On November 2, 2023, in a Manhattan federal court, a gentleman named Samuel Bankman-Fried was convicted on seven counts of fraud and conspiracy related to the bankruptcy and collapse of FTX Exchange, a cryptocurrency company that he had founded in 2019.
Formerly the third-largest exchange of its kind in the world, FTX is now scouring the wreckage of its empire to recover something of the $14 billion that have gone walkabout from its accounts. While celebrating the trial’s outcome, crypto insiders have described the case in terms of a “galactic embarrassment.”
Approximately 14,000 kilometers away, Hong Kong, where FTX was formerly headquartered, is a city losing face in a very different way. Enduring real-term GDP growth of just 0.1% after years of fray, it has witnessed an exodus of the citizens and companies that defined its global image after dramatically and violently refusing people the right to decide how and by whom they wish to be ruled.
According to The Wall Street Journal, the number of U.S. firms operating in the city has slumped to just 1,258 after year-on-year declines for almost half a decade, leaving it more reliant on Beijing than ever before in its modern history, just as China’s economy stumbles.
Desperate times call for desperate measures, and Hong Kong has now decided to marry the digital asset crisis to its own decline, positioning itself as the next cryptocurrency center in an effort to hold onto its fading status as a global financial hub. Building upon a new regulatory framework for the trade of digital currencies, the city has just launched its first exchange licensed to conduct retail trading of bitcoin and ether, two digital currencies, on November 1.
Opening more or less 24 hours before the Bankman-Fried verdict and on the back of Hong Kong’s own crypto meltdown a little over a month earlier, the timing could not have been less auspicious, and the pivot to crypto makes little sense on the face of the matter. The conceptual origins of digital currencies, particularly bitcoin, lie in cutting out intermediaries, removing institutional power holders and decentralizing finance to liberate ordinary people, an idea so antithetical to Hong Kong’s current political edifice that it is illegal even to speak aloud.
Then there is the reputational damage suffered by the Bahamas, where the FTX corpse is now located, a public face-slapping that Hong Kong was extremely lucky to avoid since the company grew on its soil, sucked “generational wealth” from its citizens and seems to have been closely aided by a cobweb of bank accounts run by a local crypto retail service named Genesis Block. It is perplexing that the city would want to risk putting itself through that again.
But Hong Kong Chief Executive John Lee Ka-chiu (李家超) and the real decision-makers in Beijing have their own reasons to experiment with digital currencies and desensitize the public to them. On the one hand, many of the people who devote their efforts to cryptocurrencies and the underlying blockchain technology are far from frauds. If Hong Kong gives home to the more successful and honest of these entrepreneurs, teething difficulties will be forgotten and it will be commended for its foresight. And let’s face it: Bitcoin is climbing in value again as Bankman-Fried reconciles himself to many years in jail.
On the other hand, tracks are being concurrently laid for the expansion of the digital yuan (e-CNY) and e-Hong Kong dollar (e-HKD), two central bank digital currencies launched by China in 2020 and researched by the Hong Kong Monetary Authority (HKMA) in 2023 respectively. Far from the libertarian vision of the apocryphal Sato Nakamoto, who laid the foundations with bitcoin for a peer-to-peer financial system in which everybody and nobody serves as the boss, Beijing surely views these digital currencies as another spoke in a firmly centralized financial wheel that would enable 360-degree surveillance of all the financial transactions within its scope.
A HKMA report on early e-HKD pilots released just as Bankman-Fried was finishing his futile testimony describes a programmable currency with “useful consumer identifiers” that can be held in stasis during transfers until certain criteria are met for its release. It enables the government and its partners “to enjoy greater visibility over the use of their funds,” whose intended use can be ringfenced to “govern how it can be spent.”
Although the document is clearly business- and consumer-focused, not expressly aimed at curtailing freedoms, the vision would still dovetail very nicely with the Chinese Communist Party’s plans for Hong Kong, which are certainly aimed at extensive control of the population, the blacklisting of democracy-supporting “Yellow Circle” businesses, the mapping of social and financial connections, the tracking of citizens’ overseas links and the blocking of financial assets owned by those who dare to defy Beijing.
A narrow and controlled cryptocurrency ecosystem could be a stepping stone toward such a goal, which Hong Kongers might otherwise view with skepticism. It may serve to strengthen the e-CNY and e-HKD if they come to be known as stable and reliable value-holders in an otherwise anarchic sphere. Investors could speculate and jump back to China’s monies for real-world spending, all under the watchful eye of the Communist Party, whose presence in the background would presumably negate the potential for capital flight.
The aforementioned HKMA report explains how this would be approached on non-native blockchains, which could be outside the direct control of the Chinese banking system, by a technique known as wrapping that “enables the value of the e-HKD to be safely used on such a network by intended parties away from its native platform.”
To some degree siloed from the mainland and currently unable to express mass dissent, Hong Kong offers China a convenient laboratory to experiment in this manner after its stability paranoia led it to stamp down on all domestic cryptocurrency transactions in 2021. And whatever it learns from trials and errors with the e-HKD can be more securely applied to e-CNY at a later date.
For the e-CNY is a special case. In the long term, it seeks to erode the need for the U.S. dollar in international trade. With such a maneuver, Beijing would widen circumnavigation of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, through which international sanctions are expedited, an extremely useful trick both for itself and its geopolitical entourage of rogue states.
Holding long-term primacy as an offshore hub for regular yuan and having already undertaken trials of a system known as mBridge, which uses a custom-built blockchain to assist digital currency transactions between a selected pod of central banks, Hong Kong can act as an interface for this dollar-exclusion strategy in multiple ways. The city is also being pushed to the center of China’s Belt and Road plans, which are seen as another potential vehicle for the e-CNY.
In a paper published in the journal China Currents earlier this year, Vijaya Subrahmanyam, professor of finance at Mercer University, argues that the collapse of FTX may even accelerate Beijing towards achieving stature for its digital currencies. “The need to regulate digital assets, cryptocurrencies and the digital ecosystem has increased in urgency, shedding favorable light on China’s approach to using centralized control for financial stability,” she states.
She also believes that the e-CNY is, in part, aimed at “strategically positioning China to influence the global financial system” and warns, “The People’s Bank of China will possess a trove of information on its users, providing tools for censuring and surveilling individuals.” This will combine with a newfound ability to observe larger money flow patterns in real time, another gauge that may be used to head off any form of organized protest against the Chinese Communist Party’s rule.
Thus, for all the risks to Hong Kong, the potential benefits to China of soft integration for the e-HKD and e-CNY alongside a curated digital asset milieu are relatively clear, even when seen from the charred remains of the FTX empire. For the wider cryptocurrency movement, however, the advantages are less obvious. In the wake of Bankman-Fried’s conviction, Hayden Adams, the pioneer of the decentralized trading exchange Uniswap, posted on X that the digital asset industry needs to focus on its values and “ignore the personality cult sociopaths.”
A city lorded over by China President Xi Jinping and administered by his sidekick John Lee may not, therefore, be the ideal location for rebirth.