How new blockchain, cryptocurrency rules can give Hong Kong an investment edge

Change is coming for Hong Kongs digital asset markets with the Legislative Council likely to consider new regulation governing blockchain and cryptocurrencies soon.

The momentum has been building for five years through the publication of white papers and statements from the Monetary Authority, Financial Services and Treasury Bureau, and Securities and Futures Commission.

An analysis of these regulatory pronouncements suggests that Hong Kong will see a more professional and institutionalised digital assets market.

The introduction of rules where none had existed will lead to some regulatory arbitrage, but if the approach is crafted to attract new institutional market entrants, the net impact could be positive for Hong Kong as a premier regional investment destination.

The institutional adoption of cryptocurrencies and blockchain digital assets is the starting point of a faster journey towards greater market maturity.

The differences in investment strategies between institutional and retail market players mean that institution-heavy markets trend towards greater stability.

In essence, the strategies pursued by institutions create baselines that restrict negative market volatility, and with more institutional participants, that baseline rises, locking increased value into the market for the long term.

The fears that feed cryptocurrencies infamous volatility – such as a fear of missing out driving prices up and a fear of collapse prompting sell-offs – are replaced instead by informed investment strategies developed by institutional firms that ultimately lead to more stability and the potential for increased market participation.

As with traditional financial institutions, those operating in the digital asset markets require retail customers in order to operate.

Regulations have ensured that institutions have a responsibility to inform their customers of the risks and benefits of financial products, with processes to assess customer risk appetite and ensure appropriate protection. These check and balances are ultimately a good thing and attract more investors.

Two men walk past a poster for bitcoin and other cryptocurrencies in Hong Kong on September 25. Photo: EPA-EFE

Change is coming for Hong Kongs digital asset markets with the Legislative Council likely to consider new regulation governing blockchain and cryptocurrencies soon.

The momentum has been building for five years through the publication of white papers and statements from the Monetary Authority, Financial Services and Treasury Bureau, and Securities and Futures Commission.

An analysis of these regulatory pronouncements suggests that Hong Kong will see a more professional and institutionalised digital assets market.

The introduction of rules where none had existed will lead to some regulatory arbitrage, but if the approach is crafted to attract new institutional market entrants, the net impact could be positive for Hong Kong as a premier regional investment destination.

The institutional adoption of cryptocurrencies and blockchain digital assets is the starting point of a faster journey towards greater market maturity.

The differences in investment strategies between institutional and retail market players mean that institution-heavy markets trend towards greater stability.

Blockchain in Asia: China Bets on Blockchain

In essence, the strategies pursued by institutions create baselines that restrict negative market volatility, and with more institutional participants, that baseline rises, locking increased value into the market for the long term.

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The fears that feed cryptocurrencies infamous volatility – such as a fear of missing out driving prices up and a fear of collapse prompting sell-offs – are replaced instead by informed investment strategies developed by institutional firms that ultimately lead to more stability and the potential for increased market participation.

As with traditional financial institutions, those operating in the digital asset markets require retail customers in order to operate.

Regulations have ensured that institutions have a responsibility to inform their customers of the risks and benefits of financial products, with processes to assess customer risk appetite and ensure appropriate protection. These check and balances are ultimately a good thing and attract more investors

With a better defined regulatory environment leading to more traditional financial institutions, including banks, engaging the markets for cryptocurrencies and digital assets, opportunities will be created in the recruitment, employment and training of asset managers, client relationship managers and operations staff.

Providing an institutional-grade service will also create transformative opportunities for sectors supporting the financial services industry.

Institutional market players create demand not just for professional services such as human resources and recruitment, and legal and communications, but also for professional advisers to inform decision-making such as in research and ratings.

They boost demand for those in areas such as custody, insurance, cybersecurity, technology platforms and exchanges. These professional advisory and support services also contribute towards increased market maturity and stability.

Greater institutionalisation of the cryptocurrency and digital asset market presents the opportunity to grow not only the financial services industry but all associated sectors as well.

As Hong Kong considers its regulatory approach to cryptocurrencies and digital assets, it needs to strike a balance between the clarity of frameworks needed by traditional financial institutions to facilitate their market entry, while retaining the ability for blockchain innovation, perhaps through regulatory sandboxes or similar structures to allow new technology to be tried out in pilot schemes or test environments.

Since the dawn of the internet, the challenge of developing regulation for the “new” has not been easy. Technological innovation has often run ahead of regulation. Innovators are often reluctant to fall under the scope of regulatory oversight.

This leads to an unhelpful game of cat and mouse between lawmakers and innovators. Dialogue is the best way to achieve a balance. Institutionalisation facilitates dialogue as it creates quantifiable and identifiable market entities with which regulators and legislators can engage. Dialogue can benefit those who would be regulated and regulators themselves.

The professionalisation and institutionalisation of the digital asset sector is a pathway to market maturity but not the end game. It is an opportunity to facilitate engagement between the regulated and the regulators. An opportunity to grow not only the financial services industry but also those professional sectors that support it. And an opportunity to promote more stable markets and create new financial products for investors.

Ultimately, the decisions taken over the coming months can help to secure Hong Kongs place as a world-leading investment destination.