The future of the cryptocurrency market, driven by expansion in Asia[Opinion]| coindesk JAPAN

As tensions rise between the United States and China, political experts are watching diplomacy, but a quiet battle is about to begin on financial regulation. Local for now, but nothing in the global market can stay local for long. Its impact goes far beyond the crypto-asset market and, in the current changing climate, may result in an unprecedented geopolitical economic clout.

The Hong Kong Securities and Futures Trading Commission (SFC) recently released a draft crypto-asset regulation that is scheduled to come into effect on June 1, and has started accepting public comments. The proposed regulation also includes a licensing regime for cryptocurrency service platforms, which was originally supposed to be offered only to qualified investors.

The SFC is currently soliciting views on whether individual investors should be included and what safeguards should be put in place. Also under discussion is the range of “approved” assets, which in principle should only include the most liquid tokens.

From what I’ve read so far, it seems like a country far ahead of the US in terms of clarity of regulation and willingness to solicit opinions from citizens about crypto assets. But a closer look reveals far more than that. It is also an example of the difference in strategy between the East and West, and the importance of looking at the power and trends of individual investors.

Hong Kong Crypto Friendly Proposal

Not too long ago, Hong Kong wasn’t all that welcoming to crypto firms. That said, they were less hostile and, in contrast to China’s growing hostility, seemed to consider it generally unimportant.

In 2020, Hong Kong announced plans to introduce a new licensing regime that would directly regulate all crypto platforms and limit their services to qualified investors only. The proposed regulation, which was announced this time, seems to go beyond clarifying the plan at the time to broaden its scope and take into account the growing interest from individual investors.

The movement is not limited to just the licensing system. Hong Kong has also set aside HK$50 million (around $870 million) for crypto development, including educational programs for individuals and businesses. Finance Secretary Paul Chan has announced the launch of a task force of policymakers and industry players to explore the use of crypto assets. It appears to be a much broader and longer-term policy than just monitoring crypto service providers.

This also has the aspect of laying the groundwork for Hong Kong’s economic growth. Hong Kong’s economy relies heavily on financial services and tourism from mainland China, both of which have been hit hard by the strict coronavirus lockdown.

Hong Kong recently announced its fourth straight quarterly GDP decline. Chief Executive John Lee said attracting talent from overseas will be a priority. Most of the Hong Kong-based crypto firms have left Hong Kong as their business prospects are uncertain after China’s ban on cryptocurrency trading and mining in 2021. But now, several companies have announced they will apply to return to Hong Kong.

Nor is this limited to Hong Kong and its seven million citizens. Hong Kong is, of course, closely related to mainland China. Mainland China and Hong Kong are governed under the principle of “one country, two systems”, and Hong Kong’s economic administration is separate from that of mainland China. But recent protests have shown the world that China has de facto control and that nothing happens in Hong Kong without China’s approval.

What’s interesting here is that China apparently endorses Hong Kong’s crypto policy.

Chinese authorities are watching

Bloomberg recently reported that officials from Chinese authorities were spotted at a crypto-related event in Hong Kong. It doesn’t seem like he was visiting in secret. Huang Yiping, a former member of the monetary policy committee at China’s central bank, publicly said in January that China should review its crypto ban. Although he did not speak on behalf of the central bank, it is highly unlikely that such a statement would have been made publicly without official approval.

That doesn’t mean China will open up its cryptocurrency market anytime soon. However, China may be keeping an eye on Hong Kong’s moves as it intends to soften its position and eventually bring global crypto assets into its economy.

Considering the size of China, this is a big deal. There are no small numbers when it comes to China, and the sheer size of potential participants overwhelms the market. China is said to have 212 million individual investors. On the other hand, the total population of America is about 330 million. Many Chinese retail investors withdrew from the stock market amid severe lockdowns citing economic uncertainty, but as the outlook improves, they will seek higher returns using assets they have hoarded during the pandemic. may be

Moreover, Chinese retail investors are generally less risk averse than American retail investors. We generally prefer to chase momentum over stable yields. That is why a few years ago, the craze for the cryptocurrency market was so widespread that the risk of catastrophic losses was so high that governments banned trading.

However, cryptocurrency trading in China has not completely disappeared. Eight percent of FTX creditors reside in mainland China, and miners in China account for about 20% of global hashrate, according to the latest research on bitcoin mining published by the University of Cambridge.

Moreover, China is one of the few countries in the world that has actively implemented a quantitative easing policy. The People’s Bank of China (PBOC) kept its policy rate unchanged in February and increased liquidity injections, but analysts expect rate cuts to continue in the second quarter. The number of new loans by Chinese banks also more than tripled between December and January. We don’t need to dig up memories too long ago to remember what effect QE will have on risk assets.

China vs America: Two Different Styles

It is also geopolitically important. Clearly, China wants to undermine the international role of the dollar without actually damaging the value of the dollar. And China understands that US capital markets have become an important factor in international trade.

In recent years, China’s financial regulators have tried to attract more foreign investors to Chinese markets, allow more hedging, simplify onshore listing requirements, and promote renminbi-settled transactions. We are working to revitalize the movement of the Chinese market.

Of course, allowing a cryptocurrency market could also encourage an outflow of the yuan. Chinese authorities would want to avoid it.

But if crypto-assets and the innovations they bring are key to the future development of financial markets, China definitely wants to be influential. Moreover, China will be watching with interest the increasing regulation of crypto assets in the United States. If the US sees the cryptocurrency market as a threat, it may be a threat worth considering for China.

This represents the typical strategic approach of two super-economy powers. Someone once heard that two countries likened their national philosophies to the popular board game.

Chess is a popular game in America, where you win by defeating the enemy leader. Go, popular in China, wins by conquering and holding territory. China’s leaders may see global financial markets as a battlefield and crypto assets as pawns in a territorial dispute. Rather than an enemy to be weakened, crypto-assets can be a strategic pillar of the new world order, or at least an opportunity to attract global capital, talent and reputation.

Analysts have focused on macroeconomic factors as the main drivers of cryptocurrency market performance through 2023, with evolving use cases and technological speculation also characterizing the recovery.

But a more important factor may be slowly shaping the global strategic arena. Moreover, it seems to be in the midst of an oriental geopolitical movement.

Mr. Noelle Acheson: Former head of research at CoinDesk and Genesis Trading.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original: The Future of Crypto Markets Will Be Driven by Developments in the East