Bitcoin logo seen displayed on a smartphone with a Hong Kong flag in the background.
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The crypto industry has had a rough year with the digital currency markets collapsing and businesses collapsing across the board.
Despite the volatility, Hong Kong is pushing to become a hub for virtual assets.
The push for the city's digital assets is in stark contrast to mainland China, where Beijing has effectively banned trade and removed cryptocurrency-related activities.
Hong Kong plans introduce new rules in June, that will require cryptocurrency trading platforms to obtain a license from the Securities and Futures Commission. The regulator has already launched a consultation on its proposal to regulate virtual asset trading platforms.
Compass for China?
The companies that spoke to CNBC say they are hopeful that the central government is watching Hong Kong's crypto movements.
"If anything, China could be looking at the effect on Hong Kong following those rules, the issuance of new crypto products or blockchain-based solutions, and the uptick in trading and trading activity that could result," Justin d' said. Anethan, Director of Institutional Sales at Amber Group.
Hashkey Capital CEO Deng Chao had similar sentiments, saying Hong Kong's potential cryptocurrency legalizations could serve as a compass for China.
"In the future, it can serve as a model for policy making in other regions [in China] if successful," he told CNBC in an email, adding that Web3 and crypto companies could eventually take a more compliant approach to their day-to-day operations.
Web3 refers to the next generation of the Internet. Proponents say it will be more decentralized and reduce the power of big tech companies. Some proponents say that cryptocurrencies will likely be a key part of Web3.
In December, a former member of China's central bank's Monetary Policy Committee, Huang Yiping, called on Beijing to review its blanket ban on cryptocurrencies.
Huang said that opportunities for digital technology development may be lost if crypto transactions are banned for a long time.
Still, caution remains about whether Hong Kong could eventually be China's crypto north star.
"While there is talk that China might loosen its stance on cryptocurrencies, there is nothing so far that we can see that indicates such a thing," d'Anethan said.
Plus, it's not going to be easy for retail investors. wanting to jump on the Hong Kong crypto bandwagon.
Bitcoin ATMs, operated by Coinhero, in Hong Kong, China on Wednesday, December 21, 2022.
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"Hong Kong is going to impose a strict set of rules on cryptocurrency trading platforms," โโsaid Yuya Hasegawa, a market analyst at Japanese crypto exchange Bitbank.
"That means it's not going to be easy for newcomers to casually join and start a business," he said, adding that he's not sure if the government's plans to let retail companies access trading in virtual assets will necessarily generate a lot of growth for industry and as a hub.
While Hong Kong harbors big crypto ambitions and boasts a relatively lower tax policy for businesses, the city could still find competition from other crypto hubs.
โRegulation is of course necessary for healthy growth, but in order to compete with other crypto hubs, there must also be an attractive tax policy for crypto projects,โ Hasegawa said.
He noted that Hong Kong has a relatively low tax policy for businesses: corporate tax rate for the first HK$2 million ($254,930) of taxable profit is 8.25%, while any profit above that amount is taxed at 16.5%.
But compared to other crypto hubs like Dubai, which charges a 9% flat fee, and Switzerland, with an 8.5% corporate fee, "it's still not that competitive," he said.
Countries vie for global crypto position
Other players who previously strove to become hubs for digital assets recently implemented legislation to regulate the industry. Observers say regulation is required to create certainty for the cryptocurrency industry and increase consumer adoption.
Last month, the The UK government set out a roadmap to regulate the cryptocurrency industry in line with that of traditional financial firms.
The European Union last year deployed the Cryptoactive Markets lawwhich required stablecoins to hold ample reserves to meet redemption requests in the event of mass withdrawals.
Other jurisdictions like Dubai in the United Arab Emirates are looking to establish themselves as crypto-friendly places to do business.
However, some countries, notably the US, have taken a tougher stance towards the cryptocurrency industry, especially after the collapse of major cryptocurrency exchange FTX and the arrest of its founder Sam Bankman-Fried.
Crippling crypto weather
However, the recent drop in the price of bitcoin has not dampened companies' hopes that crypto adoption will grow.
"For longer-term investors, the green light from regulators should highlight the fact that cryptocurrencies are gaining adoption regardless of temporary price movements or volatility in this still-young asset class," said d'Anethan of Amber Group.
Crypto markets have recently rallied despite Bitcoin dipping below $20,000 towards the end of 2022. Bitcoin was trading at $27,834 as of 9:30 p.m. ET on Sunday, according to Coinbase. That's still nearly 60% lower than its November 2021 record of $68,990.
"Although virtual assets are relatively new, retail investors already have some knowledge and experience of the market after these years of education. When the weather improves, perhaps interest will also increase," said HashKey's Deng.
โ CNBC's Arjun Kharpal contributed to this report.
