Hong Kong's Cautious Approach to Crypto Regulation Will Yield Positive Results: LegCo's Duncan Chiu

The regulation of cryptocurrency has become a competitive endeavor in Asia, with locations like Hong Kong and Singapore striving to become the region's premier crypto hub and reap the associated benefits. The challenge lies in creating a regulatory framework that balances investor protection with a welcoming environment for businesses and new capital. Hong Kong has an advantage in this regard due to its common-law framework for traditional finance, which has contributed to its status as one of the world's most open and free economies. A recent report by a Canadian think tank ranked Hong Kong as the 'freest economy' globally, with Singapore closely following in second place. However, when it comes to cryptocurrency, Hong Kong has adopted a relatively slow approach, particularly in comparison to Singapore. Duncan Chiu, a member of Hong Kong's Legislative Council and chair of its Technology and Innovation committee, believes that the territory's initial caution in regulating cryptocurrency has its advantages. 'Being a late mover can be beneficial, as it provides a clearer picture,' Chiu stated in a recent interview with CoinDesk. For instance, he pointed to the Monetary Authority of Singapore's (MAS) swift implementation of crypto regulations, which initially treated cryptocurrency as a payment tool rather than an asset class under its Payment Services Act. Japan followed a similar approach, only to revise its regulations later. 'Although Hong Kong started late, the benefit is that there were clearer patterns of how these products were being utilized,' said Chiu, a prominent voice for crypto in Hong Kong. Chiu also highlighted how the original bitcoin white paper referred to the asset class as electronic cash, whereas the market reality has evolved to view it more as a commodity, a perspective shared by the U.S. Commodity and Futures Trading Commission. This shift in market behavior around crypto has necessitated the adaptation of regulations. Building regulatory alignment is a key issue Chiu aims to address in the LegCo, focusing on establishing clear classifications for different types of digital assets, such as cryptocurrencies versus stablecoins, and ensuring alignment with global regulators. 'We need clear definitions and segmentation,' Chiu explained. 'Some assets should be regulated like securities, while others should remain unregulated, like memecoins.' According to Chiu, memecoins should be treated as collectibles, similar to Pokémon cards or stamps. 'Memecoins lack functionality and do not utilize smart contracts; they are merely collectible items, so I see no reason to regulate them like financial products,' Chiu said. The question of whether Hong Kong should establish a dedicated crypto regulator, similar to Dubai's Virtual Assets Regulatory Authority (VARA), was also raised. Chiu recalled his initial support for creating a digital version of the Securities and Futures Commission (SFC), dubbed the 'eSFC,' during his early years in the LegCo. Nevertheless, the Hong Kong government has chosen to maintain crypto oversight under existing financial regulators, with the SFC having a dedicated digital asset team and the Hong Kong Monetary Authority (HKMA) overseeing stablecoins. Chiu expressed satisfaction with this arrangement, particularly given the SFC's expansion of its headcount amidst government calls for austerity elsewhere. 'The government's intention is to keep everything under the SFC, which will have a dedicated team and is hiring; we recently approved this in the LegCo,' Chiu noted. Chiu's priorities for the LegCo include establishing regulations for over-the-counter (OTC) trading and custodian services, while leaving the development of rules for crypto derivatives and leveraged trading to the SFC and crypto exchanges. He considers crypto regulation a top-five priority, alongside Hong Kong's economic recovery and public safety issues. However, not all LegCo members share the same sense of urgency regarding crypto regulation, with some preferring to focus on establishing more stringent investor protection mechanisms first, in order to avoid another FTX or JPEX, whose failures left many in Hong Kong and Asia with significant financial losses. Given the limited legislative bandwidth, with Hong Kong facing a weak job market, a real estate sector on the verge of a painful correction, and being caught between the U.S. and Mainland China in trade tensions, an economic recovery for the territory is challenging. 'Some LegCo members are strong supporters of virtual assets, but not all, of course; they have different priorities,' Chiu said.