Although mainland China has had a ban on cryptocurrency transactions in place for years, Hong Kong has recently positioned itself as the new global hub for crypto innovation with the support of some Chinese state-affiliated banks.
This development has left some experts questioning whether China might reverse its stance on crypto, and others wondering whether the U.S. dollar's global prominence is at risk. Timothy Massad, a former chairman of the Commodity Futures Trading Commission (CFTC), told Federal Newswire that Hong Kong's steps do not necessarily signal a change in mainland China's crypto policies. While he doesn't foresee an immediate impact on the U.S. dollar, Massad said that in order to remain competitive in the global economy, the U.S. does need to keep up with the changing landscape of digital payments.
"What Hong Kong is doing is certainly in contrast to the mainland's ban on crypto, but Hong Kong has always had very different financial regulatory policies that have led to more developed and open markets," Massad said. "There is no indication at this time that Beijing is changing its own policies. The city is clearly seeking to attract crypto businesses, but I don't see that as having significant implications for the U.S. dollar in the near term. In the longer term, I do think that the U.S. needs to be involved as countries around the world explore improving the technology of payment systems, whether through CBDCs or otherwise."
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, CoinTelegraph reported. 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 Hong Kong.
Ambre Soubiran, the CEO of Paris-based Kaiko, a crypto market data provider, predicted that Hong Kong’s openness to crypto, coupled with the U.S.’s 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 said in an interview.
Many industry insiders have been surprised by the developments in Hong Kong in light of China’s previous crackdowns on crypto, but some believe 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.
Michael Greenwald, a former fellow with the Belfer Center, wrote in an opinion piece that the U.S. dollar’s global dominance is at risk of crumbling if the U.S. does not prioritize the development of a central bank digital currency (CBDC). The U.S. has already fallen behind China and many other countries in terms of a CBDC, Greenwald said. In order to preserve the strength of the dollar, “U.S. policymakers must prioritize ‘dollar innovation’ as a key national security objective on par with a great power competition strategy.”
Greenwald wrote that the dominance of the dollar is a key pillar upholding U.S. global leadership, enabling it to impose sanctions and “imprint our values” in areas such as money laundering. While China’s attempts to supplant the dollar have so far been unsuccessful, its CBDC could give it the edge it needs to “eschew reform and threaten the dollar with seamless international payments through the digital yuan.” Greenwald called on the Biden administration to take several steps to ensure the U.S. is not left behind as the world transitions to a digital economy, including working with the EU to establish global standards and accelerating research on CBDC technology.
“The dollar’s global use is a national security asset critical to U.S. geopolitical power and economic influence, and the digital yuan’s threat must be elevated on policymakers’ agenda,” Greenwald wrote.
The Federal Reserve plans to launch FedNow, a service to enable live transactions, in July, but the central bank has said that the system is not the same as a CBDC.
"We couldn't be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution," said Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow program executive.
The Fed said in a tweet that "FedNow is not related to a digital currency" and cited Fed Chair Jerome Powell, who said in a House Financial Services Committee hearing in March that a CBDC is "something we would certainly need congressional approval for."
Massad, who served as chairman of the CFTC from 2014 to 2017, is a research fellow at the Kennedy School of Government at Harvard University and an adjunct law professor at Georgetown Law School.
