In this issue

  1. Hong Kong: Rewriting rules
  2. India: Testing times
  3. China: CBDC surveillance

From the Editor’s Desk

Dear Reader,

Nobody can be in two places at once. That’s an ineluctable truth that seems to have been lost on the organizers of Asia’s two biggest annual fintech events this week.

It may be slightly uncharitable to suggest that the concurrent scheduling of two of the region’s flagship finance conferences is anything other than a matter of unfortunate timing, but for those who would have liked to attend both, the choice between one or the other may feel like a choice they shouldn’t have had to make.

Perhaps the matter is best seen through the prism of the rivalry that has long existed between their host cities — Hong Kong and Singapore — for the status of being the region’s top finance hub. It certainly has the appearance of a smackdown.

The message both cities are sending to the digital asset industry is that their patch is a more promising place to do business than the other one.

Singapore is pushing back against perceptions that its restrictive rules around retail crypto threaten to make it irrelevant in the digital asset space as jurisdictions such as Dubai embrace crypto innovation.

Hong Kong has the more difficult job of restoring its reputation as a finance hub generally, following its crackdowns on free speech and civil liberties that are still seeing journalists and activists jailed, and the imposition of Covid restrictions that isolated the city internationally for more than two years. And that’s before we even consider officials’ misgivings about digital assets, which have prompted high-profile relocations among crypto companies — developments the city’s rulers are now trying to reverse.

It’s said that life is all about choices. But that doesn’t mean that every choice should come at the absolute expense of another. Both Hong Kong and Singapore have promising futures as digital asset hubs — should they choose to embrace the industry, and choose healthy competition that plays to their complementary strengths.

I noted earlier that nobody can be in two places at once. To which I’ll add: let alone three. As I write from FIL Lisbon and the Web Summit, held in the Portuguese capital this week amid a busy conference season around the globe, all the signs point to a strong sense of engagement within the digital asset industry. So when, we might reasonably ask, will we see a similar level of engagement among regulators? 

Until the next time,

Angie Lau,
Founder and Editor-in-Chief

1. Reversal of fortune

IMG 9532
Image: Algernon Yau speaking at Hong Kong Fintech Week 2022

By the numbers: Hong Kong FinTech Week — over 5,000% increase in Google search volume.

Hong Kong is trying to restore its luster and reclaim its position as a global crypto hub after losing business to rival financial centers such as Singapore and Dubai. The move follows a review of crypto-unfriendly policies that its government introduced earlier. 

  • “The digital transformation of our financial services sector is a central priority,” Financial Secretary Paul Chan said in a pre-recorded video on the first day of the Hong Kong FinTech Week event.
  • According to Chan, Hong Kong may pilot financial applications of Web3 technology, including non-fungible tokens, green bond tokenization and a retail digital Hong Kong dollar.
  • In addition, the Hong Kong Monetary Authority — the territory’s de facto central bank — is establishing what it describes as “a risk-based, proportionate regulatory regime for payment-related stablecoins” and has issued guidelines to banks on cryptocurrency- and decentralized finance (DeFi)-related services, HKMA Chief Executive Eddie Yue said at the event on Monday.
  • Hong Kong’s securities regulator is introducing a framework to regulate digital asset trading platforms. The model will follow the basic principles of “same activity, same risk, same regulation,” Yue said.
  • “If you look at what the crypto hubs will be in the world, I think the Bahamas looks like one of them, Dubai looks like one of them, but if you look at the East, it’s not as obvious,” said Sam Bankman-Fried, CEO of crypto exchange FTX, in a virtual address to event attendees. “It could be Singapore, could be somewhere like Busan in [South] Korea, but I think there is a real chance it ends up being Hong Kong.”
  • Hong Kong was once a popular destination for cryptocurrency companies, but perceived risks and uncertainties stemming from China’s crypto crackdowns prompted crypto firms to seek out friendlier shores elsewhere. Last year, FTX moved its headquarters from Hong Kong to the Bahamas, and relocated from Hong Kong to Singapore.

Forkast.Insights | What does it mean?

Hong Kong wants its crown as Asia’s premier financial hub back, and its government now sees crypto as playing an important role in fulfilling that aim.

Hong Kong’s proposed relaxation of rules on retail crypto trading — a reversal of the territory’s earlier stance — could be a significant step by which the city can support the crypto industry. Its securities regulator is set to conduct a public consultation on how retail investors may be given access to virtual assets under a new licensing regime, according to a policy statement released this week.

KPMG head of financial risk management for China Tom Jenkins said the retail licensing regulations may enhance the commercial viability of Hong Kong as a virtual asset hub.

But if Hong Kong really wants to become a crypto hub, it will have to roll out more comprehensive regulations to oversee the sustainable development of crypto-related activity throughout the value chain, covering such services as issuance, tokenization, trading, settlement, financing, asset management and custody.

It’ll certainly take more effort for Hong Kong to establish a crypto ecosystem than other jurisdictions, as there are many nuances to which the territory’s regulators must pay attention, given the crypto ban in mainland China. Aside from prohibiting retail and institutional crypto trading, China also forbids mainland citizens from working for crypto service providers in other jurisdictions.

So, for instance: Once Hong Kong’s new crypto regulations are in place, will people from mainland China who live in Hong Kong be permitted to work for a Hong Kong crypto firm? Such questions will be numerous and demand much thought as Hong Kong regulators introduce their new crypto rules.

2. New Delhi’s digital rollout

India’s CBDC has taken a major step forward with the start of pilot testing. Image: Arun Sankar/ AFP via Getty images

By the numbers: Digital Rupee pilot — over 5,000% increase in Google search volume.

India’s central bank has started trials of its central bank digital currency (CBDC), the digital rupee, to test secondary market transactions involving government securities. 

  • The Reserve Bank of India (RBI) is currently testing its wholesale CBDC, a type of digital fiat used for interbank settlements and transfers.
  • Nine banks are taking part in the RBI’s experiment: State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC, RBI said in a statement.
  • India also plans to begin retail CBDC trials in selected locations and among defined user groups.
  • The launch of India’s digital rupee trials has boosted the country’s position in what has been dubbed a “CBDC race” as it joins 15 other nations in conducting pilots, according to the Atlantic Council, which is tracking CBDC developments around the world.
  • India is ensuring its digital rupee will enjoy a red-carpet welcome by essentially discouraging future payment competitors and cryptocurrencies with hefty taxes and limiting banks’ ability to provide financial services to crypto firms.
  • By curbing access to crypto payments, India’s near-ubiquitous RBI-backed Unified Payments Interface can continue to serve as the nation’s leading payments processor by integrating with the digital rupee in the future. 

Forkast.Insights | What does it mean?

India has a long history of protectionism. Since its independence, it has resisted opening up its economy to global market forces, choosing instead to incubate industries to the point at which they become internationally competitive. 

Its CBDC approach appears to be following a similar trajectory — but with a twist. New Delhi has been making India increasingly hostile to private businesses trying to build crypto infrastructure, citing destabilizing effects on monetary and fiscal stability

It’s a rationale that is similar to the one behind China’s moves to squash its own crypto industry, and like China, India sees a state digital currency as a way to boost the power of its domestic currency internationally via its use in settlements.

Although India’s CBDC is years behind China’s, New Delhi also shares Beijing’s vision of state-backed digital currencies as geopolitical tools that can be used to bolster the central government and national sovereignty. That is, of course, a far cry from the decentralized, borderless ideals that crypto was founded on.

3. Smart money

A sign for the e-CNY or digital yuan, China’s central bank digital currency. Image: Wiki Commons

Privacy and crime prevention are top priorities for the People’s Bank of China (PBOC) when it comes to the development of the digital yuan, bank Governor Yi Gang said in a speech at Hong Kong Fintech Week. 

  • China’s central bank digital currency (CBDC), officially known as e-CNY, is being developed using a tiered system, according to Yi.
  • In the first tier, the PBOC distributes e-CNY to authorized institutions and processes inter-institutional transaction data. In the second tier, where retail participation occurs, authorized institutions collect users’ personal information that is specifically required for transactions.
  • China’s CBDC has become a growing concern among major economies, as numerous warnings and reports have described the digital yuan as a looming threat to the U.S. dollar’s dominance in the global economy.
  • China’s CBDC is also seen as enhancing China’s future digital influence, as a tool for surveillance and as a way for the country to bypass sanctions.
  • The PBOC said several months ago that complete anonymity had never been a consideration in its development of China’s CBDC.
  • CBDCs — even those that haven’t entered the development stage, such as the digital dollar — have been dogged by privacy and surveillance worries globally.

Forkast.Insights | What does it mean?

When People’s Bank of China Governor Yi Gang spoke at last year’s Hong Kong FinTech Week, he mentioned the central bank’s efforts relating to personal data protection without directly addressing privacy concerns surrounding the digital yuan. 

However, at the same event this year, Yi directly discussed the PBOC’s approach to privacy protection as it relates to e-CNY, indicating that the central bank is well aware of the privacy issue around its new digital currency and is making efforts to ease anxiety over surveillance and control. 

But one thing is certain: China is taking advantage of e-CNY to track illicit transactions. In September, police raided a criminal group that allegedly used the digital yuan in a suspected money laundering scheme involving almost 200 million yuan (US$27.4 million). 

The case demonstrates that Chinese authorities are able to get their hands on e-CNY transaction histories if they so wish, with the “managed anonymity” design of the digital yuan giving authorities power to trace and review financial data. Can e-CNY be said to boast any privacy provisions when it comes to its usage? It seems the Chinese government has a somewhat elastic notion of privacy, just like due process, when it comes to justifications for combating crime.