For those unfamiliar with cryptocurrency, this is a major milestone in Asia and across the world as it opens the road for adoption and investment in cryptocurrency, moving the asset class from niche to mainstream. Although the US allowed spot bitcoin ETFs in January, it only recently approved applications to list spot ether ETFs; a second round of approvals will be needed before the products can begin trading. The US’ decision on ether ETFs came a month after Hong Kong became one of the first in the world to approve them.

Hong Kong’s first-mover advantage could attract a new wave of fintech activity and talent to the region, leveraging its forward-thinking regulatory framework. These steps have promoted the city as a global digital asset hub.

Hong Kong already has plans to maintain its advantage over the US by looking at strategic ways to keep developing as a cryptocurrency hub. It could do this by approving advanced financial products before the US does. For example, Hong Kong could allow yield-earning options such as ether ETF staking.

Prices of cryptocurrencies against the US dollar are displayed on a screen in Hong Kong on February 29. Photo: Bloomberg

Staking involves locking cryptocurrency tokens to a blockchain network for a set period of time to earn rewards, a practice that the US might be slower to approve. Hong Kong taking a progressive stance would not just be a regulatory success but an indirect endorsement of the potential of decentralised finance. This momentum could draw fintech investment to the region.

Encouraging foreign direct investment is crucial to Hong Kong’s economic recovery. A key move in this direction is the decision by Hong Kong’s Securities and Futures Commission to allow the tokenisation of securities and regulated funds. This means that traditional financial assets, like stocks and bonds, can now be represented digitally, making them easier to trade and manage. This approach has already attracted serious investment, with Bank of China International Holdings issuing about US$28 million worth of these digital securities.

Hong Kong is also becoming one of the main destinations for major cryptocurrency conferences, which are drawing foreign investment from venture capitalists into local cryptocurrency start-ups. In 2023, the Web3 Festival attracted a crowd of 50,000 attendees, including many investors from around the world. These events, which some have referred to as “cryptocurrency tourism”, bring high earners to Hong Kong, who boost the local economy through their spending and investment.

Overall, Hong Kong is showing the world that cryptocurrency can be regulated reasonably while maintaining an innovative environment. This is likely to impact Hong Kong’s wider financial position. Such regulatory clarity is likely to attract more start-ups and established companies, especially if cryptocurrency start-ups move from the US looking for a friendlier climate to support their growth and innovation.

Additionally, this regulated environment reassures global investors which could enhance Hong Kong’s reputation as a secure and innovative financial hub, boosting investment and job creation in related fields, and driving further economic growth.

Developing the cryptocurrency sector could help alleviate Hong Kong’s talent shortages. Nearly three-quarters of employers in Hong Kong are experiencing talent shortages, exacerbated by a 1.6 per cent population drop by mid-2022. Hong Kong’s ageing population, with 30 per cent expected to be aged 65 and above by 2040, could further intensify this issue.

Hong Kong government efforts, including the Top Talent Pass Scheme, altogether attracted 90,000 skilled workers to the city in 2023. However, continuous efforts to make Hong Kong a hub for cryptocurrency innovation, an industry primarily led by young people, could help reverse the brain drain that the city is experiencing.

Hong Kong’s rise as Asia’s cryptocurrency hub, while not guaranteed, is well-supported by its progressive regulatory environment. Challenges such as red tape in other jurisdictions and talent shortages persist, yet the dynamic cryptocurrency sector could attract and retain talent. The recent US decision on ether ETFs highlights the widening adoption of cryptocurrency assets, making it even more important for Hong Kong to stay competitive.

As global institutions seek clarity and innovation, Hong Kong stands out as an ideal location to set up shop. With its strategic initiatives, Hong Kong is poised to take the lead in the evolution of the finance industry, attracting both companies and professionals to the city.

Danny Chong is CEO and co-founder of Tranchess, a decentralised yield-enhancing asset tracking and management protocol

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