Hugh Harsono
Hong Kong has long served as a cornerstone of the world’s finance industry. However, recent history has tested Hong Kong through a variety of political and economic challenges, with tumultuous events like the 2019–2020 Hong Kong protests, the National Security Law, and severe COVID-19 restrictions causing companies to rethink their Hong Kong-based hubs.
To this extent, Hong Kong experienced a “brain drain” over the past two years, with many financial institutions, among other enterprises, relocating their personnel away from Hong Kong to Singapore and other countries. JP Morgan leadership began relocating away from Hong Kong in early 2022. Senior Citigroup staff also relocated from Hong Kong to Singapore and other markets, with Bank of America exploring similar options during this time period.
As a result, Hong Kong’s mid-2022 population dropped 1.6 percent, with a corresponding rise in Singapore’s population to the tune of 3.4 percent.
However, Hong Kong’s recent activities supporting Web3 and the digital assets ecosystem may change the way financial institutions view Hong Kong. The city has taken a surprisingly contrarian view to China’s stance on the cryptocurrency ecosystem. This direct embrace of the entire industry by Hong Kong, along with implicit support from Beijing, could help entice increasing amounts of crypto companies and traditional financial institutions to come and/or return to Hong Kong for the direct purpose of participating in an ever-burgeoning Web3 and digital assets industry, albeit potentially under Beijing’s ever-watchful eye.
The Hong Kong government has made their desire to turn Hong Kong into a crypto hub well-known, with InvestHK, Hong Kong’s department aimed at garnering foreign direct investment, regularly soliciting Web3 and virtual asset investors. Furthermore, in June 2023, Hong Kong’s Securities and Futures Commission began accepting applications for crypto trading platform licenses, further allowing virtual asset providers to serve retail investors. The Hong Kong arm of crypto exchange Huobi, which currently ranks as one of the world’s top crypto exchanges, already applied for a crypto exchange license as of late May 2023, with other exchanges inevitably following suit.
Additionally, Hong Kong’s June 2023 announcement of a task force dedicated to promoting Web3 development further signals the Hong Kong government’s commitment to the digital assets industry write-large. This follows on the heels of news in late May 2023 where the Hong Kong Monetary Authority (HKMA) and the Central Bank of the United Arab Emirates (CBUAE) announced their intent to work together to coordinate crypto regulations, potentially laying the groundwork for common standards in regulating digital assets.
Interestingly enough, the mainland Chinese government has shown implicit support for making Hong Kong a crypto-specific hub despite essentially banning all cryptocurrency trading and mining that is not state-affiliated in China. Chinese firms have seemingly received the green light to participate in Web3 and digital assets via their Hong Kong subsidiaries. Most notably, in early June 2023, BOCI, the Bank of China’s investment arm, partnered with UBS to issue $28 million in tokenized notes on the main Ethereum blockchain in Hong Kong, marking the first-ever effort by a Chinese financial institution to issue a tokenized, regulated security in Hong Kong.
A survey conducted by the Hong Kong Investment Funds Association in mid-2022 highlighted that more than a third of global fund management companies have moved out of Hong Kong, blaming harsh COVID-19 restrictions as preventing hiring. However, Hong Kong’s support of digital assets may reverse this trend, with the promotion of digital assets like central bank digital currencies (CBDCs) potentially encouraging fintech companies and traditional financial institutions alike to return to Hong Kong.
The HKMA’s landmark Project mBridge, which sought to demonstrate cross-border payments and foreign exchange transactions between organizations like the Bank for International Settlements Innovation Hub (BISIH), People’s Bank of China, the Bank of Thailand, CBUAE, and HKMA successfully showed Hong Kong’s capabilities to test a CBDC on a project basis. However, in mid-May 2023, the Hong Kong Monetary Authority unveiled a CBDC pilot program for the e-HKD, with one novel use-case emerging from this pilot being tokenized commercial bank deposits, enabling increased interoperability between banks by settling tokenized deposit payments with a CBDC.
This utilization of a potential e-HKD pilot seems to directly contrast with China’s digital yuan; yet, e-HKD pilots continue to move forward unimpeded by mainland Chinese authorities. It will be interesting to see how Beijing attempts to consolidate both the e-HKD and e-CNY if efforts to establish an e-HKD truly begin to formulate within Hong Kong.
Supporting Hong Kong-led growth in digital assets saw the late March 2023 announcement of crypto data provider Kaiko moving their Asia HQ to Hong Kong from Singapore. Furthermore, the inaugural Hong Kong Web3 Festival in mid-April 2023 was a marked success, with keynote speeches by Binance’s Changpeng Zhao (with Binance ironically being banned in China, a country where it does over $90 billion in business yearly) and Hong Kong’s Financial Secretary Paul Chan Mo-po, further demonstrating renewed industry interest in ensuring Hong Kong’s status as a global financial hub.
While Hong Kong certainly has experienced a slight downturn in its financial and economic sectors in recent years, Hong Kong’s renewed focus in leveraging Web3 and digital assets will help ensure it maintains its status as one of the world’s financial hubs. Encouragement from both the Hong Kong and Chinese governments has resulted in renewed interest in Hong Kong from a Web3 lens, with fintech developments like tokenized securities in addition to an e-HKD CBDC pilot attracting both fintech companies and traditional financial institutions to Hong Kong.
This move to position Hong Kong as a fintech hub is an interesting one given Beijing’s increasing attempts to control the blockchain within China’s borders. The establishment and positioning of critical blockchain infrastructure like the Blockchain Service Network to create a digital environment under Beijing’s conditions makes the encouragement of Hong Kong as a fintech hub something that businesses must continue to question. However, all told, Hong Kong is well-positioned to remain a major global financial hub, particularly in the immediate future.
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