FTX collapse does not change Hong Kong’s ‘cautious’ approach to becoming crypto hub, Financial Secretary Paul Chan says

FTX’s bankruptcy only shows even more that the industry needs greater transparency and regulation, Hong Kong Financial Secretary Paul Chan said
Once the second-largest cryptocurrency exchange in the world, FTX’s rapid decline has sent crypto prices spiralling and shaken investor confidence

Blockchain

Xinmei Shen

Published: 3:00pm, 14 Nov 2022

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Hong Kong’s top finance official has reiterated the city’s commitment to becoming a virtual asset hub, saying in a blog post that industry regulation is even more attractive to investors in the wake of FTX’s collapse.

The collapse of cryptocurrency-related companies “one after another”, including a large bankruptcy last week, has only made the industry believe even more in the need for greater platform transparency and regulatory compliance, Hong Kong Financial Secretary Paul Chan Mo-po wrote in a post to his office’s official blog on Sunday, without naming any companies.

“Our policy statement released recently is conducive to building such an environment, and has made the industry very hopeful about the development of Hong Kong’s virtual asset market,” Chan wrote.

Hong Kong’s digital assets sector braces for fallout from FTX collapse

FTX, until recently the world’s second largest cryptocurrency exchange, entered a sudden downward spiral last week after Binance Holdings chief executive Zhao “CZ” Changpeng announced plans to sell his company’s roughly US$530 million in FTT after CoinDesk reported that the native FTX token was the biggest asset holding of sibling company Alameda Research.

The meltdown accelerated after a preliminary deal for rival Binance to buy FTX fell apart. Institutions and retail investors alike have suffered losses as the revelations about FTX spilled over to the rest of the cryptocurrency market, pushing down token values across the board.

Founder Sam Bankman-Fried, commonly known as SBF, apologised and stepped down as CEO in an announcement revealing that his firm had filed for bankruptcy.

It is an ironic twist of fate for the crypto founder who over the past year has become known for his advocacy for more regulation of the industry, something that reportedly angered some of his more libertarian-leaning rivals. In September 2021, SBF moved FTX to the Bahamas from Hong Kong, citing a friendlier and clearer regulatory framework for cryptocurrencies in the archipelago.

SBF founded the quantitative trading firm Alameda Research in November 2017 and moved the headquarters to Hong Kong two months later. In 2019, he founded FTX in the city. Alameda CEO Caroline Ellison also lived in Hong Kong for a time, having been with the company since 2018. She became co-CEO in October 2021 and the sole CEO in August.

Sam Bankman-Fried testifies during a hearing before the House Financial Services Committee in Washington on December 8, 2021. Photo: TNS

It is unclear whether Alameda maintained any operations in Hong Kong prior to the bankruptcy. Ellison’s LinkedIn profile still shows her pictured in front of what appears to be Hong Kong in the background, although she lists herself as based in the Bahamas, where she shared a penthouse with SBF and others from the company, CoinDesk reported.

Right up to his companies’ unexpected demise, SBF remained a darling in the global crypto industry, especially in the city where he founded FTX. He joined Hong Kong’s FinTech Week by video chat on October 31, when the government unveiled its new policies regarding cryptocurrency regulation in a bid to regain its status as a hub for digital assets.

“I think [Hong Kong] could regain that status,” he said in a fireside chat when asked about the regulatory change. “When you look at the East, it’s not obvious, and I think that there is a real opening and real room there.”

FTX’s implosion has erased much of the goodwill SBF enjoyed. For most of the past month, FTT traded for around US$25, but after Binance’s CZ said his company would dump its holdings of the token, the price started to plummet, falling further after the bankruptcy announcement. FTT currently trades for about US$1.50, according to CoinGecko.

“The incidents reflect the lack of transparency among unregulated exchanges, which will stir further tightening of regulations and more centralised controls,” said Ken Lo, co-founder and chief strategy officer at Hong Kong-based HKbitEx. “Hong Kong could regain its leading virtual asset hub [status] by working closely with market ecosystem players to build the next era of crypto, which will increasingly welcome regulation for progressive development.”

FTX collapse being scrutinised by Bahamas authorities

Hong Kong’s crypto investors, whose confidence in the industry was rocked by the latest market crash, are now bracing for bigger storms to come. But in his blog post titled “Advancing the virtual asset industry’s development in Hong Kong steadily and cautiously”, Chan sought to reassure the local industry.

Chan’s blog post, titled “Advancing the virtual asset industry’s development in Hong Kong steadily and cautiously”, comes as the city’s cryptocurrency investors, whose confidence in the industry was rocked by the latest market crash, brace for bigger storms to come.

The Hong Kong government still believes that cryptocurrencies do not necessarily involve speculative flipping and that the “innovative technologies” behind virtual assets offer “huge potential” for applications in financial services, trade and enterprise services, Chan wrote.

Chan also argued that Hong Kong’s regulatory framework for cryptocurrencies prioritises investor protection. Under the city’s current regime, companies can opt in and apply for licenses for virtual asset trading platforms and serve professional investors. The licenses require platforms to properly segregate client assets and follow financial reporting and disclosure rules.

Since Hong Kong introduced an opt-in licensing framework in 2019, OSL and HashKey Group have been the only two companies to receive government approval to sell virtual assets to professional investors, defined as those with portfolios of HK$8 million (US$1 million) or more.

“The bubbles and turmoil in the virtual asset market over the past few years have disrupted investment markets, but during this time, financial innovation’s development has not stopped,” Chan wrote.

King Leung, head of fintech at the Hong Kong government’s InvestHK department, echoed Chan’s confidence in the city’s regulatory approach for the industry in his own post on LinkedIn on Sunday.

“Our vision is that as more VA [virtual asset] platforms and service providers are licensed, the regulated environment can actually give the investors an extra level of confidence to increase their exposure in this new asset class,” Leung wrote.

Additional reporting by Matt Haldane.