trading licenses, and as of 2024, the Hong Kong Securities and Futures Commission has received applications for CEX operating licenses from 22 companies, including OKX, Bybit, Bullish, Crypto.com, Huobi HK and Matrixport HK, among others.
OSL specializes in B-end brokerage and trading services OSL is a Hong Kong-based digital asset brokerage and crypto exchange. Its full name is "Olympus Markets Limited". OSL provides OTC, custody, prime brokerage services and related SaaS services for institutional and professional investors, and mainly provides services to customers around prime brokerage and API tools, and its app is available on the Apple App Store and Google Play Store in Hong Kong.
BC Technology's 2023 interim report showed that net loss narrowed from HK$300 million to HK$95 million in the six months to June, with OSL's digital asset and blockchain platform businesses playing a key role in BC Technology's revenue.
Hashke原生的合规加密sex HashKey Exchange is a cryptocurrency exchange based in Hong Kong. It is licensed by the Hong Kong Securities and Futures Commission and is one of the platforms operating legally in the region. HashKey Exchange provides users with a platform to buy, sell, and trade a wide range of cryptocurrencies, providing services such as spot trading, derivatives trading, and custodial solutions. It aims to provide a safe, compliant environment for cryptocurrency trading in Hong Kong and beyond. 、
4.2 CEXs on the Suspicious List
The Hong Kong Securities and Futures Commission (SFC) mainly publicizes CEXs that are not licensed to operate entities and are believed to be or have been directed at Hong Kong investors or claim to have ties to Hong Kong, and there are currently 23 CEXs listed, including MEXC and Bybit.
4.3 Other CEXs used by the User
In addition to OSL and HashKey, which have already complied with the regulations, there are actually a number of CEXs used by Hong Kong users in crypto asset custody and trading, and most of these CEXs are already actively applying for corresponding licenses.
OKX OKX has been applying for a Hong Kong crypto license since 2022 and has a dedicated team of more than 20 people from SFC, SEC, international law firms, or licensed financial institutions to take charge of the Hong Kong compliance process.
Currently, OKX has established a Hong Kong entity to launch virtual asset services in Hong Kong, and intends to apply for a virtual asset service provider license under the Anti-Money Laundering and Counter-Terrorism Financing (Amendment) Ordinance 2022 (which will come into effect on June 1, 2023), as well as a Type 1 and Type 7 license under the Securities and Futures Ordinance.
Bitget Bitget hired lawyers and compliance professionals in Hong Kong at the end of 2022 to learn more about all relevant Hong Kong policies and is preparing to apply for a Hong Kong virtual asset trading platform license.
Huobi Global In an interview with Bloomberg, Justin Sun said that Huobi Global has applied for a cryptocurrency trading license in Hong Kong and will be able to expand the services and products it offers to Hong Kong customers to provide a wider range of cryptocurrency trading and investment options. At present, Huobi has launched a new exchange in Hong Kong, Huobi HK, which provides spot trading and virtual asset custody services.
Gate.io Hippo Financial Services, a subsidiary of Gate.io, has been granted a Hong Kong virtual asset custody license to provide virtual asset custody services in Hong Kong. Gate is also licensed as a Trust and Company Service Provider (TCSP) in Hong Kong to provide custody solutions covering a range of digital assets in Hong Kong. Its parent company, Gate Group, is currently applying for a new cryptocurrency license in Hong Kong and launching a new platform designed for the Hong Kong market, Gate HK.
BitMart In May 2023, BitMart announced the official launch of its Hong Kong-based trading platform "BitMart Hong Kong" to continue to serve Hong Kong institutional and retail investors. Currently, BitMart Hong Kong already supports spot trading of virtual assets such as Bitcoin, Ethereum, and LTC.
4. Web3 projects in Hong Kong
As a financial center, Hong Kong is vigorously promoting the implementation of Web3 and crypto industries, compliance, and the introduction of resources and talents, but due to natural limitations, there are not many Web3 projects in Hong Kong, and some of them will outsource their technical teams or marketing teams to Shenzhen or Kuala Lumpur.
MAMORI
Mamori is a smart contract auditing system based on Web3 algorithms that focuses on zero-day economic vulnerabilities and MEV, addressing scalability, automation, vulnerability detection relevance, and performance in the Web3 security space. Their goal is to apply interdisciplinary techniques and protect against "unknown unknown" vulnerabilities. To achieve this, they leverage algorithmic parsing techniques to build smart contract sequences, leverage reproducible stateful computation, and integrate innovative, customizable algorithmic feedback mechanisms.
Ladder
Ladder is a decentralized automated market maker protocol (AMM) that specializes in providing services for NFTs to be instantly swapped using liquidity pools. Although Ladder is primarily geared towards the GameFi space, they support all major token standards, including ERC-721, ERC-1155, ERC-3525, ERC-20, and many more.
Yuliverse
Yuliverse is a blockchain-based play-to-earn game that combines elements of GameFi and SocialFi with its NFTs and cryptocurrencies, ARG and ART. It provides players with a gaming experience with a "earn on demand" mechanic. The game is designed to promote social engagement and interaction, providing players with the opportunity to explore the real world and connect with local businesses. By completing missions and challenges, players can earn two native tokens, which play an important role in the Yuliverse ecosystem.
Conflux Network
Conflux is a high-performance Layer 1 blockchain designed for dapps that require massive speed while guaranteeing decentralization. Conflux's treegraph structure allows multiple blocks to be confirmed at the same time, and this parallel processing of blocks and transactions reduces confirmation time and greatly increases transaction throughput. As a compliant and permissionless public chain in China, Conflux is building a borderless trading and technology ecosystem for crypto projects with a global mindset, expanding from China to North America, Russia, Latin America, Europe, Africa, and the rest of the world.
Element
Element is a multi-chain aggregator NFT marketplace that aims to build a community-driven, all-in-one marketplace with the best trading experience and the lowest barrier to entry. Element provides partners with exclusive pages, collection certifications, and launchpad services to facilitate project development and engagement. Element has been laying out the Hong Kong market for a long time, and many consumer goods multinational companies have a demand for issuing NFTs at their headquarters.
The Sandbox
Founded in 2012 and one of the leading metaverse concept projects, The Sandbox is a decentralized, community-driven gaming ecosystem where players can create NFTs, upload them to the in-game marketplace and deliver them to the game. The project has raised a total of $95.1 million in 2 financings, with major investors such as SoftBank Vision Fund, Animoca Brands, Blue Pool Capital, Polygon Labs, Liberty City Ventures, Samsung Nex, etc.
5. Crypto venture capital in Hong Kong
Although Hong Kong is half a beat slower in terms of Web3 policy, it is still one of the strongest cities in Asia in terms of heritage, and many giant projects in the crypto field started in Hong Kong. In recent years, Hong Kong has also given birth to many new start-ups and crypto investment institutions in the blockchain field, which shows the potential of incubating Web3 projects in Hong Kong. Among them, investment institutions rely on their own industrial resources to provide customers or project parties with customer docking, resource introduction, technical support, etc., which is of great importance to the implementation of strategies and the development of the industry.
Cyberport
Managed by the Hong Kong SAR Government, Cyberport is Hong Kong's digital technology hub and incubator. It has more than 2,000 members, including 900 on-site and nearly 1,100 off-site start-ups and technology companies. Cyberport is committed to promoting Hong Kong's digital economy, nurturing talent, promoting youth entrepreneurship, supporting start-ups, and fostering industry collaboration for digital transformation.
HASHKEY Capital
Headquartered in Hong Kong with offices in Singapore, Japan, and the United States, HashKey Capital is a leading blockchain investment firm based in Hong Kong with over $1 billion in assets under management. As one of the largest and most influential blockchain investment institutions in Asia, it is also the earliest institutional investor of Ethereum, mainly investing in blockchain technology, digital assets and cryptocurrency-related projects.
HashKey Capital plays an important role in driving innovation and growth in the blockchain ecosystem by providing funding, strategic guidance and support to promising blockchain startups and projects, as well as advisory services to institutional investors seeking to gain exposure in the blockchain and crypto markets.
Amber Group
Amber Group is a leading digital fintech platform, a well-known trading service provider, and a well-known institutional investor in the primary market. Based on the rapid development of the business and the resources of the founding team, Amber has successively received large-scale financing from top investment institutions, including Temasek, Sequoia China, Pantera Capital and Tiger Global Management, Fenbushi Capital US, etc.
Amber Group has participated in projects such as NEARProtocol, StaderLabs, SSV.Network, Sperax, Aurora, Aurigami, Mina, a Japanese blockchain game doublejump.tokyo startup, and EthSign, a Web3 infrastructure company.
IOSG Ventures
IOSGVentures is an investment and research firm focused on the blockchain/crypto space, covering multiple blockchain verticals such as infrastructure, DeFi, GameFi, and SocialFi. According to its official website, its investment focuses on the breakthrough and innovation of the project, the ambition and resilience of the founder and team, operational excellence and delivery capabilities, and a focus on community building.
IOSG is primarily focused on investing in Layer 1 projects and has become one of the major investors in Polkadot and NearProtocol. It has invested in many well-known projects, including 0x, 1inch.exchange, DeFiAlliance, etc., in the Defi field, and Conflux, Cosmos, MinaProtocol, etc. in the Layer-1 field.
Animoca Brands
A Deloitte Tech Fast winner, a Fortune Crypto 40 company, and one of the Financial Times' 2023 Asia Pacific Fast Companies, Animoca Brands leverages blockchain to provide digital property rights to consumers around the world to help build an open virtual universe. Animoca Brands is one of the most active investors in Web3, with more than 400 Web3 investments, either directly or through Animoca Ventures, including Yuga Labs, Axie Infinity, Polygon, Consensys, Magic Eden, Fireblocks, OpenSea, Dapper Labs, Yield Guild Games, and more.
C Capital
C Capital is a global asset management company that manages private equity funds, private credit funds, and blockchain hedge funds, founded in 2017 by Hong Kong real estate tycoon Adrian Cheng, together with CliveNg and BenCheng. BlockchainMarketFund is a discretionary long/short hedge fund focused on investing in the blockchain space, providing investors with a range of cryptocurrency trading strategies through technical analysis, fundamental analysis, and on-chain analysis and evaluation.
CCapital has invested in more than 60 companies to date, spanning the consumer, technology, and blockchain sectors, with investments in blockchain and digital assets including Ethereum infrastructure development company ConsenSys, financial services platform Matrixport, NFT virtual fashion brand RTFKT, AnimocaBrands, and more.
Everest Ventures Group
Everest Ventures Group (EVG) is a blockchain investment bank and incubator spun off from Hong Kong-based private equity/venture capital fund Friends Capital, aiming to promote the large-scale application of digital assets and blockchain technology. EVG focuses on fintech, DeFi infrastructure, NFTs, GameFi, Web3, and the metaverse.
EVG's portfolio includes blockchain game and NFT developer AnimocaBrands, decentralized metaverse TheSandbox, public blockchain Flow, crypto exchange Kraken, and many other well-known projects. In addition to investment and financing business, EVG will also build many companies to do GameFi, film and television NFT and other businesses, and it will have more layouts in the metaverse in the future.
GBV Capital
GBVCapital, an investment arm of GenesisBlock, is a venture fund focused on blockchain technology and digital assets in Asia, mainly operating cryptocurrency OTC business in Hong Kong. The GBV team supports full-stack collaboration with the project and is designed to facilitate the project through marketing, transactional functions, product, and strategically focused team members who can help when needed.
Since its establishment in 2020, GBV has invested in more than 70 companies covering multiple verticals, including Layer 2 public chain BobaNetwork, Layer 2 money market protocol zkLend, DeFi startup Arch, crypto options trading platform SignalPlus, P2E shooter game CantinaRoyale, Web3 creator collaboration platform Joyn, etc.
Newman Capital
Newman Capital is a full-stack venture capital firm focused on technology investments in private equity, blockchain startups, and art and collectibles, with a focus on core infrastructure, decentralized finance, social, and gaming.
According to the official website, Newman's team has supported more than 60 projects, in addition to well-known crypto projects in the blockchain/web3 field, such as NFT unicorn YugaLabs, crypto exchange Kraken, Ethereum scaling and infrastructure development platform Polygon and DapperLabs, and also participated in early investments in well-known Internet technology companies such as Reddit, SpaceX and EpicGames.
MindWorks Capital
Headquartered in Hong Kong with offices in Beijing, Shanghai and Jakarta, MindWorks Capital is an early-stage and seed-invested venture capital firm with an investment footprint in Greater China and Southeast Asia.
MindWorks Capital manages funding from university endowments, global asset managers, fund of funds, family offices, and Asia's leading new economy entrepreneurs. At present, it has invested in 33 projects, including a number of startups in the blockchain field, such as YGGSEA, a subsidiary of the blockchain game guild YGG, crypto exchange Zipmex, on-chain data monitoring platform PARSIQ, and complex asset protocol StarfishFinance.
6. Regulatory framework for crypto markets
On 31 October 2022, the Financial Services and the Treasury Bureau ("FSTB") officially issued the Policy Statement on the Development of Virtual Assets in Hong Kong, demonstrating the Hong Kong Government's open, compatible and innovative attitude in terms of public participation in virtual asset trading, property rights protection of tokenized assets, and the development of stablecoins. The Hong Kong government also took part in three pilot projects, namely NFT issuance, green debt tokenisation and e-HKD, to test the technical benefits brought by virtual assets and try to further apply the technology to the financial market.
In recent years, the virtual asset industry has been surging, with various innovative technologies and applications emerging, and regulators in various jurisdictions around the world are also following suit, with a view to regulating the development of the industry and finding a new engine for the local economy. The Hong Kong Securities and Futures Commission ("SFC"), the Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority ("HKMA") and other institutions have issued a number of statements, circulars, position papers, legislative consultations and other documents from different regulatory perspectives to gradually build a regulatory framework for virtual assets in Hong Kong.
6.1 Regulators and Division of Labor
Financial supervision in Hong Kong consists mainly of the Financial Services and the Treasury Bureau (the Treasury), the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA).
The Ministry of Finance, which plays a managerial role in financial regulation, can formulate financial policies and submit legislative proposals;
the Hong Kong Monetary Authority, which is primarily responsible for maintaining the stability of the financial system and the banking sector, and administering the Exchange Fund to maintain the stability of the Hong Kong dollar;
the Securities and Futures Commission, which oversees and facilitates the development of the securities and futures markets and may license regulated activities;
The Insurance Authority supervises the insurance industry, protects the interests of policyholders, and promotes the stable development of the insurance industry.
In addition, the Hong Kong Association of Banks, the Hong Kong Stock Exchange and the Hong Kong Federation of Insurers are the self-regulatory bodies of the banking, securities and insurance industries respectively. Such a multi-level regulatory system, while controlling financial risks, can greatly stimulate the creativity and enthusiasm of the financial market, thereby promoting the stable development of the special economic zone.
For the regulation of cryptoassets and the crypto industry, there is no separate regulator in Hong Kong, but several financial regulators have issued guidance documents on the subject, including the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA).
6.2 Timeline of Regulatory Progress
In September 2017, the "Statement on Initial Coin Offerings" was issued, and ICOs needed to apply for a license from the Hong Kong Securities and Futures Commission;
In December 2017, the "Circular to Licensed Corporations and Registered Institutions on Bitcoin Futures Contracts and Cryptocurrency-related Investment Products" was issued;
In November 2019, Hong Kong began to regulate cryptocurrency exchanges, requiring licensed CEXs to provide corresponding services to investors;
In June 2022, an announcement was issued to remind investors to pay attention to NFT risks, mentioning that most NFTs are intended to represent their underlying assets;
In October 2022, the Treasury Bureau issued the Hong Kong Policy Statement on Virtual Asset Development, which expressed Hong Kong's openness and inclusiveness towards virtual assets.
In December 2022, the Legislative Council of Hong Kong passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022.
In January 2023, the "Discussion Paper on Crypto Assets and Stablecoins" was released, which requires that stablecoins should be fully supported and allowed to be redeemed at face value;
In February 2023, the SFC published a consultation paper on the proposed regulatory requirements for virtual asset trading platform operators;
In May 2023, the Guideline on Anti-Money Laundering and Counter-Terrorist Financing was issued;
In June 2023, the virtual asset service provider (VASP) licensing regime came into effect.
In August 2023, the Hong Kong government announced that listed exchanges could sell to retail investors;
In January 2024, the "Strategic Priorities for 2024-2026" was released, pointing out that crypto-centric technological innovation will be the focus of development;
6.3 Classification of Financial Licenses
There are 10 types of financial licenses issued by the Securities and Futures Commission of Hong Kong:
- Type 1 license, securities trading, providing clients with stocks, stock options, bond trading and brokerage services, and can also provide mutual funds, unit trusts placing and underwriting securities;
- Type 2 license, futures contract trading, providing index or commodity futures trading and brokerage services to customers;
- Type 3 license, leveraged foreign exchange trading, providing customers with foreign exchange trading services;
- Type 4 license, securities investment consulting, providing customers with securities investment advice and research analysis reports;
- Type 5 license, futures contract investment consulting, provides customers with investment opinions and research analysis reports on futures contracts.
- Type 6 license, corporate finance advisory, approved to act as sponsor for clients' initial public offerings and advise on company listing compliance and other matters;
- No. 7 license, automated trading, providing customers with electronic trading platform services for order matching operations;
- No. 8 license, guaranteed financing, providing customers with stock pledge financing services;
- Type 9 license, asset management, providing customers with discretionary fund management, securities and futures contract investment management services;
- Type 10 license, credit rating, which allows rating of corporate, bond and sovereign credit;
The most critical of these licenses are the Type 1 license and the Type 7 license (respectively for securities trading and the provision of automated trading services), which are necessary conditions for the landing of compliant exchanges, and the Type 9 license is also the focus of the market. Currently, OSL and HashKey have obtained Type 1 and Type 7 licenses, and Huobi Technology has obtained Type 9 licenses.
6.4 Requirements and Safeguards for the Operation of CEX
Regarding the operation of the CEX platform, the requirements of the documents published by the Hong Kong Securities and Futures Commission are as follows:
- CEX Platform Operators, which are required to maintain a paid-up share capital of not less than HK$5 million at all times (i.e. the "Minimum Paid-up Capital");
- The Platform Operator should beneficially have fully liquid assets in Hong Kong at all times, such as cash, deposits, Treasury bills and certificates of deposit (but not virtual assets), in an amount equal to the Platform Operator's actual operating expenses on a continuous basis for at least 12 months;
- Platform Operators should establish and implement strict internal controls and governance procedures in relation to the management of private keys to ensure that all encrypted seeds and private keys are securely generated, stored and backed up, and that the seeds and private keys are stored in Hong Kong;
6.5 ETF Policies and Regulatory Requirements
On 22 December 2023, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) jointly issued the updated Joint Circular on Virtual Asset-related Activities of Intermediaries, expressing their readiness to accept applications for virtual asset spot ETFs and futures ETFs, and setting out the regulatory requirements:
On the same day, the SFC issued the Circular on SFC-Authorised Funds Investing in Virtual Assets (the "ETF Circular"). The ETF Circular replaces the SFC's Circular on Virtual Asset Futures ETFs issued on 31 October 2022 and sets out new regulatory requirements for virtual asset ETFs (including futures ETFs and spot ETFs):
- Manager Qualifications: The manager of the ETF should have a strong regulatory compliance record, have at least one competent employee with experience in the management of virtual assets and related products, and hold an upgraded Type 9 license;
- Underlying assets: ETFs can only invest (directly or indirectly) in assets that are tradable by retail users on a licensed exchange in Hong Kong;
- Investment strategy: ETFs are not allowed to increase leverage at the fund level;
- Subscription and redemption: The CSRC allows redemption in cash or in-kind;
- Custodian arrangement: The assets held by the ETF must be held in custody with a licensed exchange in Hong Kong or a financial institution and its subsidiaries authorized by the HKMA;
6.6 Stablecoin Issuance Regulatory Legislation
Stablecoins are pegged to the value of specific assets (such as fiat currency, gold, etc.) and have less price fluctuations, playing the role of "currency" in the crypto market. The Hong Kong government is very concerned about the development of stablecoins and actively promotes relevant legislation:
- the plan to introduce new legislation rather than amending existing legislation (e.g. the Payment Systems and Stored Value Facilities Ordinance (Cap. 584) or the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615 of the Laws of Hong Kong));
- The proposed regulatory regime for stablecoins would only apply to fiat-referenced stablecoins ("FRS"), i.e., cryptographically protected digital forms of value that maintain a relatively stable value with one or more fiat currencies;
- An FRS issuer licence is required for the issuance of FRS in Hong Kong, the issuance of Hong Kong dollar-linked FRS in any jurisdiction, or the active promotion of the issuance of FRS to the public in Hong Kong;
- The key licensing and regulatory requirements for FRS issuers include: requirements relating to reserve assets and the stability mechanism, redemption of FRS at par in reference currency, and the need to obtain HKMA approval before any new business, etc.;
- Only FRSs issued by FRS issuers licensed by the HKMA can be sold to retail investors, and all other types of FRSs can only be sold to professional investors.
Judging from the relevant policy documents issued by the institutional department, the main regulatory focus is on anti-money laundering and investor protection. It draws on the traditional financial supervision ideas, conforms to the regulatory principle of "the same business, the same risk, and the same rules", prevents legitimate financial activities from becoming a tool for money laundering, terrorist financing and other criminal activities, protects investors to the greatest extent, and reduces the huge asset losses caused to investors due to non-compliance or even illegal acts of the trading platform and allowing investors to invest in targets that are inconsistent with their risk tolerance.
7. Summary
Since the launch of the "Digital Convergence Competition" in 2018 to encourage local enterprises to participate in the development of blockchain and other technology fields, Hong Kong has more than 600 fintech companies, including mobile payment, cross-border wealth management, wealth and investment management, regtech, crypto asset trading, etc., and has launched crypto asset ETFs, and has continued to hold a number of large-scale blockchain industry summits.
With the rise of blockchain technology, as a traditional global financial center, Hong Kong is actively exploring how to maintain its position in the Web3 world, giving full play to its unique advantages as a financial center, and has become a hot spot in the field of blockchain and digital assets, with more and more companies choosing to set up offices or branches in Hong Kong.
Hong Kong's financial sector is characterised by a strong regulatory framework, robust infrastructure and openness to outbound investment. This is also true in the crypto industry, where regulatory policies continue to become clearer and more open, creating an environment conducive to digital asset activity and capitalizing on the opportunities presented by the growing digital asset market to continue to empower the broader fintech ecosystem.
With the further promotion and implementation of policies, the eyes of the Chinese market, the Asia-Pacific market and the global market are converging on Hong Kong, and the advantages of its financial center are also being amplified and released in the crypto field, we have reason to believe that Hong Kong's position in the crypto market will become more and more important, and become the hub and power core of the crypto industry.
Note: All views above are for reference only and are not intended as investment advice. If you have any objections, please feel free to contact us for correction.Follow and join the MIIX Captial community for more cutting-edge information:
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