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A relatively benign conflict is developing in the halls of financial regulators as political specialists concentrate on the diplomatic dance as tensions between the United States and China rise (interrupted by some balloon-shaped comedic relief that may not be that funny after all). Although now local, nothing lasts locally in a global market for very long. The potential effects reach far beyond cryptocurrency exchanges, with the ability to shape economic impact that is more crucial than ever from a geostrategic perspective given the current state of the world.
The draft wording of Hong Kong’s Securities and Futures Commission’s (SFC) impending cryptocurrency law, which is scheduled to take effect on June 1, was released earlier this week and made available for public comment. Its purview extends to the licensing of platforms that provide services for crypto assets, which were before only permitted to service authorized investors. The SFC is currently looking for feedback on what kinds of protections have to be in place and whether retail investors should be permitted to participate. The selection of “authorized” assets, which in theory would only consist of a small number of the most liquid tokens, is also up for debate.
So far, it appears that this is just another instance of a jurisdiction that is miles ahead of the United States in terms of regulation lucidity and openness to public discussion. Yet when the lid is lifted a bit, there is so much more. It serves as an illustration of the disparity between East and West in strategy, the influence of retail, and the significance of monitoring flow.
Hong Kong wasn’t exactly friendly to cryptocurrency firms not so long ago, but it wasn’t outright hostile either. In contrast to China’s growing hostility, it appeared to view them as mostly unimportant. Hong Kong revealed intentions in 2020 to implement a new licensing system that will directly control all cryptocurrency platforms and restrict access to certified investors. This most recent activity appears to both explain those commitments and widen the scope in order to accommodate for what the authorities perceive as increasing retail interest.
Nevertheless, the issue goes beyond licensing. Hong Kong has allocated HK$50 million ($6.4 million) towards the growth of crypto assets, including initiatives to educate both citizens and companies. Paul Chan, the finance secretary for Hong Kong, also disclosed the formation of a task team made up of policymakers and business leaders to investigate the integration of crypto assets. Compared to mere oversight of crypto service providers, this feels far more comprehensive and long-term.
It involves establishing the groundwork in part for the region’s economic development. The rigorous COVID-19 pandemic lockdowns had a negative impact on both Hong Kong’s financial services industry and mainland tourists, which are both major contributors to the city’s economy. The region’s Chief Executive John Lee has promised to make luring in foreign talent a top priority after it recently recorded its fourth consecutive quarterly GDP drop. Due to the operational uncertainties caused by China’s 2021 ban on crypto trading and mining, the majority of Hong Kong-based cryptocurrency companies fled. Many have since declared they will submit applications to come back.
There are other factors involved besides merely Hong Kong and its 7 million inhabitants. Of course, Hong Kong has a strong relationship with China. The “one nation, two systems” constitutional tenet governs how the two jurisdictions work and distinguishes the economic management of Hong Kong from that of its much bigger parent. But, the events leading up to and during the most recent protests demonstrated to the entire world that China is in charge and that nothing in Hong Kong happens without its blessing.
Bloomberg stated earlier in the week that Chinese officials have been spotted visiting cryptocurrency gatherings in Hong Kong. They weren’t acting secretly. Former member of the central bank of China’s monetary policy committee Huang Yiping stated in a public address in January that the nation should review its prohibition on cryptocurrencies. While he wasn’t representing the central bank, it is highly improbable that his remarks would have been made public without official consent.
None of this indicates that mainland China would open its markets to cryptocurrencies anytime soon, but it is possible that Beijing is keeping an eye on Hong Kong’s actions in the hopes that it may ultimately soften its attitude and encourage the integration of global cryptocurrencies into its economy.
The scale of this matters, in part. In China, there are no tiny numbers, and the sheer size of the pool of prospective participants may overwhelm almost any market. According to reports, there are 212 million retail investors in the nation; for context, the United States has around 330 million people overall. Given the economic unpredictability during the gloomy lockdown era, many of these investors withdrew from the stock market. Nevertheless, with the better outlook, some of the pandemic savings may now be searching for large returns.
Also, compared to their American counterparts, Chinese retail investors are frequently less risk-averse. They often favor following momentum over stable income, which helps to explain why they were early adopters of cryptocurrency markets and why the threat of a wipeout increased to the point that the government felt compelled to restrict access. However, it was unable to totally halt cryptocurrency activity; according to the papers, 8% of FTX’s creditors are located on the Chinese mainland, and the most recent Cambridge research on bitcoin mining suggests that Chinese-based miners may be responsible for 20% of the world’s hashrate.
China is also one of the few nations in the world that is deliberately loosening the money supply. The central bank increased liquidity injections earlier this month despite maintaining the monetary policy rate, although economists anticipate the committee to resume cutting rates in the second quarter. Throughout December and January, Chinese banks’ new loan volume more than quadrupled. Most people can easily recall what monetary easing can do for risky assets without having to go too far back in time.
Geopolitics also has a role in its importance. It is no secret that China wants to see the dollar’s worldwide standing decline without really harming the currency, and it appears to realize the importance of the U.S. financial markets to international commerce. Financial regulators have been attempting to increase activity on Chinese markets for a few years now. Some of the strategies they have used include increasing market access for international investors, encouraging greater hedging, reducing onshore listing requirements, and promoting trade in yuan.
Of course, the opening of crypto markets might lead to more yuan outflows, which the Chinese government would obviously wish to prevent. Yet, China would clearly want some influence if crypto assets and the innovation they offer are going to be crucial to the growth of the financial markets of the future. Additionally, Washington, D.C.’s growing hostility toward cryptocurrency is likely being watched with attention by China. If the United States considers the crypto market to be a danger, it may be worthwhile to investigate.
This exemplifies how the two economic heavyweights often tackle strategic issues. Someone once said that the respective ideologies are like the board games that are popular in each area. Chess is a game played in the United States where you win by taking out your opponent’s leader. Go is more popular in China, where you win by capturing and retaining territory. It’s possible that Chinese authorities view cryptocurrencies as a form of territorial conflict, with international financial markets serving as the field of play. Cryptocurrency markets might be a strategic pillar of a new world order rather than an adversary to be defeated, or at the very least a chance to draw in money, talent, and prestige from around the world.
Analysts have been concentrating on macro issues thus far this year as the primary factor influencing the success of the cryptocurrency market, with expanding use cases and technical speculating also contributing to the rebound. It’s possible that a stronger force is developing overtime on the stage of global strategy, notably in the geopolitical rivers of the east.
