Hong Kong’s Bold Move to Become Asia’s Crypto Capital

TLDR

• Hong Kong plans to extend tax breaks to include crypto and digital asset investments by end of 2024
• New Virtual Asset Index Series launching November 15, 2024 for Bitcoin and Ether benchmarking
• Tax incentives targeted at family offices and private funds managing wealthy clients’ crypto investments
• Plans to regulate stablecoin issuers and require physical presence in Hong Kong
• Government developing local AI solutions due to limited access to US and Chinese AI services

Hong Kong is taking steps to strengthen its position in the digital asset space by introducing tax breaks for crypto investments and developing new regulatory frameworks.

The announcement, made by Secretary for Financial Services and the Treasury Christopher Hui, outlines plans to extend existing tax incentives to include digital assets by the end of 2024.

The proposed legislation aims to reduce tax burdens for Hong Kong citizens who own cryptocurrency investments.

Currently, privately offered funds and family investment vehicles enjoy certain tax benefits, including a profits tax exemption at 16.5% and zero taxation on carried interest for private equity managers.

In a parallel development, the Hong Kong Exchanges and Clearing Limited (HKEX) announced the launch of a Virtual Asset Index Series, scheduled for November 15, 2024.

This new index will provide benchmark pricing for Bitcoin and Ether specifically tailored to Asia-Pacific time zones.

The Securities and Futures Commission (SFC) is working to finalize a list of crypto exchanges that will receive full licenses by year-end.

Eric Yip, executive director for intermediaries at the SFC, revealed plans to establish a consultation panel by early 2025 to maintain oversight of licensed exchanges.

The regulatory framework extends beyond trading platforms. Hong Kong authorities are developing comprehensive guidelines for crypto-focused over-the-counter trading desks and custodians, with implementation expected in the coming year.

For stablecoin issuers, new requirements are being introduced. Foreign fiat-referenced stablecoin providers will need to establish physical operations in Hong Kong and maintain reserves in local banks.

The framework specifically prohibits these issuers from offering interest payments to holders.

The city’s approach to artificial intelligence in finance is also evolving. The government has authorized regulatory agencies to begin developing AI-related policies, anticipating increased adoption of AI technology in financial institutions.

Hong Kong faces unique challenges in accessing AI services due to technological tensions between the United States and China.

Most popular AI platforms, including OpenAI’s ChatGPT and Google’s Gemini, are difficult to access in the region. Similarly, Chinese AI services from companies like Baidu and ByteDance have limited availability.

To address this gap, local institutions are developing their own solutions. The Hong Kong University of Science and Technology is creating InvestLM, a large language model designed specifically for local market regulations and financial services.

The tax incentive program specifically targets sophisticated investors, including family offices and private funds managing wealth for high-net-worth clients. This approach aligns with Hong Kong’s broader strategy to attract professional investment firms to its digital asset ecosystem.

The Virtual Asset Trading Platform regime, implemented in June 2023, continues to evolve as part of Hong Kong’s regulatory framework. This system aims to enhance investor protections while maintaining compliance standards for digital asset platforms.

HKEX CEO Bonnie Y. Chan emphasized the importance of transparent and reliable real-time benchmarks in supporting informed investment decisions.

These tools are expected to contribute to the development of the virtual asset ecosystem.

Christopher Hui highlighted the growing interest in government incentives for the blockchain sector, particularly in financial applications. The administration is focused on creating what Hui describes as the “right conducive environment” for blockchain technology.

The regulatory timeline includes the introduction of stablecoin policy by the end of 2024, followed by custodian regulations and consultation on over-the-counter trading in 2025.

These measures are part of Hong Kong’s strategic plan to expand market growth through broader service regulation.