Hong Kong seeks to revive crypto sector wrecked by FTX debacle – BNN Bloomberg

(Bloomberg) – Hong Kong is sticking to its plan to become Asia’s digital asset capital despite the industry’s tarnished reputation, a stance that has drawn tentative interest from battered crypto firms seeking avenues of recovery .

The city says it will learn from a $2 trillion crypto market rout and a series of global bankruptcies like the collapse of the FTX exchange to create a new regulatory framework that can protect investors. investors and encourage growth.

The three-month pivot to promoting a crypto sector is part of a broader effort to restore Hong Kong’s credentials as a financial center after Covid-related restrictions and political unrest sparked a brain drain. But digital asset businesses have tightened recently, posing a hurdle to the city’s push.

Matrixport Technologies Pte, a crypto lender with around 300 employees, is among the companies evaluating Hong Kong’s evolving rulebook. Its home base of Singapore is now so wary of virtual coins that it could ban retail token lending altogether.

Matrixport is already evaluating the possibility of expanding into Hong Kong even as it awaits the outcome of a virtual asset license application in Singapore, according to people familiar with the matter.

It is difficult to assess the likely return on the necessary investment as Hong Kong rules are still evolving, the people added, asking not to be identified as the deliberations are private. A company spokesperson declined to comment.

Hong Kong’s crypto plan includes a mandatory exchange licensing regime from June and consultation on retail licensing. Authorities also allowed exchange-traded funds to invest in CME Group Inc.’s Bitcoin and Ether futures. Three of those ETFs launched since mid-December have raised more than $80 million.

“Companies are interested in the future crypto regime, but are also hesitant as they await more details,” Bloomberg Intelligence ETF analyst Rebecca Sin said.

ETF potential

Sin pointed to the longer-term potential for asset managers if a currently limited program allowing Chinese investors to buy stock ETFs in Hong Kong was ever expanded to cover crypto. Bloomberg Intelligence estimates that total funds under management in Hong Kong ETFs could exceed $50 billion by the end of the year.

Sin expects regulators to allow spot Bitcoin ETFs as early as Q2. Samsung Asset Management, which launched the Samsung Bitcoin Futures Active ETF in Hong Kong in January, said it may consider setting up a spot fund if the city gives the go-ahead.

The territory is sort of coming full circle as it was once a crypto hub in the early years of digital assets, thanks to a reputation for laissez-faire. The now-collapsed FTX and Alameda Research, owned by discredited former crypto tycoon Sam Bankman-Fried, have roots in Hong Kong dating back to 2019. Binance Holdings Ltd., the largest digital asset exchange, y once had a base.

But over the years, signs that authorities were taking a stricter regulatory approach, such as restricting crypto exchanges to customers with wallets of at least HK$8 million ($1 million), led to a rethink. crypto outfits. Then in 2021, China largely banned crypto, tarnishing the city’s appeal as a conduit for mainland money. Bankman-Fried and FTX decamped to the Bahamas the same year.

The shadow of FTX

The United States has now accused Bankman-Fried of one of the biggest financial frauds at the head of the deposed FTX group. The contagion from its bankruptcy continues to spread, most recently in this month’s Chapter 11 filing of crypto lender Genesis Global Holdco LLC, which may owe more than $3 billion to its creditors.

Regulators around the world are grappling with the dangers exposed by these and other recent crypto meltdowns. Even so, Hong Kong Finance Secretary Paul Chan said the city remains committed to becoming a regional crypto hub.

A consultation is planned for this quarter on guardrails and authorized tokens for retail buyers. Officials are also willing to examine the ownership rights of tokenized assets and the legality of self-executing software smart contracts that are essential for many blockchain-based financial services.

A big challenge to Hong Kong’s ambitions is that the virtual asset industry remains in a deep downturn after a token price bubble deflated last year and investors fled. Exchanges Coinbase Global Inc., Crypto.com and Huobi are among a slew of companies that have cut more than 1,600 crypto jobs this month.

Another risk is the perception that Beijing is gradually exercising control over the financial hub. China continues to ban most crypto activities due to concerns about reckless speculation and the large amount of power consumed by computers that mine tokens and secure blockchain networks.

Digital token trading volume in Hong Kong grew less than 10% in the 12 months to June from a year earlier, the least in East Asia outside of a slump in China , according to blockchain specialist Chainalysis Inc. The crypto bear market only got worse in the second half of 2022.

Against this backdrop, many businesses are on hold awaiting a resumption and the final version of Hong Kong’s revamped digital asset rules.

“We are ready to expand our local operations and create jobs once the government’s roadmap is clearer on what is allowed and encouraged,” said Justin Sun, who sets strategy for the Huobi exchange. He argued that Hong Kong was “emerging to be the main force in regulated crypto adoption” in the Asia-Pacific region.

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–With help from Kiuyan Wong and Zheping Huang.

©2023 Bloomberg LP