How Asian Regulation Will Affect the Crypto Market

Today we’re going to let you in on a secret. If you want to be able to predict the future of crypto and get good at second-guessing the market, the answer doesn’t lie in the past. Not only are the crypto markets notoriously volatile, but they are also constantly being affected by growth in parallel markets or by the introduction of new technology and ideas. For that reason, the most effective crypto investors are the ones who keep up to date with all the latest tech news and follow developments around the world for clues about where the market is going.

Case in point, some of the regulatory developments in process in Asia right now promise to have a major effect on the crypto market worldwide.

The Asian Angle

While the attention of political analysts is fixed on the delicate diplomatic negotiations taking place amidst currently escalating tensions between China and the US, another conflict is developing within the financial regulatory space. And although this current dispute is confined to a specific region, it is worth remembering that nothing remains local for long in the world of international markets. The potential implications of this disagreement extend far beyond the realm of cryptocurrency trading… and could potentially significantly impact economic power dynamics.

Earlier this week, Hong Kong’s Securities and Futures Commission (SFC) released a draft of its proposed crypto regulation, scheduled to take effect on 1 June. The proposed regulation includes licensing crypto-asset service platforms, which were initially intended for accredited investors only. However, the SFC is now seeking feedback on whether retail investors should also be allowed to participate, as well as concerning the types of safeguards that should be put in place. The approved assets list is also open for debate and likely will initially consist of a small selection of highly liquid tokens.

This move appears to be another instance of a region ahead of the US regarding regulatory clarity and openness to engaging with the public. But upon closer inspection, it represents more than that. It’s also a reflection of the East-West strategic divide, the power of retail investors, and the significance of tracking the movement of funds.

The Status of Crypto in Hong Kong

Hong Kong was not particularly receptive to crypto in the recent past, but it was not openly hostile either. It viewed the industry as relatively insignificant (certainly, compared to China’s increasing hostility to crypto). In 2020, Hong Kong unveiled plans to establish a new licensing system to directly regulate all crypto platforms and limit their access to accredited investors. This current initiative appears to clarify those commitments and expand their scope.

The efforts of Hong Kong in the crypto industry are not limited to licensing alone. The government has allocated HK$50 million (approximately $6.4 million) for developing crypto assets and plans to conduct educational programs for individuals and businesses. Additionally, a task force composed of representatives from the policy and industry sectors has been launched to explore crypto asset integration. This all suggests a more comprehensive and far-reaching approach than simply regulating crypto service providers.

The move towards crypto-friendly regulations is not only about the oversight of crypto service providers though… it is also about laying the groundwork for economic growth in the region. Hong Kong’s economy heavily relies on financial services and tourism from the mainland, both of which suffered significant setbacks due to the COVID-19 lockdowns. With the region reporting its fourth consecutive quarterly GDP contraction, the technology executive and blockchain guru John S. Lee has made it a priority to attract foreign talent. However, the crypto trading and mining ban imposed by China in 2021 caused most crypto firms in Hong Kong to leave, due to the uncertainty these moves cast over their futures. Nonetheless, several have recently announced their intention to return to Hong Kong again.

This issue affects more than just Hong Kong though. It is closely linked to China, and both regions function under the constitutional principle of “one country, two systems” – which separates Hong Kong’s economic legislation from that of its much larger neighbour. However, events that occurred before and during the recent protests made it clear to the world that China holds the reins, and that nothing in Hong Kong can occur without China’s permission.

Where it gets really interesting though, is when we find that China so far seems to approve of what Hong Kong is doing in relation to crypto.

The Status of Crypto in China

Last week, Bloomberg disclosed that Chinese officials had attended crypto events in Hong Kong, making no effort to conceal their presence. In a public speech in January, Huang Yiping, a former member of China’s central bank monetary policy committee, suggested that the country should reconsider its crypto ban. Although he was not speaking on behalf of the central bank, we have to assume that his speech was made with official approval.

Although this offers no guarantee that mainland China will loosen its restrictions on crypto markets in the near future, it is nevertheless possible that China is carefully monitoring Hong Kong’s actions; as it considers easing its position and ultimately endorsing the incorporation of worldwide crypto assets into its economy.

The significance of this lies in the sheer size of China’s potential participant pool, which is nothing short of enormous. China boasts 212 million retail investors, a figure that dwarfs virtually any other market. For comparison, the population of the US is approximately 330 million. While many of these investors withdrew from the stock market during the uncertain times of the pandemic lockdowns, some of the pent-up savings could be seeking high returns with the improving economic outlook.

Moreover, Chinese retail investors have a higher tolerance for risk compared to their American counterparts. Generally, they favour pursuing trends for high gains, which partly explains their earlier interest in crypto markets, and why the risk of a crash escalated to a point where the government had to restrict access. Despite the crackdown, crypto activity has not been entirely eradicated. As per the filings, around 8% of FTX’s creditors are based in mainland China, and according to the latest study on Bitcoin mining by Cambridge, Chinese miners could account for roughly 20% of the global hashrate.

But keep this in mind too: China is among the few global regions that are currently implementing monetary easing policies. In recent weeks, the central bank has increased liquidity injections while maintaining the current monetary policy rate, although experts anticipate further rate cuts in the second quarter. The quantity of new loans provided by Chinese banks rose by over three times between December and January. We need not go too far back in time to recall the effect that monetary easing can have on risk assets.

Shoring Up Your Investments

While on that note, it is worth remembering here that not even the sturdiest of crypto assets are immune from the ebb and flow of global markets. Crypto investments are a risky prospect by their very nature, but therein also lies the potential for reaping large rewards. The best advice you can take as you approach the crypto market is to never invest a sum larger than you would potentially be prepared to lose.

There is also a lot you can do to protect yourself against other, more nefarious risks – don’t be fooled, there are plenty of bad actors in this industry, unfortunately. However, by making careful and wise choices when it comes to selecting your secure crypto wallet, and by carefully researching and vetting the crypto exchanges you use to buy and sell your tokens, you can effectively avoid such pitfalls.

Whilst finding the right crypto platform is often easier said than done, there are said to be some platforms which claim to do all of the work for you. Take the expert-recommend, for example, which uses a unique system to pair its users with a perfectly-suited broker whilst helping them sidestep scam platforms as well as offering a range of useful trading tools, too.

Comparing Approaches to Crypto in the US Versus China

China’s latest rounds of monetary easing are significant to note for a variety of reasons – including geopolitical considerations. China has long sought to reduce the dollar’s global dominance without causing harm to the currency. Chinese officials recognise that US capital markets play a critical role in global trade and have been working to encourage more activity in their own markets. To achieve this, they have taken steps such as increasing access to foreign investors, simplifying onshore listing requirements and promoting trade conducted exclusively (or primarily) in the Chinese yuan (RMB).

Enabling the opening of crypto markets may result in increased outflows from the yuan, which Chinese authorities would likely want to prevent. However, if crypto assets and their transformative potential are crucial to tomorrow’s financial markets, China would certainly want to have a say. Additionally, China is likely monitoring the growing animosity towards crypto from Washington. That is to say, if the US considers crypto markets to be a danger, then from the Chinese perspective this could be a threat worth examining.

The differing strategic approaches of the two economic superpowers are reflected in this situation. Consider this analogy: the more popular board game in the US is chess, in which victory is achieved by taking out the opponent’s leader; Go is more popular in China, and here the goal is to conquer and maintain territory. From China’s perspective, crypto assets may be viewed as a means of expanding its territorial influence in the global financial markets. Rather than seeing crypto as a threat to be diminished, it could be considered a strategic cornerstone of a new world order or a chance to draw in international capital, talent, and reputation.

Throughout the year, analysts have mainly attributed the performance of crypto markets to macro factors, along with evolving use cases and technical speculation. However, a more significant driver could be emerging in the geopolitical landscape of the East.

The Future of Crypto

All of this goes to show that the future of crypto is not simply going to be an extension of the patterns of the past; rather, it will be formed as the results of complicated economic and geopolitical activities across a global playing field. No one can predict the future – but if you want to have a reasonable chance of forecasting growth in the crypto industry, then you shouldn’t just be watching your own backyard. Each of the world’s largest economies has its own relationship with crypto, and new regulation is being rolled out every year, which will play a role in directing the future evolution of the industry.

So, for the serious crypto investor, that means it’ll pay dividends to keep an eye on the situation in China, Hong Kong, and beyond.

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