As tensions rise between the US and China, political pundits focus on the diplomatic dance (with comic relief like speech bubbles punctuated midway through, which ultimately turns out to be less funny) (possibly), a more benign battle is brewing in the halls of financial regulators. . It's local for now, but nothing stays local for long in a global market. The potential impact extends far beyond the crypto market, which could form an ever more geopolitically important economic force in this changing landscape.
Earlier this week, the Hong Kong Securities and Futures Commission (SFC) released a draft draft of its next virtual currency regulation, scheduled to come into effect on June 1, and opened it for public comment. Its scope includes the licensing of crypto asset service platforms, which were initially intended to be allowed to provide services only to accredited investors. The SFC is currently seeking views on whether retail investors should also be allowed to participate and what types of protections should be in place. The scope of “approved” assets is also debatable, and this in principle includes only a limited selection of the most liquid tokens.
So far, this seems to be yet another example of a jurisdiction that is far ahead of the United States in terms of regulatory clarity and willingness to engage in dialogue with the public on this topic. I will. But lift the lid a little and it's much more than that. This is also an example of the importance of monitoring the east-west strategy divide, retail power, and flow.
Noelle Acheson is a former head of research at CoinDesk and Genesis Trading.This article is an excerpt from her Cryptocurrency is now macro The newsletter focuses on the confluence of the changing crypto and macro landscape. These opinions are her own and nothing she writes should be taken as investment advice.
Not so long ago, Hong Kong wasn't exactly welcoming to crypto businesses, but it wasn't overtly hostile either. In contrast to the hostility towards Chinese architecture, they seem to be regarded as almost trivial. In 2020, Hong Kong announced plans to introduce a new licensing regime that would directly regulate all crypto platforms and limit their scope to accredited investors. This recent move not only clarifies these promises, but also broadens their scope, and appears to be a sign that regulators are considering the growing interest of retailers.
But it's more than just a license. Hong Kong has also earmarked a budget of HK$50 million (approximately $6.4 million) for crypto asset development, including educational activities for individuals and businesses. And Hong Kong's Treasury Secretary Paul Chan announced the launch of a task force comprised of policymakers and industry representatives to consider the integration of crypto assets. It feels like this is much more extensive and long-term than simply monitoring cryptocurrency service providers.
In part, it is also about laying the foundations for economic growth in the region. Hong Kong's economy relies primarily on financial services and tourism from the mainland, both of which have been hit hard by the harsh lockdown caused by the coronavirus pandemic. The region recently reported its fourth straight quarter of GDP contraction, and CEO John Lee has vowed to prioritize attracting foreign talent. Most Hong Kong-based crypto companies have exited as China's 2021 ban on crypto trading and mining casts a cloud of uncertainty over their operations. Several people have now announced that they will apply for reinstatement.
And this is not just an issue for Hong Kong and its 7 million residents. Hong Kong clearly has close ties to China. The two jurisdictions operate under the constitutional principle of “one country, two systems,” which separates Hong Kong's economic administration from that of its much larger parent country. But events leading up to and during the recent protests have made it clear to the world that China is in charge and nothing will happen in Hong Kong without China's approval.
This is where things get particularly interesting. China appears to approve of Hong Kong's move towards cryptocurrencies.
Early last week, Bloomberg reported that Chinese officials were spotted at a crypto event in Hong Kong. They weren't doing an undercover investigation. Huang Yiping, a former member of the People's Bank of China's Monetary Policy Committee, said in a speech in January that China should reconsider its ban on cryptocurrencies. Although he was not speaking on behalf of the central bank, it is highly unlikely that his remarks would have been made public without official approval.
None of this necessarily means that mainland China will immediately open up to the crypto market, but China will likely soften its stance and eventually integrate global crypto assets into its economy. It is possible that China is closely monitoring developments in Hong Kong with the aim of providing support.
This is important partly because of its size. China has no shortage of them, and the size of the pool of potential participants could be smaller than in virtually any other market. He reportedly has 212 million retail investors in the country. For comparison, the total population of the United States is approximately 330 million people. Many of these investors pulled out of the stock market given the economic uncertainty during the dark lockdown period, but the improved outlook could see some of the pandemic savings buildup seek higher returns. There is sex.
Furthermore, Chinese retail investors tend to be less risk averse than their US counterparts. Generally, they prefer chasing momentum over stable yields. This partly explains their enthusiasm for the crypto market a few years ago and why the potential risk of annihilation has increased to the point where governments feel the need to cut off access. However, it has not been possible to completely eradicate cryptocurrency activity – filings show that 8% of FTX’s creditors are based in the mainland, and the latest research shows that China-based miners Bitcoin mining exposed by Cambridge could account for around 20% of the world's hashrate.
China is also one of the few regions in the world that is actively relaxing its currency supply. The central bank stepped up liquidity injections earlier this month while keeping monetary policy rates unchanged, but analysts expect the committee to continue cutting rates in the second quarter. The number of new loans by Chinese banks more than tripled from December to January. Most of us don't have to look far back in history to remember what monetary easing does for risk assets.
China vs. USA: Two different gamesmanship
This is also important partly because of geopolitics. It is no secret that China wants to weaken the dollar's international role without actually negatively impacting the dollar, and that the role of US capital markets is an important factor in global trade. He seems to understand. Financial regulators have been working for several years to further encourage activity in the Chinese market, including opening up the market to foreign investors, strengthening hedging, streamlining domestic listing requirements, and promoting renminbi-settled transactions. There is.
Of course, allowing the cryptocurrency market to open up could lead to even more outflows from the yuan, which Chinese authorities would understandably want to avoid. But if crypto assets and the innovation they bring are the key to the development of tomorrow's financial markets, China will clearly need some influence. Additionally, China will likely be watching the growing hostility towards cryptocurrencies from Washington DC with interest. If the US views the crypto market as a threat, it could be a threat worth exploring.
This represents the typical strategic approach of the two economic powers. I once heard someone compare relative philosophy to a board game that is popular in each region. In America, there is a game of chess where you win by killing your opponent's leader. China prefers the game of Go, where the game is won by conquering and holding territory. Perhaps China's leaders see crypto assets as an activity within the realm of global financial markets. Rather than being an enemy to be undermined, the crypto market could become a strategic pillar of the new world order, or at least an opportunity to attract global capital, talent, and prestige.
So far this year, analysts have focused on macro factors as the main driver of crypto market performance, with evolving use cases and technological speculation also featuring in the recovery. Perhaps a more significant thrust is slowly building in the global strategic arena, especially in the eastern geopolitical rivers.
