Hong Kong and India’s quest to regulate crypto a boon for Asia’s Web3 ecosystem


Hong Kong and India are taking different routes towards developing their crypto ecosystems. Hong Kong has established a set of comprehensive regulations for the crypto industry and has made it easier for retail investors to engage in digital assets, which has attracted international crypto businesses. India, on the other hand, has seen a thriving crypto ecosystem from 2020 until early 2022, but government-imposed taxes and regulations have caused setbacks. While both countries have implemented anti-money laundering laws and mandatory KYC norms for crypto users, they have different approaches towards engaging the youth population and building crypto infrastructure.

Hong Kong and India’s quest to regulate crypto a boon for Asia’s Web3 ecosystem  0 Both Hong Kong and India have been in the news recently with respect to their developments in the crypto landscape. While Hong Kong has been announcing several regulatory developments in its crypto ecosystem, India’s G20 presidency is what the crypto community in the country is banking on for a billion dollar market making opportunity.

Hong Kong has traditionally been friendly in its approach towards crypto, which attracted many prominent businesses to set up shop in the region. After some initial back and forth on letting retail investors engage with digital assets, it has been made clear that all users can invest and engage in crypto the same way. The region’s welcoming policy for crypto institutions to establish themselves in the region initially was met with skepticism. This was mainly due to speculations of China’s influence and control over the industry from behind the curtains.

Reports even suggested that Hong Kong was being used by Beijing as a sandbox, which itself had imposed a blanket ban on digital assets. This was a cause for concern among many stakeholders.

However, these concerns were superseded by the pros that the country offered. For one, the country offers a set of comprehensive regulations among the increasing regulatory uncertainty in the US, the largest crypto market. In the recent collapse of banks in the US such as Silvergate and Signature, Hong Kong promptly stepped in to solve the fiat on ramp and liquidity challenges for crypto companies by offering partnerships with banks in its region.

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View Details »In an attempt to become a crypto hub, it also withdrew restrictions for retail investors to engage with crypto and allowed them to have the same level of access as authorized investors to further increase adoption. Hong Kong announced a list of tokens such as Bitcoin, Ethereum, Litecoin, Polkadot, Bitcoin Cash, Solana, Cardano, Avalanche, Polygon, and Chainlink, which would be available for retail investors to trade.

These were shortlisted based on their ability to meet the stringent criteria of the Securities and Futures Commission. As of last week, they also invited Coinbase to establish its presence in the region which is currently in the middle of a lawsuit in the US.

In India, however, the scenario has been quite different. Its increased crypto adoption that mainly started in 2018, saw the emergence of some of the most prominent Crypto organizations, specifically exchanges whose objectives were to make crypto accessible to the masses. These private players recognized the massive opportunity that India presents with the perfect combination of talent, tech savvy audience, appetite for financial inclusion and interest in adoption of emerging technologies.

But the Reserve Bank of India imposed a blanket ban on digital assets, which dampened the spirits of users and made them rethink their idea of engaging with crypto. However, after several months of dialogues between public and private parties, the narrative changed to a large extent and the ban was subsequently overturned.

Since then the country witnessed a thriving crypto ecosystem from 2020 till early 2022, the last bull market which saw the adoption of digital assets hit the roof. In order to ensure that the market volatility doesn’t affect users, the leaders in the space advocated for conducive regulations for all stakeholders.

The government at its end made it mandatory for all platforms to impose a Know Your Customer norm that will make it mandatory for users to share an authorized ID proof to set up an account for Crypto trading.

However, in 2022, much to the disappointment of the ecosystem, the government imposed a 30% tax on capital gains and 1% TDS for crypto trades. This was a major setback in the progress that India’s crypto ecosystem had made in terms of user reach as more and more users abandoned domestic Crypto exchanges.

In Hong Kong, too, KYC norms and identification are mandatory for crypto users to register on authorized platforms. The region has put investor protection and benefit as utmost priority by ensuring that people only invest as much as they can afford to lose. Both India and Hong Kong have brought Crypto businesses under the ambit of Anti Money Laundering laws, which was a welcome move to weed out any bad actors or malpractices in the industry.

However, overall there remains a cautionary approach as crypto is still not seen as an enticing opportunity for all demographic groups irrespective of the country. Hong Kong has an advantage over India since it has been a financial hub, center of tech innovations, home to global banking institutions for years before crypto became mainstream. The number of young people, although at a decline now, comprise almost 24% of the total population, making crypto a popular tool to engage with and invest in considering buyer persona, risk appetite and ability to adapt.

Hong Kong also has an advantage in terms of being a crypto hub since literacy rate in the country and its ratio to the youth population engaging in crypto hit a sweet spot. While India is riding the Web3 wave, the country has a lot of ground to cover in terms of providing the right infrastructure to its audience to engage in crypto, raise awareness around digital assets, and create campaigns for regulators to soften their stance towards crypto.

There is another aspect to consider here which is Hong Kong’s thriving crypto ecosystem will provide China access to digital assets. This in turn could affect how it collaborates with Russia to take over the US dominance in the financial system since the two countries had expressed an interest to work together on building digital asset capacity last year,

India’s G20 presidency in 2023 was a major hope driver for the country to formulate domestic crypto laws. However, the Finance Minister has emphasized on the need for a more globally aligned regulatory framework instead of each country developing its own set of rules. This creates a disadvantage for India, since Hong Kong has its own set of domestic rules which the crypto community has been applauding in the last few months, going as far as to predict that the country might be responsible for the next bull run in crypto.

Both countries, however, have laid equal importance to the development of blockchain based solutions in various industries such as finance, healthcare, education, etc. The countries have also released framework/whitepaper for CBDCs with India all set to run its pilot project in partnership with its leading banks.

One thing to note while we compare the two countries in their approach towards crypto is that the stakes for Hong Kong are too high in this since they are looking to boost their economy by capitalizing on the Web3 movement.

It has been reported that the other industries have been slow moving and crypto is what will restore the fading glory of Hong Kong. For India, which is a growing economy, Web3 is an opportunity to gain leadership status among countries worldwide by creating homegrown solutions for the world with local talent. It would be ideal for the country to look at it this way while formulating its domestic policies which are long overdue.

As the Securities and Exchange commission in the US becomes more averse to digital assets, with its latest crackdowns of prominent crypto exchanges, the prospect of growth in Asia will inevitably entice many businesses in the West to make a move in the continent.

And Hong Kong alongside Singapore remain the most opportunistic destinations for the same. India too is making baby steps towards progress in regulations of VDAs. The country however, must not overlook Crypto’s potential to create employment for millions of people.

(The author is Vice President, WazirX)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)


Updated: 06/23/2023 — 08:00

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