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Hong Kong harbors crypto hub ambitions despite China’s crackdown

With the collapse of the digital currency markets and numerous company collapses, the crypto industry has had a difficult year.

Hong Kong is attempting to establish itself as a center for virtual assets despite the volatility.

The city’s promotion of digital assets stands in stark contrast to Beijing’s effective prohibition on trade and suppression of cryptocurrency-related activity on the Chinese mainland.

In June, Hong Kong plans to implement new rules requiring cryptocurrency trading platforms to obtain Securities and Futures Commission licenses. The government has already begun the consultation process for its plan to regulate trading platforms for virtual assets.

Compass for China?

Companies claim they are optimistic that the central government is keeping an eye on cryptocurrency activity in Hong Kong.

If anything, China may be considering how these rules would affect Hong Kong, the emergence of new crypto-related products or blockchain-based solutions, and the potential increase in trade and commercial activities, said Justin d’Anethan, institutional sales director at Amber Group.

Similar thoughts were expressed by Deng Chao, CEO of Hashkey Capital, who also said that China could take direction from Hong Kong’s potential legalization of cryptocurrencies.

If it is effective, it might in the future be used as a model for policy formulation in other provinces [in China], he said in an email adding that Web3 and cryptocurrency businesses may eventually take a more compliant approach to their daily operations.

Web3 is the term used to describe the upcoming internet. Its supporters claim that it will increase decentralization and lessen the influence of powerful technological giants. According to some supporters, Web3’s use of cryptocurrencies is expected to be crucial.

Huang Yiping, a former member of the Monetary Policy Council of the Chinese central bank, called on Beijing to reconsider its pervasive crypto prohibition in December.

If cryptocurrency transactions are prohibited for a long time, according to Huang, there may be missed possibilities for the advancement of digital technology.

Hong Kong may someday become China’s crypto north star, but this is yet uncertain.

Although there has been some speculation that China may be softening its attitude on cryptocurrencies, d’Anethan stated that so far there has been little to suggest such a development.

Also, it won’t be simple for regular investors to join Hong Kong’s cryptocurrency bandwagon.

Platforms for trading cryptocurrencies would be subject to a tight set of restrictions in Hong Kong, said Yuya Hasegawa, a market analyst with the Bitbank cryptocurrency exchange in Japan.

The government’s efforts to give retail firms access to virtual asset trading won’t necessarily lead to much growth for the sector and as a hub, he continued, so it won’t be simple for newcomers to casually join in and establish a business.

Hong Kong may face competition from other crypto hubs despite having high cryptocurrency goals and a relatively lower tax environment for enterprises.

In order to compete with other crypto centers, there must also be an acceptable tax policy for crypto ventures, according to Hasegawa. Regulation is obviously important for healthy growth.

He noted that the corporate tax rate in Hong Kong is relatively low for enterprises, at 8.25% for the first 2 million Hong Kong dollars ($254,930) of assessable profit and 16.5% for profits over that threshold.

But it’s still not very competitive, he said, when compared to other crypto hotspots like Dubai, which has a flat rate of 9%, and Switzerland, which has an 8.5% corporate rate.

Countries jostle for global crypto position

Recently, legislation to control the industry was introduced by other entities that had earlier aspired to become hubs for digital assets. Regulators are needed, according to observers, to give the cryptocurrency market stability and boost consumer acceptance.

The UK government released a plan last month for regulating the cryptocurrency sector in a manner similar to that of conventional financial institutions.

The Markets in Crypto-Assets law, implemented by the European Union last year, mandated that stablecoins keep sufficient reserves to cover redemption requests in the case of large-scale withdrawals.

Some countries, such Dubai in the United Arab Emirates, are attempting to position themselves as crypto-friendly economic hubs.

However, other nations, most notably the U.S., have adopted a more aggressive posture towards the cryptocurrency sector, particularly in the wake of the collapse of the important cryptocurrency exchange FTX and the subsequent arrest of its founder Sam Bankman-Fried.

Unstable crypto environment

The recent failure of cryptocurrency-friendly institutions, including Silicon Valley Bank, Silvergate Capital, and Signature Bank is just the latest in a long list of problems that have plagued the sector in recent months.

The fact that all three were significant lenders to cryptocurrency businesses emphasises the unpredictability of stablecoins.

Bitcoin fell below $20,000 for the first time since January on March 10. Despite the recent decline in price of bitcoin, businesses continue to believe that usage of cryptocurrencies will increase.

Despite brief price fluctuations or the volatility of this still-young asset class, the regulators’ approval should demonstrate to longer-term investors that cryptocurrencies are gaining popularity, said d’Anethan from Amber Group.

Despite bitcoin’s price falling below $20,000 near the end of 2022, the cryptocurrency markets have recently risen. Bitcoin was trading at $27,834 at 9:30 p.m. ET Sunday. Even yet, it is still about 60% below the record high of $68,990 set in November 2021.

Retail investors already have some market knowledge and experience thanks to their years of education, even though virtual assets are still fairly new. It’s possible that interest may increase when the climate gets better, Deng from HashKey stated.

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