What New York can learn from Hong Kong in regulating crypto
Web3 companies are leaving New York, spurred on by Washington DC’s recent belligerent approach to regulating the industry. The Big Apple’s global relevance relative to other major financial hubs is diminishing as regulators have rejected the wishes of the city’s leadership – but China and Hong Kong have proven that it doesn’t have to be.
Over the past 100 days, China and the US have taken divergent paths when it comes to regulation. After an 18-month period of animosity, the former appears to have turned a corner and quickly implemented common sense rules in Hong Kong that promote innovation and encourage the industry to grow. This all happened because officials in Beijing listened to and supported Hong Kongers and their leaders, something US securities regulators seem determined to avoid.
Omer Ozden is chairman of RockTree Capital, a Beijing-based Web3 investment fund, and was previously a US securities attorney who practiced in Hong Kong and New York.
New York City Mayor Eric Adams has embraced Web3 from the start, running a pro-crypto campaign and even receiving his first paycheck in bitcoin. This democratically elected official has touted the benefits and actively engaged industry with a blueprint for the city’s economic recovery, but D.C. bureaucrats disagree.
Currently, a small number of unelected individuals in Washington DC wield alarming authoritarian power in their seats as regulators, in defiance of New York’s desire to move from legacy financial systems to digital ones.
Hong Kong’s example
In the summer of 2021, the Chinese government aggressively targeted the crypto industry by banning financial institutions and payment companies from providing services related to digital asset transactions, and excluding crypto exchanges with domestic operations. The central authorities in Beijing took a draconian approach to this nascent technology.
Beijing’s restrictive policies and lack of clarity from the Hong Kong securities regulator resulted in the loss of many entrepreneurs, highly skilled jobs, investors (with their billions of dollars in capital), stock exchanges and countless other active industry participants. From China, these people moved to Hong Kong, Singapore, Dubai, Silicon Valley and beyond. Technological innovation and the further development of the country’s capital markets were resolutely suppressed. But what happened next is quite impressive: it seems that the Chinese authorities realized the damaging impact of this disastrous direction and in late 2022 decided to drastically change course.
The great hub of China
Last December, a former monetary policy official from China publicly expressed the opinion that “banning cryptocurrencies may be practical in the short term, but whether it is sustainable in the long term deserves a thorough analysis” and stressed the need to create an appropriate regulatory framework for cryptocurrencies. Those of us in Beijing know that such public statements are not made without being in line with the thinking of the central government.
After seeing crypto exchanges, capital and real estate tenants leave Hong Kong, the newly appointed executive leader, John Lee, consulted with the Web3 industry and developed a plan to eventually turn Hong Kong into a global cryptocurrency hub. He then worked with Hong Kong’s financial regulators to gain Beijing’s support for his city’s ambitions. This dialogue quickly led to the adoption of a robust regulatory framework for Web3 that provides clarity for broker-dealers, investors and crypto exchanges, while also ensuring that there are adequate considerations for private investor participation.
Make no mistake, this decision was Beijing’s: both a geopolitical move for the nation and a supportive response to boost Hong Kong’s economic recovery, which has historically been the gateway of international finance to mainland China. This new framework, which was implemented on June 1, also acts as a testing ground for future regulatory development and innovation for the rest of China’s Web3 industry – and Hong Kong’s recovery is moving remarkably fast.
The Big Apple is souring
New York has the advantage of Hong Kong’s advance warning. With U.S. regulators taking a restrictive approach similar to China’s two years ago, the Web3 industry Adams is trying to promote — including venture capital funds and projects — is leaving Silicon Alley and the rest of the country. Most worryingly, Coinbase, which has embraced a pro-regulatory approach, is considering leaving the country due to the current environment in the US. The Web3 industry is flexible.
Both Hong Kong and New York, as leaders in the financial industry, are natural locations for the Web3 industry to flourish. Fortunately for Hong Kong, Beijing decided to support financial innovation. Unfortunately for New York and the rest of America, regulators in D.C. have decided to firmly stifle it.
Both Lee and Adams came to power in 2022. Despite the latter’s pleas to state and federal regulators to relax restrictive measures and bring clarity to the crypto industry, regulators have firmly rejected the wishes of Adams, his constituents and the 50 million Americans who have used. cryptocurrency. And what is painfully ironic for those who live in “the land of the free” is that currently a very small number of unelected individuals with regulatory mandates have gone to extraordinary lengths and used significant public resources to stifle innovation.
100 days contrast
The SEC’s regulation through enforcement, and the constant, ominous boom of its stance that stablecoins are securities, have paralyzed innovators, investors, and highly skilled workers by hanging a sword of Damocles above each participant’s neck, ready to be dropped by the whim of an unelected bureaucrat.
USDC has lost $27 billion in market cap from its peak 12 months ago, or nearly 50%. Since this is a US-regulated stablecoin, some see the metric as a measure of market consensus on trust in US regulation: the crypto industry is leaving soon.
As part of Hong Kong’s moves to bring back crypto, regulators have created a playbook for stablecoin issuance, and a Hong Kong Dollar-based stablecoin is apparently on the way. There are ongoing discussions about developing a CNH-based stablecoin; CNH is the overseas version of the Chinese renminbi.
In March, US regulators forced Signature Bank to close despite being solvent. Ex-congressman and board member, Barney Frank, publicly announced that the bank had been shut down by politically motivated US authorities to send a strong anti-crypto message. Almost immediately afterward, China’s state-owned banks quickly jumped at the opportunity with the international branches of Bank of China and Bank of Communications moving in to bring in former Silvergate and Signature clients in the Southeast Asian market. And the Hong Kong Monetary Authority is officially pressuring major Hong Kong banking institutions, such as Standard Chartered and HSBC, to accept crypto clients. Meanwhile, while the SEC is suing crypto exchanges in the US, a Hong Kong politician has been courting them to establish operations in Hong Kong.
In my experience as an investor in Web2 and Web3, and a decades-long practice as a U.S. securities attorney in New York and China at major international law firms, I’ve seen the rapid development of permissive, smart laws from legislators as critical as the rapid development of intelligent code by engineers to promote innovation and growth.
Unfortunately, the SEC has framed the predominant regulatory question in America as What is a security? when the smart question for developing smart laws is: how do we promote innovation and economic growth? That’s the question Adams asked, and Lee’s.
Federal lawmakers and New Yorkers risk suffering the same fallout from this cautionary tale unless they embrace blockchain. This month, representatives in Congress introduced the SEC Stabilization Act to overhaul the SEC and remove Chairman Gary Gensler for a series of outlined abuse of power. If the unelected president unilaterally steers the nation in the opposite direction to the wishes of the elected mayor in the nation’s most populous city, and the tens of millions of U.S. crypto users, then Adams and his constituents should learn from the experience of Hong Kong and act now.
Because New Yorkers are rapidly losing the two things they love most: money and freedom.