Will China’s cryptocurrency ban impact Hong Kong? Or will the financial hub also protect digital currencies?

As cryptocurrency exchanges and providers of digital currency services in Hong Kong have spent the last month scrambling to reign in and pivot away from business ties with Mainland Chinese clients — after China’s central bank banned all crypto activities within the country as well as by Chinese nationals and companies overseas — the special administrative region has become a malleable middle ground, a haven for some displaced firms from Mainland China who had to exit amidst the ban, and a question mark by other companies who are leery of the long-term reliability of the city given the increased amount of regulations coming out of Beijing.

"Huobi and Binance, major crypto-related businesses that work with Mainland China users, obviously took a hit, as did Bitcoin itself, when China announced the ban," says Jimmie Jeremejev, managing director at LehmanBush. "But that is short-term volatility. The long-term shifts away from China are already here, and Hong Kong is a part of that."

Hong Kong has played a large role in the development of cryptocurrencies. Tether, the world’s largest stablecoin, was launched in Hong Kong. Crypto groups such as FTX Trading, valued at $18 billion USD, and blockchain start-up Block.one, which raised $10 billion USD this year, had meager beginnings in Hong Kong.

Hong Kong has one of the most open approaches towards crypto funds in the world. Currently, any licensed fund manager can have up to 10 percent of their portfolio in cryptocurrencies with no additional licensing conditions.

Additionally, Hong Kong has at least one distinctive global feature for digital currencies: Brick and mortar stores for the retail public. Compared with regions like the United States or Europe, where buying and selling cryptocurrency on regulated exchanges is fairly easy, Hong Kong’s physical storefronts are a unique trademark providing individuals with another way to access cryptocurrencies.

But that is not necessarily enough to placate would-be digital currency investors, who just as easily can look at Hong Kong as a domino waiting to fall after China’s ban on cryptocurrencies.?

"It fundamentally calls into question the long-term viability of Hong Kong as a digital currency hub," says Bobby Afshar, managing director at LehmanBush. "Stakeholders are clearly factoring into their calculations the idea that if other facets of Hong Kong can come under increased scrutiny from Beijing, why can’t cryptocurrency?"

China’s disapproval for cryptocurrency activities dates to 2017, when the country started clamping down on power-sapping mining activities and ordered the closure of all exchanges. The move caused jitters among investors about keeping their assets in the $2 trillion USD market within the Mainland and Hong Kong jurisdictions.

On the eve of China's all-out ban on digital currencies, more than $50 billion USD of cryptocurrency had moved from China-based digital wallets to other parts of the world.

Prior to the ban, nearly 70 percent of bitcoin’s mining took place within Mainland China, an outsized chunk of the global market. All that mining has since fled China for other locales, chief among them is the United States, which has become the global leader in bitcoin mining.?

But even in the shadow of Mainland China and greater influence from Beijing, both Jeremejev and Afshar agree the financial industry in Hong Kong remains stable, and that includes digital currencies.