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(Kitco News) – China’s decision to ban cryptocurrency trading in 2019 and cryptocurrency mining in 2021 had a material impact on crypto-related activity in the East Asia region, according to data provided in the 2023 Geography of Cryptocurrency Report by Chainalysis, but that may be changing as Hong Kong pushes to become a global crypto hub.
The firm noted that Eastern Asia now ranks fifth in terms of activity in their crypto market and accounted for 8.8% of global crypto activity between July 2022 and June 2023, down from 30% prior to Q1 2020.
“Eastern Asia’s decline in cryptocurrency activity over the last few years has been notable – as recently as 2019, Eastern Asia was one of crypto’s top markets by transaction volume, largely powered by China’s huge trading activity and mining sector,” Chainalysis said. “But while still substantial, crypto activity in the region at large, and China specifically, has declined in the last two years.”
Share of cryptocurrency transaction value by region. Source: Chainalysis
That could soon change, however, as Hong Kong represents “a potential tailwind for East Asia,” they said, with “several crypto initiatives and industry-friendly regulations launched over the past year [now fostering] bubbling optimism.”
“The increasingly close relationship between China and Hong Kong leads some to speculate that Hong Kong’s growing status as a crypto hub may signal that the Chinese government is reversing course on digital assets, or at least becoming more open to crypto initiatives,” Chainalysis said.
The authors noted that the crypto market in Hong Kong is “extremely active by raw transaction volume,” with an estimated $64.0 billion in crypto received between July 2022 and June 2023. “That’s not far behind China’s $86.4 billion received during the same time period, despite Hong Kong having a population 0.5% the size of mainland China’s,” they said.
They attributed this activity to the region’s active over-the-counter (OTC) market, which is used to facilitate large transfers for institutional investors and high-net-worth individuals in a more private manner so as to not affect asset prices or broadcast traders’ activity.
“Hong Kong sees a larger share of transaction volume coming in large institutional transactions of $10 million or more compared to other countries in the region – notably mainland China,” they said. “On the other end of the spectrum is South Korea, which appears to be the least institutional-driven market in the region based on transaction sizes.”
Eastern Asia transaction volume by transfer size vs. global average. Source: Chainalysis
As for what Hong Kong’s push to become a crypto hub means for the future of crypto in China, Chainalysis said that recent developments have “created speculation that the Chinese government may be warming to cryptocurrency and that Hong Kong may be a testing ground for these efforts.”
“Hong Kong functions as a Special Administrative Region of China, meaning it has autonomy over many aspects of policy, including regulation of cryptocurrency,” they said. “Over the last year, Hong Kong has implemented rules allowing retail crypto trading within a regulated environment. It has also seen Chinese state-owned businesses launch crypto-focused investment funds and collaborate with local crypto businesses.”
According to comments provided to Chainalysis by Dave Chapman, co-founder of OSL Digital Securities, institutional investors in the East Asia region have grown increasingly bullish on crypto in recent months.
“The future of digital assets is no longer questionable; it’s widely acknowledged that digital assets are not going away,” Chapman said. “Whether or not traditional finance is ready to accept digital assets as a new asset class, the reality is that many institutional investors are now keen to explore and develop their own digital asset strategies.”
Merton Lam, founder of CryptoHK, echoed Chapman’s experience in the region in a conversation with Chainalysis. “We work with many investment banks, private equity firms, and high-net-worth individuals. For them, cryptocurrency is part of their investment portfolio. They mostly want Bitcoin and Ether, though some have shown interest in smaller altcoins recently, which is interesting.”
Both Merton and Chapman noted that the potential for high returns is the main motivation for both retail and institutional investors to get involved in crypto. Many are also interested in the asset class due to its ability to move portions of their wealth out of their local currency and banking systems, especially in countries with unstable economies or strict capital controls.
“Anecdotally, I hear from other crypto exchanges that many Russians and Ukrainians are coming to Hong Kong to get their money to safety using crypto,” said Merton. “These aren’t multimillionaires either — ordinary people are doing this too.”
Moving capital across borders may also be driving some of the interest from mainland Chinese investors, Chainalysis said. According to the Financial Times, some users of the Hong Kong OTC market from mainland China use these services to move money to other countries or to on-ramp from fiat to cryptocurrency, both of which are difficult to do in China.
International business payments are also an important use case in Hong Kong, said Merton, as crypto payments offer several advantages over bank transfers.
“It’s much easier for many businesses to, say, pay a supplier via stablecoin transfer than through banks,” he said. “It can take as long as three days for a SWIFT transaction to settle, and payments can be especially difficult when dealing with counterparties in developing countries such as in South Asia and Africa.”
Chainalysys suggested that the international payments use case for digital assets and central bank digital currencies (CBDC) like the digital yuan is also attractive to China as they offer another avenue to “undermine the dominance of the U.S. dollar in international trade, particularly given the power it gives the U.S. to sanction entities around the world.”
“Given cryptocurrency’s value as a tool for international trade generally, even apart from CBDCs, it’s possible that goal undergirds any potential openness to blockchain technology we’re seeing from the Chinese government,” Chainalysis said.
When it comes to whether or not Hong Kong’s embrace of crypto over the past year suggests that the Chinese government is softening its stance on the technology, Chapman said the move is “not necessarily indicative of the Chinese government’s stance on crypto.”
“However, we are seeing a number of Chinese state-backed entities indirectly supporting Hong Kong’s web3 ventures, and this could be viewed as an exploratory approach to understanding digital assets without loosening mainland policies,” he said.
Chainalysis said that “while these developments strengthen Hong Kong’s chances to become a global leader in the regulated digital asset market, it’s too early to say what they mean for China as a whole.”
“Overall, Hong Kong’s unique crypto market enables a variety of use cases, not just for local users, but for foreigners as well,” they said. “Moreover, while nothing is for certain, the apparent tacit approval of Hong Kong’s new crypto initiatives could possibly signal that the Chinese government’s stance on cryptocurrency is evolving. That may mean interesting developments are in store for what was once one of the most important countries in the crypto landscape.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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