A recent report from cryptocurrency data analysis company Chainalysis suggests that Hong Kong’s increasing adoption of cryptocurrencies may signal that China is evolving in relation to digital assets.
According to the report, cryptocurrency activities in East Asia have declined in recent years, especially after China banned cryptocurrencies. However, a “counterwind” is coming from Hong Kong, as the region is implementing various cryptocurrency initiatives and favorable regulations for the industry.
“The increasingly close relationship between China and Hong Kong leads some to speculate that Hong Kong’s growing status as a cryptocurrency hub may indicate that the Chinese government is reversing course on digital assets, or at least becoming more open to crypto initiatives,” the company pointed out.
Hong Kong is an extremely active cryptocurrency market in terms of transaction volume, receiving around $64 billion in cryptocurrencies between July 2022 and June 2023, which is not far behind the $86.4 billion received by China during the same period. However, it is worth noting that Hong Kong’s population is only 0.5% of mainland China’s population.
The relationship between China and digital assets has changed significantly in recent years. In 2020, the country was home to one of the most active cryptocurrency markets in the world and was leading in Bitcoin mining by a wide margin. However, the Chinese government began cracking down on cryptocurrencies, with the State-run People’s Bank of China declaring virtually all cryptocurrency activities illegal in 2021.
Recent developments, however, have sparked speculation that the Chinese government may be changing its mind about digital assets. In this regard, Hong Kong could be a “testing ground” for these Chinese efforts.
Hong Kong operates as a Special Administrative Region of China, which means it has autonomy in many aspects of policy, including cryptocurrency regulation. The region has a large local over-the-counter cryptocurrency market and has recently implemented rules allowing retail cryptocurrency trading in a regulated environment. Chinese state-owned companies have also launched cryptocurrency-focused investment funds and collaborated with local industry companies.
According to Dave Chapman, co-founder of Hong Kong-based company OSL Digital Securities, Hong Kong’s promotion as a potential crypto hub does not necessarily indicate the Chinese government’s position on cryptocurrencies. However, it could be an “exploratory approach” by the country.
“We are seeing a number of entities indirectly supported by the Chinese state supporting web3 endeavors in Hong Kong. This could be seen as an exploratory approach to understanding digital assets without loosening mainland policies,” Chapman said.
In other words, while these developments reinforce the hypotheses of Hong Kong becoming a global leader in the regulated digital asset market, it is too early to say what they mean for China as a whole.
“The apparent tacit approval of Hong Kong’s new crypto initiatives could signal that the Chinese government’s position on cryptocurrencies is evolving. This may mean that interesting developments are in store for what was once one of the most significant countries in the crypto scene,” concluded Chainalysis.