Time in the Market
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MARTY MCFLY NEEDED: CAN THE U.S. KEEP UP WITH HONG KONG’S CRYPTO REGULATIONS?

Like my unwavering belief that ketchup should always be kept in the fridge and not in any haphazard kitchen cabinet, I am entirely convinced that Hong Kong will succeed in establishing regulations for the crypto industry under China’s watchful gaze before the U.S.

The efforts of regulatory bodies like SEC, CFTC, FinCen, IRS, ESMA, EBA, and FCA highlight the difficulties in developing coherent and reasonable regulations for the global crypto market, as they strive to determine whether crypto should be stored in the fridge or a kitchen cupboard. Nonetheless, Hong Kong has demonstrated a readiness to embrace and execute an operating model, positioning itself as a “Site of Excellence” on the world stage.

While there is a high likelihood that ‘regulation’ could classify a majority of crypto projects as a ‘security,’ the focus remains on Hong Kong and its unfolding master plan. With China’s support, history suggests that the matter will be resolved quickly, and with Hong Kong’s Securities and Futures Commission (SFC) who recently published its upcoming crypto regulations, seeking public input on the licensing of crypto-asset service platforms, including whether retail investors should be allowed to participate and what types of protections should be in place.

This example highlights a jurisdiction ahead of the United States in terms of regulatory clarity and public engagement on the topic, demonstrating the East-West strategy divide, the power of retail, and the importance of monitoring financial flows. Additionally, integrating global crypto assets into the Chinese economy could have a significant impact due to the country’s large potential participant pool of 200 million retail investors.

Moreover, while Hong Kong operates under the principle of ‘one country, two systems,’ events leading up to the recent protests have shown that China holds the reins, and nothing happens in Hong Kong without China’s approval. However, China’s approval of Hong Kong’s regulatory approach could signal a relaxation of its stance and eventual support for global crypto assets in its economy. The potential for Hong Kong to become a leader in the crypto industry, along with its close affiliation with China, makes it a critical jurisdiction to monitor.

To put it another way, if Hong Kong were to signal its approval to China, it could potentially unleash the most significant transfer of wealth in human history, a monumental event that would unfold right before our eyes. Such an occurrence could leave the United States needing a DeLorean and the assistance of the brilliant Marty Mcfly and Dr. Emmett Brown to reverse this significant and historical moment.

The US needs help in keeping up with the global regulatory pace in the crypto industry. The ongoing investigation into FTX, combined with new bills such as the Crypto-Asset Environmental Transparency Act in Congress, which would require disclosing emissions for mining operations that consume over 5 megawatts of power, maybe adding to the struggle.

This proposed act raises questions about its relevance, considering the many other pressing issues. The rise of crypto exchanges not subject to custodial banking laws could also be due to traditional financial institutions’ concerns about competition.

Cryptocurrencies are emerging as a disruptive force in the traditional banking system, offering direct peer-to-peer transactions without intermediaries like banks. The potential for cryptocurrencies to reduce the role and power of conventional banks in the financial system is becoming increasingly apparent as more individuals turn to this new form of currency for their financial needs, hence China throwing their support to Hong Kong for testing.

The strategic and prudent exploration of options by Hong Kong is a noteworthy example of the sensible approach to adopting cryptocurrencies. A key focus in this exploration will be to understand how cryptocurrencies can offer lower transaction fees compared to traditional banking systems. This cost advantage may lead to reduced revenue for banks as consumers opt for cheaper alternatives for their financial transactions. Furthermore, banks derive revenue from various instruments, including overdraft fees, ATM fees, credit card fees, and loan fees, which the growing adoption of cryptocurrencies may impact.

Although the use of cryptocurrencies in China is yet to be tested properly, their potential to disrupt the traditional banking system cannot be overlooked. By providing a more cost-effective and efficient alternative to traditional banking, cryptocurrencies are poised to shift the balance of power in the financial system, and traditional banks may find themselves sidelined if they fail to adapt to this new reality.

Don’t sleep on Hong Kong.

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