Key Insights:

• First Digital warns Hong Kong may lag behind in global crypto regulation without faster regulatory progress.
• Hong Kong banks hesitate to offer crypto custody services due to liability concerns, leaving a market gap.
• Hong Kong’s Web3 innovations in CBDCs and tokenized assets advance despite slow progress in stablecoin regulation.

First Digital Trust, a Hong Kong-based crypto custody provider, has expressed concerns over the city’s slow pace in regulating the cryptocurrency industry. According to Vincent Chok, CEO of First Digital, Hong Kong risks falling behind other jurisdictions if it does not move faster to regulate digital assets. While acknowledging the city’s cautious approach to investor protection, Chok emphasized the importance of adapting quickly to keep up with the rapidly evolving industry.

“We hope to see regulation move faster to ensure it does not fall behind the industry’s fast pace of development,” Chok stated in an interview with Cointelegraph. He pointed out that Hong Kong’s careful approach is understandable, but also cautioned that delays could result in the city losing its competitive edge in the global digital asset market.

Stablecoin Regulation Not Yet in Place

Although Hong Kong has positioned itself as a hub for cryptocurrency, First Digital Trust says the city is not ready to regulate USD-backed stablecoins. This stance contrasts with Dubai, which has already implemented regulations for USD-denominated stablecoins. Chok expressed hopes that Hong Kong would eventually roll out guidelines for such stablecoins but noted that the city is not there yet.

In contrast, other jurisdictions like Dubai have already moved forward with a global regulatory framework for stablecoins. While the Hong Kong Monetary Authority (HKMA) has allowed some local stablecoin initiatives, such as Jingdong Coinlink Technology’s plan to launch a Hong Kong dollar-pegged stablecoin, broader stablecoin regulation, particularly for USD-backed versions, remains absent.

Chok stressed the need for Hong Kong to eventually catch up in this area, adding, “We look forward to Hong Kong rolling out regulation for USD-denominated stablecoins shortly.”

Banks Cautious About Offering Crypto Custody Services

While crypto regulation may be slow in some areas, banks in Hong Kong are also holding back from offering digital asset custody services. According to Chok, the liability risks associated with these services remain beyond the risk appetite of many financial institutions in the region.

Several companies with established trust structures have stepped in to fill this gap, providing crypto custody services that banks have been hesitant to offer. Meanwhile, other regions, such as the United Arab Emirates, have seen major banks like Standard Chartered enter the crypto custody space.

In September, Standard Chartered announced that it would begin offering digital asset custody services for Bitcoin and Ether, partnering with the cryptocurrency division of hedge fund Brevan Howard.

Despite some movement in global markets, Chok does not foresee Hong Kong banks rushing to offer similar services anytime soon.

Web3 Integration and Innovation in Hong Kong’s Financial System

While Hong Kong’s regulatory progress for digital assets may seem slow, the city is making strides in Web3 integration, particularly in areas such as central bank digital currencies (CBDCs) and tokenization of real-world assets. Vincent Chok pointed out that Hong Kong has implemented innovative structures that make it easier for investors to engage with digital assets.

One example is the availability of Bitcoin (BTC) and Ether (ETH) exchange-traded funds (ETFs) in Hong Kong, which feature an “in-kind” subscription and redemption mechanism. This allows investors to directly use BTC and ETH for transactions, simplifying the investment process. “This innovative structure offers a flexible and simple investment process for investors,” Chok noted.

Hong Kong also offers a unique framework through its Trust and Company Service Provider licensing. This allows digital assets to be held in trust structures, a feature not commonly found in other jurisdictions. Chok explained that this regime facilitates crypto custody services and more advanced options like legacy management.

Tokenization of Real-World Assets Gaining Momentum

In addition to its Web3 initiatives, Hong Kong is also advancing in tokenizing real-world assets. The Hong Kong Monetary Authority (HKMA) recently introduced Project Ensemble, a regulatory sandbox aimed at exploring the tokenization of real-world assets and interbank settlements using a wholesale central bank digital currency (wCBDC).

This project builds on previous trials involving tokenized deposit settlements and e-HKD CBDC pilot programs conducted by major banks such as HSBC and Hang Seng Bank. Project Ensemble is expected to explore the technical interoperability of tokenized assets, tokenized deposits, and wCBDC, further cementing Hong Kong’s role in this area of digital finance.