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June 2024
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Hong Kong has the edge over Singapore as crypto hub

Crypto
By Benjamin Quinlan*   
June 9, 2022

The debate on the merits of Hong Kong versus Singapore as the leading financial centre in Asia is not new but one significant aspect of their friendly competition – and what could ultimately turn the tide – is in the world of cryptocurrency. Now more than ever, we are seeing them vie to become key global centres for both cryptofinance and blockchain technology companies.

If Hong Kong wants to nurture its status as the regional crypto and blockchain hub, it will need to set the right tone and framework to continue supporting the development of this rapidly growing industry.

So, what will it take to position Hong Kong as Asia’s leading crypto centre in years to come?

Regulation is key

A jurisdiction’s regulatory framework sets the operating parameters for, and provides clarity to, all market participants.

Singapore was an early proponent of crypto and one of the first countries in Asia to set out a regulatory framework for the industry. But it appears to have backtracked somewhat from its initial stance, particularly with respect to investment decisions by retail participants compared with institutional investors. As the Monetary Authority of Singapore (MAS) outlined in April: “don’t advertise crypto to retail consumers”.

Meanwhile Hong Kong has taken, and continues to maintain, a prudent approach towards crypto. Regulators in the city are taking the view that crypto assets are a speculative investment in spite of the fact that there is a wide range of variations in terms of their structure and nature. As such, virtual asset service providers, or VASPs, are required to be licensed.

Retail investors in Hong Kong are currently prohibited from investing in crypto due to concerns around the significant risks involved. The recent volatility in crypto markets has proven that this is a judicious stance.

Notwithstanding their current posture around crypto, it is abundantly clear that Hong Kong regulators will continue to monitor the development and adoption of this rising asset class and adapt their regulatory frameworks in line with ongoing market developments. They are seeking to strike a delicate balance between supporting innovation on the one hand and protecting consumers on the other.

This open-minded and forward-looking view towards crypto regulation, in which local regulators have actively sought industry feedback, is clearly evidenced by the Hong Kong Monetary Authority’s recent consultations on regulation of stablecoins and the introduction of an e-HKD.

The FinTech Association of Hong Kong provided a response on behalf of its members, recommending that the HKMA adopt a practical stance, looking first and foremost at the “substance over form” of the stablecoin in question.

Broader financial ecosystem

Beyond regulations, the broader financial ecosystem remains critical to the ongoing development of the crypto industry. And this is where Hong Kong’s dominance over Singapore becomes very apparent.

As the home or headquarters of many of the world’s leading banks, insurance companies, asset managers, venture capital firms, private equity firms, family offices and high-net-worth individuals, Hong Kong is poised to evolve into a key institutional crypto hub.

This bodes particularly well for B2B crypto players seeking customers, partnerships, and/or capital in the city. A clear regulatory framework bodes well for the institutional adoption story, given the need for institutions to have clear rules of engagement.

Talent is a key ingredient for the long-term success of any crypto hub. It is undeniable that Hong Kong’s stringent Covid-19 rules have had an impact on the ability of local crypto players to attract and retain international talent, particularly compared to Singapore which recently opened its borders to the rest of the world.

However, Singapore’s strict quotas for hiring offshore talent and preference for companies to recruit homegrown professionals means there are limits to its comparative advantage over Hong Kong on the talent front. And we expect this advantage to all but disappear when Hong Kong reopen its borders.

With the crypto regulatory arbitrage window set to narrow in coming years, it is likely that a jurisdiction’s relative dominance - or otherwise - as a crypto centre will be heavily determined by its fundamentals, i.e., its rule of law, financial market infrastructure, capital availability, and talent pool. And in this regard, Hong Kong, despite the short-term hurdles, appears well positioned to win the long game as Asia’s leading crypto hub.

However, the competition between Singapore and Hong Kong should be seen as good news for Asia, for investors and issuers alike. It should not be perceived as “one or the other” since both markets have their unique strengths, given the marked differences between the end customers that they service.

*Benjamin Quinlan is chairman of the FinTech Association of Hong Kong.