Hong Kong laid out a master plan to become a top Asian crypto hub offering legalized retail trading and digital-asset exchange-traded funds, part of a wider push to restore the city’s credentials as a financial center.

A consultation will begin on how the retail segment “may be given a suitable degree of access” to tokens, according to a statement Monday from the government. The city invited global crypto exchanges to explore opportunities, adding that work toward a new virtual-asset licensing regime is intensifying.

The Securities and Futures Commission for the first time detailed criteria for authorizing crypto ETFs, which initially would only be able to invest in Bitcoin and Ether futures traded on CME Group Inc. exchanges. The allowable futures portfolios could expand over time, the regulator said.

Asset managers and banks can apply to roll out such ETFs right away, SFC Deputy Chief Executive Julia Leung told reporters, adding the products would be available to retail buyers.

Years of political turmoil and Covid curbs sparked a talent exodus from Hong Kong, undermining the city’s claim to be Asia’s financial nerve-center. Officials are now trying to undo some of that damage by wooing businesses back, though it remains an open question how successful they will be.

In a separate policy paper, Hong Kong said it “will be careful and cautious about the risks to retail investors” and will enhance education and ensure appropriate regulatory arrangements are in place.

Bloomberg News reported earlier that a planned mandatory licensing program for crypto platforms due to be enforced in March next year is likely to allow retail trading. The current voluntary crypto framework restricts exchanges to clients with portfolios of at least HK$8 million ($1 million).

“A consistent framework for crypto regulation is essential and key to growing institutional and retail adoption of digital assets at scale,” Yvonne Szeto, vice president at Worldpay from FIS, said in a Bloomberg Television interview. She added she welcomes the direction Hong Kong is moving in.

In Monday’s statement, Hong Kong also said it’s willing to review “property rights for tokenized assets and the legality of smart contracts.”

Tokenization refers to the process of using blockchain technology to create tradable tokens that could represent a range of assets or fractions of them. Smart contracts, key to decentralized finance applications in crypto, are software programs that automatically execute when certain conditions are met.

Singapore, China

Regulators globally are grappling with how to oversee the volatile digital-asset sector, which is picking up the pieces of a $2 trillion rout over roughly the past year. The shakeout may lead to a reordering of crypto markets in Asia.

For instance, Singapore is tightening up to restrict retail transactions after being buffeted by high-profile crypto blowups. But Japan is taking steps to make it easier to list tokens, partially reversing a conservative stance. China declared the crypto sector largely illegal a year ago.

“We need to find ways to help China do things that China itself is not yet prepared and able to do,” Charles Li, chairman at Micro Connect and a former chief executive officer of Hong Kong Exchanges & Clearing Ltd., said on Bloomberg Television. “And so this is a very important psychological step.”

Hong Kong used to be a base for big exchanges like Binance and FTX. They were lured by a laissez-faire reputation and close ties with China.

The city introduced the voluntary licensing regime in 2018, a framework that seemed to signal a toughening approach that would turn away lucrative consumer-facing business. FTX decamped to the Bahamas last year.

Free NFTs

The new approach to digital tokens was rolled out at the start of the Hong Kong FinTech Week conference. Crypto was the centerpiece of the event, with participants even getting free nonfungible tokens.

Leading players in the digital-asset ecosystem such as Animoca Brands Corp. Chairman Yat Siu and crypto exchange FTX’s Chief Executive Officer Sam Bankman-Fried attended in person or by video.

Bankman-Fried said it’s “obviously not too late” for Hong Kong to try to catch up and even take the lead in virtual-asset regulation.

Digital-token transaction volume in Hong Kong expanded less than 10% in the 12 months through June from a year earlier, the least in East Asia outside of a slump in China, according to blockchain specialist Chainalysis Inc.

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