New York can learn from Hong Kong in regulating crypto.
Web3 companies are leaving New York, fomented by Washington D.C.’s recent combative approach to regulating the industry. The Big Apple’s global relevance in relation to other major financial hubs is diminishing because regulators have spurned the wishes of the city’s leadership – but China and Hong Kong have proven it does not have to be this way.
Over the past 100 days, China and the U.S. have been on divergent paths when it comes to regulation. After an 18-month period of hostility, the former appears to have pivoted, rapidly implementing common-sense regulations in Hong Kong that foster innovation and encourage the sector to grow. This all happened because officials in Beijing listened to and supported Hong Kongers and their leaders, something U.S. securities regulators seem hell-bent on avoiding.
Omer Ozden is chairman of RockTree Capital, a Web3 investment fund from Beijing, and he was previously a U.S. securities attorney practicing in Hong Kong and New York.
New York City Mayor Eric Adams has embraced Web3 from the beginning, running a pro-crypto campaign and even taking his initial paychecks in bitcoin. This democratically elected official has touted the benefits and actively engaged the industry with a blueprint for the economic recovery of the city, but bureaucrats in D.C. disagree.
Currently, a small number of unelected individuals in Washington D.C. are exercising alarming authoritarian power in their seats as regulators, counter to New York’s stated desire to move from antiquated financial systems to digital ones.
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Hong Kong’s example
In the summer of 2021, China’s government aggressively targeted the crypto industry by banning financial institutions and payment companies from providing services related to digital asset transactions, and expelling crypto exchanges with domestic operations. Central authorities in Beijing took a draconian approach to this nascent technology.
Beijing’s restrictive policy, and the Hong Kong securities regulator’s lack of clarity, resulted in the loss of many entrepreneurs, high-skilled jobs, investors (with their billions of dollars of capital), exchanges and countless other active participants of the industry. From China, these people moved to Hong Kong, Singapore, Dubai, Silicon Valley and beyond. Technological innovation and the further development of the country’s capital markets was resolutely stifled. Yet, what transpired afterwards is quite impressive: It appears that Chinese authorities realized the damaging impact of this ruinous direction and decided to dramatically change course in late 2022.
China’s great pivot
This past December, a former monetary policy official from China publicly voiced the view that “banning cryptocurrencies may be practical in the short term but, whether it is sustainable in the long term, deserves in-depth analysis” and stressed the need for developing an appropriate regulatory framework for cryptocurrencies. Those of us in Beijing know that public statements like this are not made without being in alignment with the central government’s thinking.
After watching crypto exchanges, capital, and real-estate tenants leave Hong Kong, the newly appointed executive leader, John Lee, consulted with the Web3 industry and developed a plan to eventually turn Hong Kong into a global cryptocurrency hub. He then worked with Hong Kong’s financial regulators to obtain Beijing’s support for his city’s aspirations. This dialogue quickly led to the approval of a robust regulatory framework for Web3 that provides clarity for broker-dealers, investors and crypto exchanges while also ensuring there are adequate considerations for the participation of retail investors.
Make no mistake, this decision was Beijing’s: a geopolitical move for the nation as much as a supportive response to help stimulate economic recovery for Hong Kong, which has traditionally been the gateway of international finance to mainland China. This new framework, implemented on June 1, also acts as a testing ground for the future development of regulations and innovation for the rest of China’s Web3 industry – and Hong Kong’s recovery has been noticeably fast.
The Big Apple sours
New York has the benefit of Hong Kong’s forewarning. Today, as U.S. regulators take a restrictive approach similar to the one China took two years ago, the Web3 industry Adams seeks to foster – including venture-capital funds and projects – is already leaving Silicon Alley and the rest of the nation. Most alarmingly, Coinbase, which has embraced a pro-regulatory approach, is considering leaving the country due to the current environment in the U.S . The Web3 industry is agile.
Both Hong Kong and New York, as financial industry leaders, are natural locations where the Web3 industry can flourish. Fortunately for Hong Kong, Beijing decided to support financial innovation. Unfortunately for New York and the rest of America, regulators in D.C. have decided to decisively suffocate it.
Both Lee and Adams came to power in 2022. Notwithstanding the latter’s pleadings to state and federal regulators to loosen restrictive measures and bring clarity to the crypto industry, regulators have resolutely rejected the wishes of Adams, his constituents and the 50 million Americans who have used cryptocurrency. And, what’s painfully ironic for those living in “the land of the free” is that currently a very small number of unelected individuals with regulatory mandates have taken extraordinary efforts and utilized significant public resources to suffocate innovation.
100 days of contrast
The SEC’s regulation by enforcement, and the constant, ominous drone of its position that stablecoins are securities have paralyzed innovators, investors and highly skilled workers by hanging a Sword of Damocles above the necks of every participant, ready to drop at the whim of an unelected bureaucrat.
USDC has lost $27 billion in market cap from its peak 12 months ago, or nearly 50%. Since this is a U.S. regulated stablecoin, some see the metric as a measure of market consensus on U.S. regulatory confidence: the crypto industry is leaving fast.
As part of Hong Kong’s steps to bring crypto back, regulators have created a stablecoin issuance playbook , and a Hong Kong Dollar-based stablecoin is apparently on the way. There are ongoing discussions of developing a CNH-based stable coin ; CNH is the overseas version of China’s Renminbi.
In March, U.S. regulators forced Signature Bank to shutter despite being solvent. Ex-Congressman and board member, Barney Frank , publicly voiced that the bank was closed by politically motivated U.S. authorities to send a strong anti-crypto message . Almost immediately after, China’s state-owned banks swiftly seized the opportunity with the international arms of Bank of China and Bank of Communications moving in to swoop up former clients of Silvergate and Signature in the Southeast Asian market. And, the Hong Kong Monetary Authority is officially pressuring major banking institutions in Hong Kong, such as Standard Chartered and HSBC , to accept crypto clients. Meanwhile, as the SEC sues crypto exchanges in the U.S., a Hong Kong politician has been courting them to establish operations in Hong Kong.
In my experience as an investor in Web2 and Web3, and a decades-long practice as a U.S. securities attorney in New York and China at major international law firms, I have seen that the prompt development of permissive, smart laws from legislators is just as critical as the fast development of intelligent code from engineers in order to foster innovation and growth.
Unfortunately, the SEC has framed the overriding regulatory question in America as What is a security? when the smart question for developing smart laws is: How do we foster innovation and economic growth? That is the question Adams has been asking, and the one Lee asked.
Federal legislators and New Yorkers risk suffering the same consequences from this cautionary tale unless they embrace blockchain. This month, representatives in Congress introduced the SEC Stabilization Act to overhaul the SEC and remove Chairman Gary Gensler for a series of outlined abuses of power . If the unelected chair is unilaterally steering the nation in the extreme opposite direction of the desires of the elected mayor in the most populous city in the country, and the tens of millions of U.S. crypto users, then Adams and his constituents should learn from the experience of Hong Kong and take action now.
Because New Yorkers are rapidly losing the two things they love the most – money and freedom.