​China’s comeback. What could launch cryptocurrencies to new heights

The former head of the BitMEX crypto exchange Arthur Hayes published an essay called Comeback, in which he argues that Hong Kong could become a global hub for cryptocurrency development. Hayes believes that the legalization of digital assets in the region will become a new trigger for the growth of the crypto market.

Hong Kong intends to change its approach to crypto regulation so that it is different from a complete ban on cryptocurrencies in mainland China. According to Elizabeth Wong, head of the fintech unit at the Securities and Futures Commission (SFC), the Hong Kong government is considering introducing its own bill to regulate cryptocurrencies without China’s participation.

One of the SFC’s initiatives was to allow retail investors to “directly invest into virtual assets.” The commission will allow shares of certain cryptocurrency exchange-traded funds (ETFs) to be traded, and will also begin public consultations on trading in digital assets for individuals.

China’s comeback

Hayes believes that Hong Kong can mediate between China and the rest of the world in the adoption of cryptocurrencies. He writes in the essay that the history of cryptocurrency markets is centered in Greater China (includes Mainland China, Hong Kong, Taiwan, and Macau). For example, margin trading and perpetual swaps were launched by Hong Kong’s Bitfinex and BitMEX exchanges. Binance, the largest cryptocurrency exchange by trading volume, is also based in Greater China.

Cryptocurrency billionaire Justin Sun also expects the easing of bans on cryptocurrencies in China. Speaking to Bloomberg TV reporters, he says that the state “is undergoing big changes” that will affect the economic course and many industries, among them cryptocurrencies and blockchain. Sun recently joined the board of Huobi, which a few years ago was one of the top three exchanges in China in terms of trading volumes. If there is indeed a change in rhetoric from the government, he admits the crypto exchange will return to China.

“I don’t think cryptocurrencies will get the green light in Mainland China in the next decade. The Chinese authorities are not ready to give up strict control over the cross-border movement of capital, which is facilitated by cryptocurrencies, as the asset itself exists outside national borders,” argues Nikita Vassev, founder of TerraCrypto.

In the coming years, China has a difficult economic situation on its agenda, falling foreign investment, a tougher trade confrontation with the United States, problems with microchips and logistics, and possible geopolitical conflicts with Taiwan and within the country. Under such conditions, the party absolutely will not agree to give more freedom to the Chinese, who are known for their love of all kinds of risky investments, the expert believes.

“The year 2022 has taught us one main principle: anything is possible. Of course, it cannot be ruled out that China will reconsider its decision regarding cryptocurrencies. But if we look at the bare facts, so far nothing points to this,” commented Nikita Zuborev, senior analyst of Bestchange.ru aggregator, adding that cryptocurrencies are especially inconvenient for states with totalitarian policies, and not only for them. By losing access to control over issuing and censorship of transactions, the government of any country loses its leverage, the expert notes.

China initially banned cryptocurrencies for two main reasons. The first is the lack of control over cash flows, and the second is the serious damage to the environment and the repeated creation of power shortages in some provinces due to the uncontrolled phenomenon of mining in the country.

China, when and if it becomes profitable, may follow the Russian scenario and allow cryptocurrencies for foreign economic activity, while leaving any operations with cryptocurrencies banned within the country. The integration of cryptocurrencies into the Chinese economy looks extremely unlikely today, Zuborev believes.

Legalization in Hong Kong

In his essay, Hayes writes that the market is seeing a change in its approach to cryptocurrencies. He emphasizes that Hong Kong intends to legalize cryptocurrencies, non-fungible tokens (NFTs), and metaverses. Such a move could encourage capital inflows to the region from investors from China. This, in turn, could lead to a new bull cycle in the crypto market.

Hong Kong is more dependent on Mainland Chine’s politics than it would like to be, Zuborev notes. In his view, Hong Kong could potentially be seen as the only exception that would exist in China to serve as a kind of gateway between the outside world with their cryptocurrency investments and the country’s closed domestic economy.

“So we can partly agree with Hayes, but I wouldn’t give away wishful thinking. The full legalization of cryptocurrencies across the country definitely does not fit into the existing party policy,” Zuborev says. According to the analyst’s observations, even if cryptocurrencies are successful in Hong Kong, they should not be seen as the “first step” to the return of the legal status of cryptocurrencies in the country.

Beijing has always used Hong Kong “as a certain island of freedom” within China, explains Vassev. “Beijing has failed to successfully ban cryptocurrencies, which means it is easier to channel the pull for free enterprise and make it manageable. There is Hong Kong for that,” explains the head of TerraCrypto.

According to Vassev, Hong Kong’s policy on cryptocurrencies is unlikely to be a precursor to a new bull cycle: “Now the main force in the crypto mar