SINGAPORE – Hong Kong is sticking with a plan to become Asia’s digital asset capital despite the industry’s tarnished reputation, a stance drawing tentative interest from bruised crypto firms seeking recovery.

The city claims it will learn the lessons of a US$2 trillion (S$2.6 trillion) crypto market rout and a spate of global bankruptcies like the collapse of the FTX exchange to create a fresh regulatory framework that can protect investors and encourage growth.

The three-month-old pivot towards fostering a crypto sector is part of a wider effort to restore Hong Kong’s credentials as a global financial centre after Covid-19-related curbs and political unrest sparked a brain drain. But digital asset businesses have been retrenching, posing an obstacle to the city’s push.

Matrixport Technologies, a crypto lender with about 300 employees, is among the firms assessing Hong Kong’s evolving rulebook. Its home base of Singapore is now so wary of virtual coins it may ban all retail token lending.

Matrixport is considering setting up in Hong Kong even as it awaits the outcome of a Singapore virtual asset licence application, say people familiar with the matter.

Gauging the likely return on the needed investment is hard because Hong Kong’s rules are still evolving, the people added, asking not to be identified as the deliberations are private. A company spokesman declined to comment.

Hong Kong’s crypto plan includes a mandatory exchange licensing regime from June and a consultation on allowing retail trading. Officials have also permitted exchange-traded funds (ETFs) investing in CME Group, Bitcoin and Ether futures. Three such ETFs launched since December have raised over US$80 million.

“Companies are interested in the prospective crypto regime, but also hesitant pending more details,” said Bloomberg Intelligence ETF analyst Rebecca Sin.

ETF potential

Ms Sin points to longer-term potential for asset managers if a currently limited programme allowing Chinese investors to buy some stock ETFs in Hong Kong is one day widened to span crypto.

Bloomberg Intelligence estimates that total funds under management in Hong Kong ETFs may surpass US$50 billion by the year end.

Ms Sin expects regulators to permit spot Bitcoin ETFs as early as the second quarter. Samsung Asset Management, which launched the Samsung Bitcoin Futures Active ETF in Hong Kong in January, has indicated that it could consider starting a spot fund if the city gives the green light.

The city is in some ways coming full circle as it used to be a crypto hub in the earlier years of digital assets, courtesy of a then laissez-faire reputation.

Discredited former crypto mogul Sam Bankman-Fried’s now-collapsed firms FTX and Alameda Research have Hong Kong roots dating from 2019. Binance Holdings, the biggest digital asset exchange, once had a base there.

But signs over the years that officials were taking a tougher regulatory approach, such as restricting crypto exchanges to clients with portfolios of at least HK$8 million (S$1.3 million), led to a rethink among crypto outfits.

Then in 2021, China largely banned crypto, dulling the city’s allure as a conduit for mainland cash. Bankman-Fried and FTX decamped to the Bahamas the same year.

FTX’s shadow

The United States has now accused Bankman-Fried of one of the biggest financial frauds at the helm of the fallen FTX group.

Contagion from its bankruptcy is still spreading, most recently in the Chapter 11 filing of crypto lender Genesis Global Holdco, which may owe creditors more than US$3 billion.

Regulators worldwide are grappling with the dangers exposed by these and other recent crypto collapses. Even so, Hong Kong Financial Secretary Paul Chan has said the city remains committed to becoming a regional crypto hub.

A consultation is due this quarter on the guard rails and allowable tokens for retail buyers.

Officials are also willing to review property rights for tokenised assets and the legality of the automatically executing, software-based smart contracts that are key for many blockchain-based financial services.

A big challenge for Hong Kong’s ambitions is that the virtual asset industry remains in a deep downturn after a bubble in token prices deflated last year and investors fled. Exchanges Coinbase Global, Crypto.com and Huobi are among a slew of firms that slashed more than 1,600 crypto jobs this month.

Another risk is the perception that Beijing is gradually exerting control over the financial hub. China continues to ban most crypto activity on concerns about reckless speculation and the vast amount of energy consumed by the computers that mine tokens and secure blockchain networks.

Digital token transaction volume in Hong Kong expanded less than 10 per cent in the 12 months to June from a year earlier, the least in East Asia outside of a slump in China, according to blockchain specialist Chainalysis. The crypto bear market only worsened in the second half of 2022.

Against that backdrop, many companies are in a holding pattern as they await a recovery and the final version of Hong Kong’s revamped digital asset rules.

“We are ready to expand our local operations and add jobs once the road map from the government is more clear on what is allowed and encouraged,” said Mr Justin Sun, who sets strategy for the Huobi exchange. He added that Hong Kong is “becoming the leading force in regulated crypto adoption” in the Asia-Pacific. BLOOMBERG