Experts say it’s time for the SAR to steal a march in its bid to be a global hub for digital assets. Liu Yifan reports from Hong Kong.

At a glitzy Fintech Week held in Hong Kong in late October, venture capitalists and technology chieftains hobnobbed with true believers in digital assets, pondering the next generation of finance. 

There was a string of high-profile speeches made, including one by Sam Bankman-Fried, the once-feted founder of FTX that recently went into bankruptcy proceedings in the United States after having been the world’s third-largest cryptocurrency exchange valued at $32 billion.

“If you look at where the crypto hubs will be in the world, I think the Bahamas looks like one of them, Dubai looks like one of them. But, if you look at the East, it’s not as obvious,” Bankman-Fried told a webinar. “It could be Singapore, could be somewhere like Busan in South Korea, but I think there’s a real chance it ends up being Hong Kong.”

Just two months after his eloquent address, Bankman-Fried has gone from a crypto rainmaker to being the industry’s most-hated man following revelations that FTX had loaned user assets to its affiliated trading firm Alameda Research, and left tens of billions of dollars in liabilities.

Bankman-Fried’s downfall and FTX’s going to the wall have dealt a debilitating blow to digital assets’ reputation and led to the debacle of multiple other platforms. But, his prophecy during the fintech gathering doesn’t appear defunct — at least Hong Kong is proving it, with the city’s first two exchange-traded funds (ETFs) for cryptocurrency futures making their debut in December.

CSOP Asset Management’s bitcoin futures and ether futures ETFs raised $58.9 million and $19.7 million, respectively, ahead of their listings. The two ETFs allow investors in the Hong Kong Special Administrative Region to access cryptocurrency futures traded on the Chicago Mercantile Exchange.

The crypto ETFs’ rollout echoes the SAR government’s commitment to make the city a global virtual-asset hub by making it easier for retail investors to trade in cryptocurrencies, introducing a new licensing regime for virtual-asset providers, and promoting the tokenization of green bonds.

Opportunity lost

There’re two major types of virtual assets. Cryptocurrencies, like bitcoin and ethereum, are classified as “fungible tokens”, which means each token has the same value and function, and may be divided into smaller units for trading. In contrast, “non-fungible tokens”, or NFTs, are neither divisible nor interchangeable. Such “one-of-a-kind” assets are better known as the digital answer to collectibles as they can be bought and sold like any other piece of property, but have no tangible form of their own. 

At the virtual-asset base are blockchains — the shared ledger systems that secure virtual asset ownership by using cryptographic signatures. It is considered a checkbook built on a network of computers around the world, guaranteeing the transparency of a record of data and, in theory, maintaining trust among strangers without the need for a third party.

The promise was of technological applications that could revolutionize conventional finance, which requires expensive infrastructure and is often captured by insiders who take a cut. 

However, the disappointment is that, with the contagion effect of the FTX demise unfolding, the on-blockchain world is still seen more as a virtual casino with a high degree of volatility. Cryptocurrencies’ anonymity has also given rise to criminal activities, such as money laundering and ransomware attacks.

Hong Kong’s biggest-ever overhaul of the virtual asset ecosystem came after years of stringent regulations, with the city having emerged largely unscathed from the recent chaos in the digital space. 

After rocketing to popularity during the boom in token prices in 2021, crypto exchange-traded assets tumbled into a rout. Both bitcoin and ethereum have lost more than 70 percent of market value from their peak in November last year.

By shunning risks brought by digital assets, the SAR, nevertheless, had lost the opportunity to reap tangible growth from these intangible valuables, which could be a multi-trillion-dollar business in the near future, said Angus Lo, co-founder of — a Hong Kong-based crypto exchange.

For instance, Binance — the world’s biggest crypto exchange — has recorded a daily trading volume of $10 billion, according to the crypto data website This accounts for almost half of the Hong Kong Stock Exchange’s average daily turnover of HK$166.7 billion ($21.4 billion) last year.

Virtual assets’ underlying potential that could make financial intermediation faster, cheaper and more efficient is, undoubtedly, a good fit for Hong Kong to maintain its international financial center status, Lo said, adding that today’s market bottom is opportune for the city to steal a march in the virtual space.

“In the past 10 to 20 years, Hong Kong has mainly relied on the Chinese mainland’s growth story to stay ahead of the financial games. But now, we need to find the second curve and prepare ourselves for reinventing the financial world,” he said.

Financial Secretary Paul Chan Mo-po has cited the 2000s in backing the SAR government’s determination, saying the tech bubble burst at the time caused many people to be wary of technological development, but innovations have still emerged and developed into platform and network economies in an environment of mobile terminals and networks.

“While the bubble and volatility in the virtual-asset market in the past few years have disturbed the investment market, financial innovation has not ceased to develop, and the industry continues to evolve in technology and applications,” the finance chief said.

Balanced regulation

From the spectacular rise and fall of the global virtual asset industry, one lesson is clear for Hong Kong — the question is how much regulation of the digital playground is needed, not if it is.

FTX’s lightning implosion is the latest example of an industry built on lax discipline, with companies so intertwined that a single wobble could spark financial turmoil.

But, as the virtual economy develops, only enough leeway could bestow vigor and vitality upon Hong Kong’s development of digital assets, said Dominic Wai, a partner at ONC Lawyers.

“What we should expect is proper regulation over the virtual space instead of overregulation because when you tighten the grip too much, you often stifle the sector’s progress,” he warned.

Hong Kong officials have addressed regulation concerns in a bid to convince every player in the industry that the hub for traditional finance could also become a well-governed cradle of the next digital asset boom.

Secretary for Financial Services and the Treasury Christopher Hui Ching-yu told the Legislative Council recently that Hong Kong’s regulatory framework over virtual assets will be “comprehensive and balanced”, distinct from many other jurisdictions’ limited rules that focus on battling money laundering or on payments.

Passed on Dec 7, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 specifies that a new licensing regime for virtual-asset service providers will come into effect on June 1 next year. Unlike the current opt-in licensing regime, the new regulation will require virtual-asset platforms to comply with a range of capital and investor protection guidelines before they can get a license to operate.

Licensed virtual-asset exchanges and their wholly owned subsidiaries will also have to submit audited accounts and financial information regularly to the Securities and Futures Commission. The city’s securities watchdog is also empowered to enter business premises to conduct inspections and investigations when necessary.

“Hopefully, that would give some comfort and a kind of security mat to whoever intends to invest in virtual businesses domiciled in the city,” said Jerome Wong, co-founder and chief business officer at Everest Ventures Group — a virtual economy-focused venture studio.

The veteran venture capitalist admitted that although EVG has incubated emerging virtual asset-related firms across the globe so far, only a few are in Hong Kong.

“Hong Kong is yet to see very high-quality projects emerging. But, we believe it just needs time,” Wong said. “This U-turn in regulation and policymaking by the SAR government is definitely a bullish signal to attract more talent and capital to this place.”

Joint growth

In Hong Kong’s bid to be a virtual-asset center, regional competition is inevitable. Archrival Singapore announced its first decentralized finance industry pilot project this year, under which DBS Bank and JPMorgan Chase completed a real-time cross-currency transaction involving tokenized Singapore and Japanese government bonds.

The digital issuance of wealth management products by HSBC and United Overseas Bank has also been launched by the Monetary Authority of Singapore — the city state’s central bank.

“Therefore, it’s important for Hong Kong to catch up,” said Duncan Chiu, who represents the technology and innovation functional constituency in the Legislative Council.

Besides maintaining overall financial stability and avoiding excessive risks for investors, the SAR authorities need to encourage financial innovation, demonstrate the inclusiveness of new technologies and services, and maximize the value of the virtual industry in pilot runs, said Chiu.

As co-founder of Lendary Asia Capital — a German-based assets management firm that has expanded to Hong Kong — Agost Makszin says he now sees no obvious difference in outlook between the virtual-asset operations of Hong Kong and Singapore.

He says Lendary is “very committed” to its Hong Kong business, but may expand its sphere to the Lion City “sometime next year”.

“Each place has its pros and cons. We don’t think we need to choose either, as Hong Kong and Singapore can complement each other and grow together.” 

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