Here we talk about the crypto environment and status of the US, China and Hong Kong.

Crypto is buzzing around the globe, and so are the laws that govern them — they’re just as diverse and dynamic. Some countries welcome cryptos with open arms, from preliminary drafts to full-blown regulations. In contrast, others are a bit more skeptical. And the rules can change depending on what aspect of crypto we’re talking about. So, in this article, we will zoom in on the latest policy updates from three major players — the US, China, and Hong Kong. We’ll chat about how these changes might affect folks like you and me, whether we’re just using crypto or investing in it. Sounds good? Let’s dive in.

The Crypto Landscape

Cryptocurrency is showing resilience on a global scale. Still, it isn’t advancements in blockchain technology or groundbreaking features driving this recovery. Rather, it’s regulation that has taken center stage. The progression of cryptocurrency is no longer solely a technological journey but a regulatory one. Beginning in 2023, we’ve seen a surge of regulatory evolutions globally, with notable changes in jurisdictions such as the E.U., U.K., Dubai, and Singapore. Cameron Winklevoss, the co-founder of the Gemini exchange, even suggested that the “next crypto bull market will come from the East.” In this article, we will concentrate on the regulatory landscapes and their implications on the markets in the U.S., China, and Hong Kong. We’ll look into the established power of the West with the changing policies in China, particularly Hong Kong, to analyze if these Eastern territories could be the catalyst for the next bullish momentum in cryptocurrency.

U.S. Crypto Regulation and Market Impact

Currently, no crypt-specific regulations are implemented in the U.S. On May 10, 2023, a hearing titled “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Assets Markets” was held in Washington, D.C. The hearing showed the latest regulatory progress and struggles in the United States, and here I am going to summarize some of the key points that you might be interested in.

1. Lost in the Leading Position of Crypto

In our first examination, we find ourselves focusing on the U.S., the birthplace of blockchain and cryptocurrency. Despite leading the pack with the highest number of crypto projects financed globally, there are growing concerns that the U.S. might be losing its pioneering position in this domain compared to emerging nations. Many countries have already outpaced the U.S. when it comes to crypto regulations. Significant players like the U.K. and E.U. have not only passed specific rules but have also commenced their implementation. This highlights an impending need for the U.S. to establish its regulatory framework promptly. Otherwise, there’s a risk that crypto businesses and projects might flock to jurisdictions that are already geared up for their arrival.

2. Debates on Commodities and Securities, CTFC vs. SEC

In the U.S., regulatory authority over cryptocurrencies hinges upon whether they are classified as commodities or securities. If deemed commodities, they fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC); if considered securities, the Securities and Exchange Commission (SEC) assumes regulatory control.

A noteworthy dichotomy arises here, largely personified by the contrasting views of SEC Chair Gary Gensler and various current and former CFTC officials. Gensler claims that Bitcoin is a commodity, with all other cryptocurrencies, including stablecoins, qualifying as securities. In contrast, many CFTC officials see both Ethereum and stablecoins as commodities.

Some suggest that a cryptocurrency’s degree of decentralization is the determining factor. Former SEC Director Bill Hinman once stated that Ethereum could not be classified as a security given its sufficient decentralization. However, this then prompts the question of how one accurately gauges a cryptocurrency’s level of decentralization, not to mention a feasible process for coins and tokens to become sufficiently decentralized — and thus not considered securities.

Amidst this complex debate, a power struggle between the CFTC and SEC over which body should hold the reins of cryptocurrency regulation in the U.S. The crypto industry leans towards placing the CFTC in charge, mainly due to its principle-based approach to regulation, which industry stakeholders perceive as more manageable. The SEC, as a rule-based regulator, has been critiqued for its lack of clear guidance, rendering compliance a seemingly impossible task.

Cases in point illustrate these challenges. For one, Coinbase has sought court intervention to elicit a response from the SEC to its rulemaking petition, which has remained pending since July. Through this legal action, Coinbase aims to force the SEC’s hand in establishing much-needed regulatory clarity for the crypto industry. Similarly, the SEC is currently pursuing a lawsuit against Binance, the largest cryptocurrency exchange globally, accusing it of securities violations. These examples underscore the growing urgency for precise, effective, and fair regulatory measures in the fast-evolving world of cryptocurrency.

3. Increasing Pro-crypto Politicians

Increasingly, politicians across party lines in the United States are beginning to appreciate the significance of cryptocurrency regulations, recognizing that being seen as crypto-friendly could enhance their political prospects. Indeed, despite the U.S. being a principal driver of the 2021 cryptocurrency bull run, it is at a losing pace. As such, those constituents who are active retail users, investors, or simply attuned to future opportunities may well favor candidates who demonstrate a proactive stance on cryptocurrency.

Those politicians who take the time to engage with and discuss cryptocurrency matters generally tend to be supportive of the technology. It’s encouraging to witness the ranks of crypto-positive politicians swelling. Yet, it must be acknowledged that cryptocurrency remains a peripheral issue for a significant portion of its constituents. However, this apathy may shift as the market begins its upward trajectory again. America grapples with the Fear of Missing Out (FOMO) on the cryptocurrency wave.

4. Slow Progress on Regulations

While conversations around cryptocurrency regulations in the U.S. are gaining traction, any concrete policy implementation may not occur until the post-2024 Presidential Elections. However, preliminary drafts of these proposed regulations could be available by year-end, perhaps even nearing their final form.

5. Possible Futures

As we cast our gaze towards the future, it seems unlikely that the United States will spearhead the next crypto bull run, and we anticipate their regulatory response to trail behind other jurisdictions. The emergence of stablecoins, in particular, poses a substantial risk to the standing of the U.S. dollar as the global reserve currency, hence the noise for strict industry regulation. However, with upcoming elections on the horizon, introducing any fresh crypto-related regulations seems improbable as they could be used to sway voters.

In terms of regulation, I am in favor of the Commodity Futures Trading Commission (CFTC) taking the reins, primarily because their approach to implementation is more straightforward and less hostile towards crypto compared to the Securities and Exchange Commission (SEC), which to date, has not lost a lawsuit against any crypto companies or projects. Here’s hoping Coinbase’s petition accelerates the pace of regulation.

China’s Crypto Regulation and Market Impact

China once had the highest percentage of Bitcoin mining computer power in the world, one of the earliest countries entering the mining era. Currently, China is banning crypto mining, trading, and investment. However, there might be a subtle twist recently regarding the H.K. regulations. And here, let me bring up some background and updates on China’s crypto regulation and market impact.

1. Multi Bans in the Last 10 Years

China’s complex relationship with cryptocurrencies can be traced back to 2013 when Bitcoin mining began to surge within its borders. The People’s Bank of China (PBC) issued new regulations preventing Chinese banks from transacting or holding virtual currencies like Bitcoin. While this first ban didn’t outlaw Chinese citizens from buying, storing, or transferring crypto, it certainly complicated their ability to access cryptocurrencies via exchanges such as Bitcoin China, which had to stop accepting yuan deposits in response to the PBC’s rules.

Fast forward to the 2017 crypto bull market, Chinese authorities tightened the loop around crypto trading and paid particular attention to Initial Coin Offerings (ICOs) facilitated by smart contract blockchains like Ethereum (ETH). The speculative frenzy of the bull market resulted in a drastic increase in ICO trading. Still, a lack of regulation in the crypto space led to many of these ICOs becoming scams.

The most resolute crackdown arrived during the 2021 bull run when Bitcoin traded around $55,000 per coin. China’s State Council passed a full-scale ban on crypto mining, which triggered a precipitous drop in the Bitcoin network’s hash rate by 50%, and the price of Bitcoin tumbled to about $30,000 in the following months. Alongside the Bitcoin mining ban, Chinese regulatory bodies prohibited all crypto trading and transactions. Presently, employees of Chinese tech firms associated with crypto could face imprisonment. It is also unlawful for residents to transfer crypto and for businesses and banks to accept coins like Bitcoin and Ethereum.

2. Twists in Recent Practices

The Chinese government’s intriguing endorsement of Hong Kong’s crypto initiatives has raised a few eyebrows. Despite the mainland’s strict laws against providing banking services to crypto firms, reports suggest that Chinese banks are eager to serve crypto-oriented companies in Hong Kong.

Hong Kong’s banking institutions are also breaking new ground by offering crypto-to-fiat conversion services to their client. This development starkly contrasts mainland China’s stringent policies, which heavily restrict crypto transactions and trading. However, it’s noteworthy that Chinese courts confirm that holding cryptocurrencies is entirely legal, despite other constraints. This curious dichotomy reveals the complexity of the crypto landscape within China and its Special Administrative Region, Hong Kong.

3. CBDCs and Possible Futures

China uses Hong Kong as a testing ground for its inevitable crypto adoption. Chinese officials want to see if it’s possible to control crypto transactions by tracking them and regulating the on and off-ramps for Fiat. Their ultimate goal? China wants to maximize the economic growth it would get from crypto adoption while minimizing the Financial Freedom of its citizens. What is funny is this is what almost every other country is doing. They are all terrified of losing control over their National Currencies. This is why nearly every nation is in the process of rolling out a Central Bank Digital Currency, CBDC.

CBDCs allow central banks and governments to gain control over every transaction within the economy. Unsurprisingly, China is a forerunner in this domain, actively pursuing its own CBDC. However, the adoption of CBDCs has been slow, even in China. This is because the average citizen doesn’t want to use a dystopian digital currency issued by their government.

It seems a matter of time before China broadens crypto access to its people. Such a move would create a significant influx of new investors and potentially catapult the value of major cryptocurrencies to unprecedented levels, inciting global interest. Intriguingly, China, where the previous crypto bull run ended, might be the spark to ignite the next.

Hong Kong’s Crypto Regulation and Market Impact

“Hong Kong could be key for China’s crypto comeback,” said Arthur Hayes, co-founder and CEO of BitMEX. As Hong Kong is part of China, this highlights the importance of Hong Kong crypto adoption because it foreshadows China doing the same.

1. Regulations and Bans in Recent Years

Hong Kong was initially seen as a safe haven for Chinese crypto companies and projects, but this changed after the not-so-subtle takeover of the administrative state following mass protests in 2019 and 2020. In late 2020, Hong Kong banned retail crypto trading and required crypto exchanges to be licensed in a crackdown on fraud and money laundering. Nevertheless, institutional crypto trading and investment are still allowed.

In late 2022, the narrative shifted again. Hong Kong officials expressed an interest in integrating CBDCs into DeFi, contemplating the creation of a CBDC-pegged stablecoin. At the end of 2022, H.K. officials announced they were considering legalizing retail crypto trading and investing. H.K.’s intentions to legalize retail crypto trading in the city-state could foreshadow similar laws passed in mainland China. After the announcement, H.K. committed to attracting over 1000 crypto companies and projects to its jurisdiction over the next three years. Complete 180 in attitude.

This year, H.K. officials further detailed their plans to limit retail crypto investment to the most liquid and high-market-cap cryptocurrencies. This suggests that cryptos like BTC and ETH could be the biggest beneficiaries when retail crypto trading and investing becomes legal this summer.

Under the new regulation, all crypto exchanges in H.K. will need to register with the Security and Futures Commission (SFC). Application for registration opens on June 1.

2. Only Trading and Investing

Despite regulating cryptocurrencies to prepare for allowing crypto trading and investment, H.K. officials appear to be averse to everything except crypto trading and investing. Regulator says Defi projects could face regulatory requirements, meaning being restricted too. And financial privacy may not find a welcoming environment either.

NFTs, too, are under scrutiny. Officials indicate that these unique digital assets might need to be encased within additional regulatory frameworks. This suggests that the jurisdiction may not be as open to metaverse and NFT niches as the UAE and Saudi Arabia. One potential explanation for this caution could be China’s stringent control over social media and a wish to maintain that control.

In line with these limitations, at least initially, non-CBDC stablecoins will also be off the table. However, the Securities and Futures Commission (SFC) hints at a possible change in stance once stablecoin regulations are implemented. This measured approach illustrates Hong Kong’s careful navigation in the cryptoverse, keeping the reins firmly in hand.

3. Intentions and Possible Futures

As mentioned, Hong Kong is the trial point of China’s upcoming crypto adoptions. Unsurprisingly, trading, investing, and CBDCs are the only two encouraged areas. The former is designed to entice commercial opportunities and the monetary influx into both Hong Kong and China, while the latter seeks to enable China to close the gap or potentially spearhead CBDC evolution globally.

For consumers like us, the formalized and structured gateway into the world of cryptocurrencies is undoubtedly a welcome development. However, full control of transactions and limited financial privacy would be against the initial philosophy of blockchain and cryptocurrencies. Still, at least retail adoption is kick-started.

Bearish Scenarios for the Future of Crypto

After briefly introducing the regulation background and key points of the 3 jurisdictions’ crypto status, here are some bearish scenarios for the global crypto future.

1. FATF, Financial Action Task Force

The Financial Action Task Force (FATF) is an international organization willing to kill crypto with its so-called recommendations. Any country that refuses to comply with the FATF’s recommendations will be put on the grey list and, eventually, on the blacklist. Once greylisted, a country’s financial institutions may be hampered in their interactions with the broader global financial system, particularly the Western segment.

The UAE was on the greylist. Despite a progressive crypto regulatory environment, its greylisting status complicates local crypto ventures’ engagement with the worldwide financial system. Pakistan’s Finance Minister recently said that permanently banning crypto was a condition for getting off the FATF’s greylist. This shows the stand that FATF is holding.

It’s also worth noting the FATF’s regulatory leanings closely mirror those of the United States. Given the U.S. dollar’s status as the world’s predominant reserve currency, strict crypto regulation — or banning — could mitigate potential risks to this status. From this perspective, the ideal scenario is the total control of crypto, perhaps via introducing a U.S. dollar CBDC.

With FATF’s huge influence, as long as the country wants to avoid falling into the greylist, the crypto adoption on regulations might be slow. This might also how the U.S. try to slow down global adoptions and make themselves be able to catch up.

2. CBDC Arm Race

In the grand scheme of blockchain and crypto, the domains that pique the primary interest of nations and jurisdictions are crypto trading, investment, and Central Bank Digital Currencies (CBDCs). The rationale behind the first two is to drive economic expansion within their respective borders. The sooner these countries can formulate and enforce retail investment regulations, the more potential growth opportunities emerge. This explains the global spotlight on Hong Kong’s upcoming regulations, which could signal a gateway to billions of untapped retail users in mainland China.

And for CBDC, this weapon can counterbalance potential drawbacks of cryptocurrency adoption, namely the loss of monetary control and currency dominance. With CBDC, the government can enjoy the advantage of technological advancement and more direct control of currency compared to the current system, with extensive transactional records and history and the ability to impose instant restrictions at the code level, surpassing procedural limitations.

Other niches like NFTs, metaverse, and Defi might face more stringent regulations or restrictions. And the more people are forced or tempted to use CBDCs, cryptocurrencies will likely be a new tool for governors and powers to control their citizens, leading to a dystopian future.

3. Bi-Polar Reserve Currencies Adoptions

Countries researching and examining the creation of their CBDCs are simultaneously aiming to reduce their dependence on the U.S. dollar. The traditionally favored reserve currency, the U.S. dollar, has been challenged recently due to the current global economic environment and international relationships between countries.

A rising number of countries are seeking to break free from the U.S. dollar’s hold, exploring alternatives such as the Chinese Yuan and creating their own CBDCs. We are witnessing the formation of alliances amongst anti-U.S. dollar nations, who have already begun using the Yuan for settling international deals. The creation of their own CBDCs further underlines their intent to shrug off U.S. dollar supremacy.

As more countries create and use their CBDCs, international relations will become more bipolar, where one side is led by the U.S., holding an anti or crypto-regulated solid approach. On the other side, countries like China, UAE, and Saudi Arabia, are leading a more open crypto approach.

Bullish Scenarios for the Future of Crypto

Even with the challenging situation and barriers towards adoption, there are still some bullish scenarios from the regulatory status.

1. Potential Money Inflow to BTC and big Alt Coins

As mentioned at the start of the article, crypto adoption isn’t technological anymore and is purely regulatory. Although we may lose freedom and financial privacy due to regulations, it provides a safer gateway for potential retail users to enter crypto. The governments of these active jurisdictions have already realized the influence and changes brought by crypto, and it would just be a matter of time before ordinary people find it out and get into it. Under regulations, retail users are mostly allowed to invest in large-cap cryptocurrencies, which is enough to kick-start a new crypto bull market.

2. Crypto Bull Market Will Come from the East and Pro-crypto Competition

By the time the U.S. gets its crypto regulations in order, most of the industry will have moved to Asia. Though the U.K. and E.U. are also paving their pro-crypto regulatory paths, the Middle East’s UAE and Saudi Arabia, coupled with Singapore, China, and Hong Kong, are showing more proactive implementations and considerable potential in terms of user bases. The crypto bull market will likely be initiated from the East.

Driven by the desire to lure crypto enterprises, projects, and investors, nations may find themselves in a competitive scramble to create the most pro-crypto regulatory frameworks. This could result in jurisdictions like Hong Kong easing their restriction on stablecoins, NFT, metaverse, and Defi-related to stay ahead of the race. Thus, there might be restrictions at the beginning of the regulations. But as long as the country wants to keep up with the competition, we will see the rules looser and more favorable to companies and users.

3. Bitcoin Becoming World Reserve Currency

The development of the country’s own CBDC might be implementing more restrictions on retail users and undermining the whole investment environment. Take Hong Kong as an example. While retailers might allow investing in BTC and ETH, stablecoins like USDT and USDC are not eligible for users. The government might introduce HKD CBDC as the exchange medium, thereby maintaining a higher degree of control and surveillance over transactions. More countries would follow the same, to allow trading and investing, but in the manner of under control. The same control concerns will eventually apply to every fiat currency because every fiat currency will eventually become a CBDC.

This sounds sad, but it can also paint a bullish picture of the future of crypto. As every fiat currency turns into CBDC, and with these CBDCs entirely under government control, no single CBDC would be universally trusted or adopted as the reserve currency. Instead, a credibly neutral digital currency free from any entity’s control would become paramount. Fortunately, there are such cryptocurrencies available. This is why a crypto like BTC could become the world’s reserve currency. An environment of extreme control could pave the way to a trustless future.

Final Thoughts

We’ve taken a deep dive into the crypto world, examining three different markets, their rules, and what might happen next. This article is meant to help you understand how these changes can impact the market and your options as a crypto user.

Yes, rules can be tough, but they’re often necessary to protect us. Plus, with clear rules, more people may start using crypto.

Hope you guys enjoyed the information above. If you are interested in learning about other countries’ regulations we didn’t mention, stay tuned for our next updates!

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