East Asia is the fifth most active cryptocurrency market studied by Chainalysis. From July 2022 to June 2023, cryptocurrency activity in East Asia accounted for 8.8% of total global cryptocurrency activity.
East Asia’s cryptocurrency markets appear to be less exposed to institutional activity than other larger markets. They are also more inclined toward DeFi projects than similarly sized markets in the Middle East, North Africa, and Latin America.
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Over the past few years, there has been a noticeable decline in cryptocurrency activity in East Asia. In 2019, thanks to the mainland's huge trading and mining business, East Asia became one of the world's largest cryptocurrency trading markets. Although trading volumes in the region remain high, crypto market activity in East Asia has weakened significantly due to a series of bans on cryptocurrencies imposed by the mainland government.
However, Hong Kong's multiple cryptocurrency initiatives and friendly industry policies in recent years have brought new vitality to East Asia. As the relationship between the mainland and Hong Kong grows closer, some speculate that Hong Kong's rising status in the cryptocurrency field may indicate a policy shift by the mainland government on digital assets, or at least a more open attitude towards cryptocurrencies. Data shows that from July 2022 to June 2023, Hong Kong's cryptocurrency trading volume reached US$64 billion. Considering that Hong Kong's population is only 0.5% of that of the mainland, this transaction volume is still very impressive compared to the mainland's US$86.4 billion in the same period.
Hong Kong’s active over-the-counter (OTC) market is the main driver of its surge in trading volume. OTC, or “over-the-counter” trading, mainly provides large-value transfer services for institutional investors and high-net-worth individuals. These transactions are usually conducted privately to avoid affecting asset prices or revealing the activities of traders. Hong Kong’s “preference” for OTC trading is reflected in the volume of transactions divided by transaction size, which we compare with the volume of transactions in surrounding regions and the overall global average in the figure below.
Hong Kong has a larger share of large transactions ($10 million and above) than other regions in East Asia, especially mainland China. In terms of transaction size, South Korea seems to be the market in East Asia that is least affected by institutional activity. This may be because local regulations make it difficult for financial institutions to participate in trading activities - South Korea requires that cryptocurrency trading accounts must be linked to specific personal bank accounts, which makes it difficult for institutional players to enter the crypto market. Overall, Japan seems to be closest to the global average in terms of the ratio of retail and institutional trading.
When we break down the most commonly used types of cryptocurrency platforms in each region of East Asia, we find interesting regional preferences.
Similarly, Japan once again closely follows the global market, with the majority of trading activity concentrated in centralized exchanges and various DeFi protocols, with the proportion of the two being almost the same. On the other hand, 68.9% of South Korea's trading volume is related to centralized exchanges, while the trading volume related to DeFi protocols is relatively small. This may be related to the negative sentiment in South Korea regarding the TerraLuna crash. The TerraLuna crash affected a large number of Korean cryptocurrency users - even ordinary people who did not lose money may have seen a lot of coverage in the local media. After the incident, South Korea introduced several new regulations to regulate the operations of centralized exchanges, including requiring centralized exchanges to hold reserve funds. Due to the tarnished image of DeFi in South Korea, these new measures may have increased the trust of the Korean people in centralized exchanges.
Mainland China and Hong Kong also have their own unique features in the use of crypto platforms. However, it is said that many crypto transactions in these two places are completed through OTC or grey market P2P transactions (grey market peer-to-peer), so these data are not completely accurate. We will discuss this issue further below.
Hong Kong’s growing status as a cryptocurrency hub: What does this tell us about the future of cryptocurrency on the mainland?
Over the past few years, China’s relationship with cryptocurrency has been one of the most interesting and elusive stories in the industry. As recently as 2020, China was one of the most active crypto markets in the world and was a distant leader in Bitcoin mining. But in 2021, China began to crack down on cryptocurrencies, with the People’s Bank of China even declaring all crypto activities illegal.
However, recent developments have led to speculation that the mainland government may be softening its stance on cryptocurrencies, and that Hong Kong could become a testing ground for the mainland government’s moves in the crypto space. Hong Kong is a special administrative region of the People’s Republic of China and has a great deal of policy autonomy, including over the regulation of cryptocurrencies. As mentioned above, Hong Kong has developed a large local crypto market that is dominated by over-the-counter trading. Last year, Hong Kong enacted new rules to allow retail cryptocurrency trading in a regulated environment. In addition, mainland state-owned enterprises have launched cryptocurrency-focused investment funds and have partnered with local Hong Kong crypto businesses.
What’s driving the adoption of cryptocurrencies in Hong Kong? And what does it mean for the future of cryptocurrencies on the mainland? Merton Lam of Crypto HK and Dave Chapman of OSL Digital Securities, founders of two over-the-counter trading firms in Hong Kong, shared their views on these issues.
Both founders said that various practical application scenarios are the main factors driving the popularity of cryptocurrencies in mainland China and Hong Kong. Merton introduced some of the scenarios he observed during his operation of Crypto HK: "Different clients have different needs. We work with many investment banks, private equity firms and high net worth individuals. For them, cryptocurrency is part of their investment portfolio. They mainly invest in Bitcoin and Ethereum, but recently some people have shown interest in altcoins, which is really interesting." Chapman expressed a similar view, adding that many institutional investors are optimistic about cryptocurrencies: "The future of digital assets is no longer in doubt; it is generally believed that digital assets will not disappear," he said, "Whether the traditional financial industry is ready to accept digital assets or not, the fact is that there are now many institutional investors who are keen to explore and develop their own digital asset strategies."
Chapman noted that similar motivations, such as potential high returns, are also driving retail investors in the region. Merton agreed, but added that Crypto HK meets the needs of many foreign users. Many of them want to use cryptocurrencies to transfer some of their wealth out of their own currencies and banking systems, especially those with unstable economies or strict capital controls. "I have heard from other cryptocurrency exchanges that many Russians and Ukrainians come to Hong Kong and want to move their money to a safe place through cryptocurrencies. These people are not multi-millionaires, ordinary people are doing it too," Merton said. In addition, cross-border transfers of funds may also attract the interest of some mainland users. Recently, an article published by the Financial Times detailed how some mainland users have transferred funds to other regions or converted fiat currencies into cryptocurrencies through Hong Kong's over-the-counter markets. These are things that are difficult to do in the mainland.
Merton said that for Hong Kong, international commercial payments are another key application scenario for cryptocurrencies. Compared with traditional bank transfers, using cryptocurrency payments has many advantages. He said: "For many businesses, it is much more convenient to pay suppliers through stablecoin transfers than through banks. SWIFT transaction settlements can take up to three days, especially when dealing with partners in developing countries such as South Asia and Africa. This is particularly cumbersome." In addition, the international payment scenario also brings another noteworthy factor: given that the US dollar gives the United States global sanctions power, it has been trying to weaken the US dollar's dominance in international trade. This is also one of the motivations behind the promotion of the CBDC (digital RMB) project. The potential value of cryptocurrency in international trade may be the reason why the mainland government remains open to blockchain technology.
This naturally leads to another question that everyone is concerned about: Does Hong Kong’s positive attitude towards cryptocurrencies over the past year indicate that the mainland government’s attitude towards crypto technology is softening? Chapman has special insights into this issue because OSL became one of the first companies to obtain a crypto exchange license under Hong Kong’s recent new regulatory system. “The promotion of Hong Kong as a potential crypto hub does not necessarily represent the mainland government’s stance on cryptocurrencies,” he said, adding, “However, we do observe that many state-owned enterprises are indirectly supporting Web3 projects in Hong Kong, which may be a way to explore digital assets without relaxing mainland regulatory policies.” In other words, while these developments increase the possibility of Hong Kong becoming a leader in the global digital asset market, it is too early to determine what this means as a whole.
Overall, Hong Kong's unique crypto market offers a variety of practical application scenarios for local and foreign users. More importantly, while nothing is set in stone, the mainland government's apparent acquiescence to Hong Kong's new cryptocurrency initiatives may hint at a changing stance on cryptocurrencies. This could mean some exciting changes for the former king of the cryptocurrency space.#DeFiChallenge 