Hong Kong and Singapore Take Different Approaches to Regulating Digital Assets

Hong Kong and Singapore are two cities that serve as Asia’s financial hubs, and the two are often compared because of their similar market-friendly regulatory environment.

But when it comes to digital assets, that comparison is only skin deep. In fact, the two cities take vastly different approaches to regulating this nascent industry, explained Alessio Quaglini, CEO of Hex Trust, a Hong Kong-based crypto custodian, in an interview with Blockworks. 

“For securities, the two cities have different approaches, but they are quite similar in the way they are looking at it. They have developed frameworks that are essentially an extension of the traditional securities frameworks but apply specifically to the complexities that blockchain assets can add to the picture,” Quaglini said. 

Hex Trust recently expanded its operations to Singapore, where it has been granted a license to provide custodial services under the City State’s Securities and Futures Act. The company is based in Hong Kong, and set up shop in the City around the time that the Securities and Futures Commission created its initial regulatory framework for digital assets custodians. 

Defining digital assets

The difference in regulatory approaches between Hong Kong and Singapore begins with how the two Cities define digital assets — in Hong Kong they are called Virtual Assets while in Singapore they are known as Payment Tokens — and thus the regulators that would supervise the market.

In Hong Kong, this is spread between a number of different bureaus depending on what’s being regulated: the Hong Kong Monetary Authority, the city’s central bank, determines whether or not the digital asset is considered money; the Securities and Futures Commission (SFC), Hong Kong’s market regulator, makes rules about the trade of digital assets; the Registrar of Companies oversees Trusts that hold digital assets. 

“Hong Kong has not done much in setting up a clear framework, but has only provided guidance for exchanges,” Quaglini said. As Quaglini explained in a previous interview with Blockworks, virtual asset exchanges  are licensed under securities law and licensed as either a Type 1, securities dealer, or Type 7, an automated trading service provider.

Singapore, in contrast, has created a separate framework under the Monetary Authority of Singapore (MAS) — its hybrid central bank and financial regulator — that “specifically addresses the issues and complexities and licensing requirements of companies that want to set up a business dedicated to virtual assets,” explained Quaglini.

MAS licenses exchanges as what it calls Digital Payment Token (DPT) Service Providers under the Payment Services Act (PSA). Custodians also fall under MAS via the Securities and Futures Act.

“In Hong Kong — so far — they have patched things on via the traditional securities framework whereas in Singapore they have a completely different framework,” he said. 

Now, to be sure, this is in the process of changing in Hong Kong. Authorities in the City are currently in the consultation process of rolling out new laws. According to a white paper that is circulating amongst stakeholders, one of the proposed new laws would limit cryptocurrency services only to professional investors. 

Singapore’s crypto push

All this begs the question as to why Singapore’s approach to digital assets is so different from Hong Kong’s?

Quaglini believes it comes down to Singapore being well-positioned as a financial hub, with connectivity between Southeast Asia, India, and the West as well as the AAA-rated supply chain of professional services businesses. Being incubated amongst all this is the next generation of financial companies with Singapore’s vibrant startup scene, something that Hong Kong lacks. This has served the tradfi sector well, and the digital asset sector effectively needs the same thing. 

There’s also the 1000-pound gorilla of DBS. Earlier this year, DBS opened its digital assets trading desk focused on institutional investors. Although the volume is minimal compared to its peers like LMAX Digital, that’s beginning to change.

“It’s very good to have a bank behind it, it’s very good to have their branding behind it. But I say at this point in the digital asset business this is secondary. People are more interested in the actual quality of services that are offered and the breadth of services,” he said.

Traders are used to being able to trade dozens of different blockchain protocols and settling transactions instantly, said Quaglini. 

“And they expect the service providers to be up and running 24/7-365. This doesn’t really match the operating model of a bank,” he continued. “It doesn’t mean that DBS can’t pull it off, but it will take some time.”

Regardless, it’s more important that DBS is actually going through with running this digital asset desk in the first place given that the bank is partly owned by the government’s sovereign wealth fund Temasek Holdings. This, according to Quaglini, is a sign that the government is “really fostering and supporting the development of this kind of new initiative.” It should also be noted that Temasek’s more conservative blue-chip peer GIC is a large investor in digital asset bank Anchorage.

“In contrast, in Hong Kong, not a single crypto business can get a local bank account yet,” Quaglini said.