In 2021, China banned all cryptocurrency transactions, but recently, Chinese state-affiliated banks have been supporting the crypto industry in Hong Kong, raising questions as to whether China could be reconsidering its ban.
Benn Steil, a senior fellow and the director of international economics at the Council on Foreign Relations, told Federal Newswire that China may be using Hong Kong as a low-risk experiment, and depending on how it develops, China's leadership could revise the limits it has placed on crypto in the mainland, or it could shut down the experiment.
"For China, Hong Kong is a valuable petri dish for studying ways of competing with the United States without much risk of infecting the wider mainland population," Steil said in a statement. "If the experiment goes well, China may begin to revisit its own crypto ban. If there are problems, China can always invoke 'national security' to limit or end the Hong Kong experiment."
According to CoinTelegraph, Chinese state-affiliated banks in Hong Kong are working to develop partnerships with and onboard cryptocurrency companies, marking a shift in China’s attitude toward crypto. Major banks, including the Bank of Communications and ZA Bank, have been collaborating with regulated crypto companies. Earlier this year, Hong Kong’s financial secretary Paul Chan said he wants Hong Kong to become a hub for crypto, and since then, approximately 80 crypto-related companies have expressed interest in moving to or expanding operations in the city.
Ambre Soubiran, the CEO of Paris-based Kaiko, a crypto market data provider, predicted that Hong Kong’s openness to crypto, coupled with the United States' regulation-by-enforcement approach, will push crypto innovation out of the U.S. and into Hong Kong, CoinTelegraph reported. “The U.S. being more stringent these days than ever on crypto and Hong Kong regulating in a more favorable way…is going to clearly shift the center of gravity of crypto assets trading and investments more toward Hong Kong," Soubiran told CoinTelegraph. In February, Hong Kong’s Securities and Futures Commission laid out a proposed licensing framework for crypto companies with the goal of protecting consumers while also encouraging innovation, according to the article.
Many industry insiders have been surprised by the developments in Hong Kong in light of China’s previous crackdowns on crypto, but some say that Chinese banks’ support of the industry signals a significant shift toward collaboration between traditional financial institutions and the crypto industry, which will ultimately be beneficial for crypto, Blockchain News reported. The banks will enable crypto holders to withdraw their funds in U.S. dollars, Hong Kong dollars and Chinese yuan, the article said.
Some industry insiders in the U.S. have said that rather than encouraging crypto innovation, government agencies are actively working to harm crypto companies by de-banking them, including by closing their accounts and refusing to open new accounts. The Blockchain Association submitted Freedom of Information Act (FOIA) requests in March to the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency to see any documents or communications related to the de-banking of crypto companies.
“The crypto industry is building the next generation of the internet and financial services. This is important work that has created tens of thousands of American jobs. Businesses need bank accounts to pay employees, vendors and taxes,” Blockchain Association CEO Kristin Smith said in a press release. “These are lawful businesses in the United States and should be treated like any other law-abiding business.”
The U.S. Securities and Exchange Commission (SEC) has been hitting crypto companies with enforcement actions, but many in the crypto industry take the stand that existing regulations are not clear enough to enable them to comply. The SEC recently sent a Wells notice to Coinbase, the largest crypto exchange in the U.S., notifying the company of a potential upcoming enforcement action. Paul Grewal, the chief legal officer of Coinbase, said in response to the notice that Coinbase has repeatedly asked the SEC to put out clear regulatory guidelines so that Coinbase and other crypto companies can follow them, but he said the SEC has not been communicative.
Last summer, the SEC asked Coinbase if it would be interested in registering with the SEC and laying out what a potential path for registration would look like, given that a path for crypto exchanges to register does not exist. Coinbase said it was absolutely interested in registering with the SEC and developed and proposed two different models for registration.
"We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none," Grewal said in a Coinbase blog on the issue. He said the SEC also declined multiple invitations to provide feedback or raise questions about Coinbase's listing process. "If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules,” Grewal said in the blog.
In March, the U.S. Commodity Futures Trading Commission (CFTC) announced a lawsuit against Binance, the largest crypto exchange in the world by volume, for allegedly allowing U.S. customers to trade crypto derivatives without proper regulatory approval.
Former attorney and investment banker Matt Levine wrote in a Bloomberg Opinion column, "There are no accusations that Binance is stealing customer money, or even taking big risks with it, which makes Binance look better than some other crypto exchanges I could name.... the CFTC’s case is mainly about letting U.S. customers trade crypto derivatives. It is illegal to run a crypto derivatives exchange in the U.S. without registering it with the CFTC, and it’s not exactly easy to do that either."
Changpeng Zhao (CZ), the Canadian CEO of Binance, also has called for regulatory clarity in the U.S. CZ wrote in a blog post last year that declaring "regulation is bad for crypto" is a "simplistic view," and he said that well-guided regulations serve to protect consumers while still encouraging growth and innovation in the crypto sector.
