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One Crypto, Two Systems: How Hong Kong and China Differ on Regulation

In a bid to rebuild its status as the world’s crypto hub, Hong Kong is considering offering retail investors access to cryptocurrencies and crypto exchange-traded funds (ETFs). The move comes as the city has seen an exodus of crypto start-ups to other markets such as Singapore and Dubai following its stringent crypto regulations.

How do China and Hong Kong Differ in their Crypto Stance?

Hong Kong has been a part of China since 1997 under the “one country, two systems” approach. While Beijing maintains control over Hong Kong’s diplomacy and defense, the country is still allowed to forge external relations in certain areas, including trade, communications, tourism, and culture.

This system should allow Hong Kong to take a different approach to digital assets than China’s. In late September 2021, the People’s Bank of China (PBOC) banned all cryptocurrency transactions as part of its aggressive clampdown on the industry.

Following the ban, many crypto businesses moved to Hong Kong, which was already enjoying a status as the world’s fintech hub. However, after its proposal to limit crypto trade to professional investors only, the city saw an exodus of crypto businesses.

The overall lack of clarity about the city’s stance on blockchain-based digital assets is another common complaint and is seen as hurting Hong Kong’s status as a center for the industry. Not to mention its strict Covid-19 travel control measures, which have led to crypto start-ups moving to other markets such as Singapore and Dubai.

Hong Kong Aims to Allow Retail Traders Access to Crypto

Hong Kong has proposed allowing retail users to trade in cryptocurrencies as the city seeks to bring back fintech businesses. The announcement comes as the city has recently announced a bill to regulate crypto by 2023.

The “one country, two systems” principle “forms the basic foundation to Hong Kong’s financial markets”, and the fact that the city can introduce its own bill to regulate cryptocurrencies “shows just how separate Hong Kong is from the mainland,” Elizabeth Wong, director of licensing and head of the fintech unit of the Securities and Futures Commission (SFC), reportedly said.

Wong added that the SFC is considering allowing retail investors to “directly invest into virtual assets.” This shows a u-turn of the SFC’s stance regarding crypto over the past years, which supported limiting crypto trading on centralized exchanges and only to professional investors, individuals with a portfolio of at least $1 million.

“We’ve had four years of experience in regulating this industry … We think that this may be actually a good time to really think carefully about whether we will continue with this professional investor-only requirement.”

However, some industry experts have voiced concern over China’s power to influence Hong Kong on matters related to digital assets. “What’s to say that Beijing won’t change its opinion tomorrow and rescind all these positive crypto policies?” BitMex co-founder Arthur Hayes said in a recent blog.

Hayes also mentioned that access to Chinese customers is crucial to Hong Kong’s attractiveness to crypto companies. “As crypto investors, we care about Hong Kong’s ability to facilitate Chinese capital’s needs,” he wrote.

This article originally appeared on The Tokenist

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