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Hong Kong is moving toward a softer regulatory stance for digital assets after the industry endured a challenging couple of years, with the blanket ban in China on digital assets and the effects of falling economic indices following the pandemic hampering the sector’s growth.

As a measure to restore faith in Hong Kong’s teeming retail traders, administrators have imposed a mandatory licensing program for digital asset service providers scheduled to take effect in 2023. Another plan by the special administrative area is listing large-cap virtual currencies, but it is unclear which tokens will be listed.

“Introducing mandatory licensing in Hong Kong is just one of the important things regulators have to do,” notes Gary Tiu, a director at BC Technology Group. “They can’t forever effectively close the needs of retail investors.”

Insiders claim that aside from being large-cap assets, other requirements will be considered before being listed on retail exchanges. Two key details will be the liquidity and membership of third-party ‘crypto’ indexes.

“Just trading digital assets on its own is not the goal,” said Michel Lee, president of HashKey Group. “The goal is really to grow the ecosystem.”

Growing an ecosystem like Hong Kong to be a digital hub could face pitfalls like its proximity to China. Analysts are unclear whether or not Chinese investors will be allowed to trade the tokens. Another reason for the perceived difficulty is the herculean task of luring firms to return to the jurisdiction after an initial exit.

The tricks up Hong Kong’s sleeves

Despite the factors militating against Hong Kong’s quest to stimulate the entire ecosystem, there are available options for administrators that offer a ray of hope for enthusiasts.

The first is the creation of a legal regime to approve and regulate exchange-traded funds (ETFs). ETFs based on virtual assets have the potential to attract a wide range of investors, including those with no prior knowledge of digital assets, notes Elizabeth Wong, a leading executive of the country’s Securities and Futures Commission.

Establishing an overarching legal framework distinct from China will undoubtedly restore faith in the country’s digital asset industry. At one point, Hong Kong was home to FTX and Binance, but unsavory regulations led the industry giants to look outside for a place to set up their headquarters.

As the giants left, the metrics for the digital assets industry in Hong Kong took a hit. Virtual currency transactions were at their lowest ebb in 2022, while the ranking for adoption fell from 39 to 46.

Watch: The BSV Global Blockchain Convention presentation, Domineum: Better Government & Enterprise Applications with BSV

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