China’s decision to ban cryptocurrency trading in 2019 and mining in 2021 had a major impact on crypto-related activity in East Asia. According to data provided by Chainalysis in 2023, the region now ranks fifth in terms of crypto activity. Between July 2022 and June 2023, East Asia accounted for 8.8% of global crypto activity, which is lower than it was in Q1 of 2020.
“Eastern Asia’s decline in cryptocurrency activity over the last few years has been notable – as recently as 2019, Eastern Asia was one of crypto’s top markets by transaction volume, largely powered by China’s huge trading activity and mining sector,” Chainalysis said. “But while still substantial, crypto activity in the region at large, and China specifically, has declined in the last two years.”
However, this could soon change. Hong Kong is making a push to become a global crypto center, and this “potential tailwind for East Asia” has led to “several crypto initiatives and industry-friendly regulations launched over the past year,” according to Chainalysis.
“The increasingly close relationship between China and Hong Kong leads some to speculate that Hong Kong’s growing status as a crypto hub may signal that the Chinese government is reversing course on digital assets, or at least becoming more open to crypto initiatives,” Chainalysis said.
The region’s active OTC market has also been a contributing factor to the level of activity. Hong Kong’s OTC market is estimated to have received $64.0 billion between July 2022 and June 2023. This is only slightly lower than China’s $86.4 billion received during the same period, despite Hong Kong having a population 0.5% the size of mainland China.
Furthermore, Chainalysis noted that Hong Kong’s share of transaction volume is higher for large institutional transactions of $10 million or more. South Korea, on the other hand, is the least institutional-driven market in the region based on transaction sizes.
Dave Chapman, co-founder of OSL Digital Securities, said that institutional investors in East Asia are becoming more bullish on crypto. “The future of digital assets is no longer questionable; it’s widely acknowledged that digital assets are not going away,” he said. “Whether or not traditional finance is ready to accept digital assets as a new asset class, the reality is that many institutional investors are now keen to explore and develop their own digital asset strategies.”
Merton Lam, CryptoHK founder, echoed Chapman’s experience in the region. “We work with many investment banks, private equity firms, and high-net-worth individuals. For them, cryptocurrency is part of their investment portfolio,” he said. “They mostly want Bitcoin and Ether, though some have shown interest in smaller altcoins recently, which is interesting.”
Retail and institutional investors are both motivated by the high potential returns of crypto. It also allows them to remove a portion of their wealth from the local currency or banking system, especially in countries where there is instability in the economy or strict capital controls.
“It’s much easier for many businesses to, say, pay a supplier via stablecoin transfer than through banks,” Merton said. “It can take as long as three days for a SWIFT transaction to settle, and payments can be especially difficult when dealing with counterparties in developing countries such as in South Asia and Africa.”
The international payment use case of digital assets and central banks digital currencies (CBDC), like the digital Yuan, is also appealing to China as it offers another way to undermine the dominance of the U.S. dollar in international trade, particularly given the power it gives the U.S. to sanction entities around the world.
“Given cryptocurrency’s value as a tool for international trade generally, even apart from CBDCs, it’s possible that goal undergirds any potential openness to blockchain technology we’re seeing from the Chinese government,” Chainalysis said.
However, Dave Chapman believes that this move is “not necessarily indicative of the Chinese government’s stance on crypto.”
“However, we are seeing a number of Chinese state-backed entities indirectly supporting Hong Kong’s web3 ventures, and this could be viewed as an exploratory approach to understanding digital assets without loosening mainland policies,” he said.
Chainalysis believes that “while these developments strengthen Hong Kong’s chances to become a global leader in the regulated digital asset market, it’s too early to say what they mean for China as a whole.”
“Overall, Hong Kong’s unique crypto market enables a variety of use cases, not just for local users, but for foreigners as well,” they said. “Moreover, while nothing is for certain, the apparent tacit approval of Hong Kong’s new crypto initiatives could possibly signal that the Chinese government’s stance on cryptocurrency is evolving. That may mean interesting developments are in store for what was once one of the
