Hong Kong crypto initiatives offer ray of hope in East Asia: Chainalysis

Once a bustling hub for crypto trading and mining, Eastern Asia has witnessed a significant decline in crypto activity, with China’s stringent bans on crypto-related businesses serving as the main culprit.

Yet, there’s a renewed sense of optimism out of Hong Kong. Recent crypto initiatives and favorable regulations in the region appear set to reignite enthusiasm for cryptocurrencies, according to Chainalysis.

While China’s crypto ban had perceived objectives of reducing yuan-to-crypto exchanges and enhancing digital yuan adoption, the evolving connection between China and Hong Kong has raised questions about the Chinese government’s stance on cryptocurrencies.

Some speculate that Hong Kong’s emerging role as a crypto hub might suggest a potential shift or increased openness to crypto initiatives within China, Chainalysis said in a report published Monday.

Since Hong Kong regulators introduced their licensing program for digital asset operators earlier this year, interest in establishing a presence in the region, particularly among exchanges, has been growing.

So far however, only two crypto exchanges — HashKey and OSL Exchange — hold the status of virtual asset trading platforms, as recognized by the Securities and Futures Commission.

Despite appearing strong, trading volumes in both Hong Kong and China have declined compared to the levels seen between 2021 and 2022.

Hong Kong’s crypto transaction volume between July 2022 and June 2023 surpassed $64 billion, signaling a slight decline from the previous year’s trading volume of over $70 billion.

In contrast, China recorded $86.4 billion received in the same period. This number is far lower than the nearly $225 billion last year, according to Chainalysis data.

East Asia contributed 8.8% of the global crypto activity during this time frame, representing a drop from its 12.9% share in the previous year.

The year 2022 witnessed significant turbulence in the crypto market, marked by multiple crashes driven by factors. Reasons include hacks, inadequate risk management practices and fraud committed by prominent industry players such as FTX’s implosion.

Alongside these market downturns, bitcoin’s (BTC) value experienced a nearly 80% decline from an all-time high in 2021 due to adverse macroeconomic conditions. This includes the ongoing conflict in Ukraine, consecutive interest rate hikes by the Federal Reserve and the strength of the US dollar.

The global cryptocurrency market has not yet recovered entirely from last year’s approximate $2 trillion loss, research by Reuters shows.

Hong Kong’s crypto adoption ranking slides despite emerging hub status

Despite its efforts to position itself as a virtual hub, Hong Kong’s worldwide crypto adoption ranking experienced a notable decline in Chainalysis’ most recent assessment, dropping from 46th place in 2022 to the 47th position, per South China Morning Post.

Yet, a significant driver of Hong Kong’s crypto activity this year is its vibrant over-the-counter (OTC) market, as identified by the analytics firm.

OTCs, often catering to institutional investors and high-net-worth individuals, discreetly facilitate large trades to avoid impacting asset prices or disclosing traders’ activities.

OSL Securities’ co-founder Dave Chapman told Chainalysis that Hong Kong’s growing affinity for crypto in the past year shouldn’t automatically imply a shift in China’s overall attitude toward the industry.

He emphasized that while these advancements bolster Hong Kong’s prospects as a prominent global center for regulated digital assets, it’s still too early to draw conclusions about China’s broader stance on the matter.

Apart from introducing regulatory guidelines, Hong Kong has advocated for major banks including HSBC and Standard Chartered to engage with crypto exchanges as clients.

Reflecting this perspective, the Hong Kong Monetary Authority underscored in an April letter that safeguarding secure and effective banking systems while facilitating access to essential banking services for legitimate enterprises remain core objectives.

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