HK’s new crypto regime sparks family office interest
Hong Kong's new licencing regime for virtual asset exchanges has the potential to attract more family office and institutional investment interest.
The participation of traditional banks in this market will be crucial, industry players said.
The new licensing regime introduced on June 1 by Hong Kong’s Securities and Futures Commission (SFC) allows retail investors in Hong Kong to trade cryptocurrencies with large market capitalisation and high liquidity, such as bitcoin and ether.
Previously, only professional investors could access licenced exchanges.
The SFC will also implement measures to protect investors, including ensuring thorough onboarding assessments, governance, enhanced token due diligence, and disclosures.
Tuck Meng Yee, chief investment officer of Singapore-based family office JRT Partners, said these developments made Hong Kong and the cryptocurrency space an interesting market to consider.
“It's an emerging market. Just need some certainty when it comes to quality of the counterparties and infrastructure like any new market,” Yee told AsianInvestor.
Echoing Yee, Zann Kwan, chief investment officer and managing partner of Revo Digital Family Office noted it is "crucial" for institutional participants that their counterparties are licenced with robust governance and risk management.
“Hong Kong’s virtual asset exchange licence is a game changer for the ecosystem,” Kwan told AsianInvestor.
“The investors' comfort that comes along with regulatory clarity is where they would see the most value in Hong Kong's virtual asset regime."
Revo is a multifamily office for digital asset investment under the Raffles Family Office.
Many family offices have asssessing the industry and educating themselves on cryptocurrencies and virtual assets.
They see virtual assets as a risk diversifier with relatively higher risk-adjusted returns and are increasing looking to increase allocation, Kwan said.
With retail investors’ participation, the expected increase in volume and the corresponding derivative products will create a more vibrant ecosystem for both institutional and retail participants, she added.
Still, it's very early days and it remains to be seen how much trading actually takes place.
“This is a good first step,” said Ejoe Ye, founder and chief executive officer of Fore Elite Capital Management, a Hong Kong-based virtual asset hedge fund.
“But when it comes to concrete implementation and the actual volume it can bring to the market, we don’t know. It requires time to prove,” he told AsianInvestor.
In Asia, family offices are particularly active, allocating between 1% and 5% of their portfolios to digital assets. This exposure is achieved through direct investments, options and structured products and digital asset funds, according to Matt Long, general manager, Asia Pacific at FalconX, an over the counter (OTC) virtual asset brokerage.
“Our institutional clients are increasingly telling us they are seeking regulatory clarity in order to allocate more capital to digital assets,” he told AsianInvestor. He believes SFC's regulation will result in increased institutional investment into the asset class.
GIC is one of the lead investors backing FalconX in series D funding last year.
BANK PARTICIPATION NEEDED
Hong Kong’s new licensing regime for virtual asset exchange comes at a time when the city aims to become a global Web3 hub and is eager to bring people and fund flows back to the city after the exodus of the past few years.
“If the cryptocurrency markets in Hong Kong can be regulated with bank-backed trading settlement and custody, then people who have left to go to Dubai may be coming back, especially the crypto guys with families who relocated together with them previously,” said JRT Partners’s Yee.
Under the new rules, an exchange needs to have a local banking relationship and maintain sufficiently liquid with cash assets equivalent to at least 12 months of its actual operating expenses.
"Bank has been playing a crucial role in the on and off ramping of fiat in the virtual asset industry," Revo's Kwan said.
The SFC recently approved two licenced exchanges, OSL and HashKey, to expand their services to retail investors on top of previous professional investor-only licences.
HashKey partners with local virtual bank ZA Bank and the Hong Kong arm of China’s state-owned Bank of Communications for trading settlement.
Unlicenced exchanges with existing business in Hong Kong before June 1 need to submit their applications before February 29, 2024, or will need to close down their business in the city.
Many startups have struggled to establish such relationships with traditional banks in Hong Kong, with some turning to Singapore to support their operations, said Dominic James, partner of Sidley Austin’s investment funds practice.
“Successive market crashes and the FTX collapse stoked fears of potential prosecution against Hong Kong banks if platforms are exploited for illicit activities like money laundering," James told AsianInvestor.
The fall of FTX cost Singapore’s Temasek a writedown of $275 million for its investments into the cryptocurrency exchange.
"This mindset prompted the banking regulator to urge banks to adopt a ‘forward-looking’ approach to recognise the legitimate needs of crypto trading firms to open bank accounts in Hong Kong, which was a much-needed catalyst for the industry," he said.
In Hong Kong, some banks have onboarded clients with business in the virtual assets space and have been proactively marketing to virtual assets-related companies, according to Robert Zhan, director of risk consulting, Hong Kong at KPMG China.
"Other banks are more cautious, but are having discussions with potential customers, regulators, and consultants on this topic," Zhan told AsianInvestor.
This article has been updated with additional information on FalconX.