China's cross-border Financial Openness policy is announced, is the encryption asset industry ushering in a new turning point?

On January 22, the People’s Bank of China and four other departments jointly issued the “Opinions on Promoting Institutionalized Opening-up with High Standards in the Pilot Area for Free Trade Zones (Hong Kong) in the Financial Sector under Certain Conditions” (hereinafter referred to as the “Opinions”). The document proposes 20 policy measures, including supporting the optimization of the pilot program for “Cross-border Wealth Management Connect” in the Guangdong-Hong Kong-Macao Greater Bay Area, improving the cross-border flow arrangement of financial data, and allowing foreign Financial Institutions to provide new Financial Services, marking the official opening of a new round of Financial Openness.

In this policy framework, can the cryptocurrency industry find a point of fit and broaden its development path with the help of policy dividends? This article will explore the potential and future of the blockchain and cryptocurrency industry in the Greater Bay Area from the perspectives of the construction of the new blueprint and the analysis of industry challenges. Potential Paths of the Cryptocurrency Industry Under Policy Guidance The Opinion provides many potential opportunities for the blockchain and crypto asset industry, especially in qualified investment products, data flow support, and Financial Service innovation, where policy and industry can find directions that fit together. The document mentions “supporting residents of the Guangdong-Hong Kong-Macao Greater Bay Area to purchase eligible investment products sold by Hong Kong and Macao Financial Institutions through Hong Kong and Macao Financial Institutions, and expanding the range of participating institutions and eligible investment products”. Currently, eligible products mainly focus on traditional financial instruments such as Hong Kong stocks funds, offshore bonds, etc. However, with the proactive exploration of the Hong Kong SAR government in virtual asset regulation, such as the launch of virtual asset ETFs, it is worth looking forward to whether these products can be included in the cross-border wealth management connect in the future.

Combining with the policy terms, if Hong Kong’s encrypted asset products can provide investment channels for mainland investors through the Wealth Management Connect, it will not only enrich the asset allocation choices of mainland residents, but also become an important tool to promote the internationalization of the renminbi. Once the scope of cross-border Wealth Management Connect is further expanded, virtual asset ETFs or on-chain bonds may be the first to pilot, opening the door for the financialization of the blockchain industry. How can foreign Financial Institutions help domestic enterprises with financing? The “Opinions” clearly require “facilitating and standardizing the cross-border flow of Financial Institution data in pilot areas, exploring the formation of a unified compliance caliber for the cross-border flow of financial data within the framework of the national system for the security management of cross-border data transmission”. This policy provides the possibility for the application of blockchain in cross-border finance. The inherent transparency and security of blockchain technology can meet the requirements of regulatory tracking of fund flows, and achieve efficient transactions through smart contracts. This is not only applicable to small-scale cross-border payments between individuals and businesses, but also supports larger-scale trade financing and settlement. In the “Opinions”, it is mentioned that “foreign Financial Institutions are allowed to carry out new Financial Services similar to Chinese Financial Institutions, and the relevant approvals are required to be completed within 120 days”, and “under the premise of real compliance, pilot regions are allowed to freely remit all transfers related to foreign investors’ investments, with no delay. Such transfers include: capital contributions; profits, dividends, interest, capital gains, royalties, management fees, technical guidance fees, and other expenses.” This policy has not only facilitated the opening of traditional Financial Service, but also created new possibilities for the integration of blockchain technology and traditional finance. Especially in the RWA (Real World Asset, on-chain real assets) field, the cooperation between foreign Financial Institutions and blockchain enterprises is expected to become an important means for domestic enterprises to broaden their financing channels.

RWA is a new way to break through traditional financial restrictions by digitizing and tokenizing real-world assets (such as real estate, equity, bonds, etc.) using blockchain technology, thereby achieving more efficient circulation and financing. When companies in the current domestic market generally face difficulties and high costs in financing, RWA provides a solution. RWA provides domestic enterprises with opportunities to expand international market channels. Traditional corporate financing usually requires multiple layers of intermediaries, with complex processes and high costs. Through RWA and blockchain technology, enterprises can directly access international investors, eliminating complex approval and intermediary processes, significantly shortening the time to raise funds. This directness brings efficiency improvements to corporate financing while reducing overall transaction costs. The high transparency of asset tokenization allows investors to conduct real-time risk assessments based on on-chain information. This transparency greatly reduces information asymmetry, thereby reducing investors’ demand for risk premium, and ultimately enabling the financing party to obtain lower financing rates. Through cooperation with foreign Financial Institutions, domestic enterprises can not only attract international investors interested in emerging markets, but also enter the global market through the circulation of on-chain assets. This international financing model not only provides enterprises with diversified sources of funding, but also enhances their influence in the international market, further expanding their business growth space. With the introduction of RWA, the cooperation between foreign Financial Institutions and blockchain enterprises is expected to create new financing paths for domestic enterprises. This model can not only effectively make up for the shortcomings of traditional financing methods, but also inject new vitality into the Financial Openness of the Greater Bay Area, becoming an important bridge connecting domestic and international capital markets. Formidable Challenge: The Art of Balancing Regulation and Innovation Although policies provide opportunities for the potential development of the cryptocurrency industry, the game between regulation and innovation is still an undeniable reality. This game involves both the constraints of the existing legal framework and tests how the industry can achieve technological breakthroughs and commercialization in compliance. 01 Dynamic Game between Loose Policy and Regulatory Pressure Mainland China has always maintained a high-pressure regulation on cryptocurrencies. Since the complete ban on initial coin offerings (ICOs) in 2017, domestic services of virtual currency trading platforms have also been strictly limited. Although the ‘Opinions’ propose the expansion of cross-border wealth management and support for the purchase of certain types of overseas Financial Service, the investment tools currently allowed are still limited to traditional financial products. Whether cryptocurrencies can be included in the scope of policy pilot is a dynamic regulatory game. In Hong Kong, the Virtual Asset Service Provider (VASP) system launched in 2023 provides a legal pathway for compliant cryptocurrency trading platforms, making Hong Kong one of the important centers for international cryptocurrency development. However, whether the mainland will indirectly pave the way for cryptocurrency products to enter the mainland market through the pilot results of Hong Kong and Macao remains a pending issue. 02 The Challenge of Integrating Technology and Business Models Blockchain technology is known for its transparency and efficiency, but its implementation in traditional financial systems faces multiple obstacles. Cross-border payments are one of the popular applications of blockchain technology, but existing cross-border payment networks such as SWIFT and CHIPS have already established complex and efficient global clearing systems. How to seamlessly integrate blockchain payments into existing networks remains an unsolved commercialization challenge. On the other hand, asset tokenization, as another important application scenario of blockchain technology, can theoretically achieve significant advantages by splitting and circulating almost all traditional financial assets from real estate to stocks and bonds through blockchain technology. However, it still faces certain obstacles in practical operation. For example, whether tokenized assets can obtain the same recognition as traditional assets in law still requires further policy support. At the same time, how to conduct cross-border fund flows in a compliant framework, especially in the face of complex international regulatory requirements, is also a major challenge. In addition, the process of on-chain assets needs to ensure the authenticity and integrity of the data. Especially when it involves multiple jurisdictions, how to achieve efficient cross-border regulatory coordination is a problem that needs to be continuously explored. 03 Market Education and Investor Trust The cryptocurrency industry has long been controversial due to its high price volatility and lack of transparency. Even though policy openness allows certain cryptocurrency products to enter the wealth management pilot program, the maturity of the market will still depend on the understanding and acceptance of these products by ordinary investors. For example, virtual asset ETFs, as a more traditional investment tool for crypto assets, have been launched in multiple markets worldwide. However, even in mature regulatory markets, concerns about the liquidity and volatility of ETF products continue to worry investors. In addition, the complexity and high technological barriers of crypto assets make it difficult for many ordinary investors to assess risks effectively. In this situation, how Financial Institutions enhance investor confidence through information disclosure and user education will be an important topic for future development. Summary and Outlook: The Cryptocurrency Industry in the Era of Financial Openness The Financial Openness of the Greater Bay Area provides vast opportunities for the cryptocurrency industry, but also brings new challenges. The core issue facing the industry at present is how to find a path of innovation and breakthroughs under high regulatory pressure. From a policy framework perspective, if the cryptocurrency industry can develop around compliance and transparency, it will have the opportunity to become part of the financial system of the Greater Bay Area. In the future, the industry needs to accelerate the implementation of technology and explore the possibility of cooperating with traditional Financial Institutions. At the same time, industry participants should pay more attention to investor education and information disclosure to eliminate the cognitive barriers in the market towards crypto assets. Through these efforts, the crypto asset industry is expected to find a stable path of growth in the Greater Bay Area, exploring more possibilities for China’s Financial Openness.

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This article is written by Lawyer Liu Honglin