Hong Kong Stock Exchange Launches Smart Contract-Powered Platform, Leaves Ripple Effect on China's Crypto Landscape

Hong Kong Exchanges and Clearing Limited (HKEX), which manages The Stock Exchange of Hong Kong, Hong Kong Futures Exchange, and London Metal Exchange, is introducing an innovative platform called "Synapse."

This platform will leverage smart contracts written in the DAML programming language to streamline processes after trades and improve overall efficiency.

Synapse will be implemented on Stock Connect, a channel provided by HKEX that enables international investors to access over 1,000 mainland Chinese stocks by routing their transactions through Hong Kong. According to HKEX, the average daily trading volume for Northbound Stock Connect reached RMB109.3 billion in the first half of 2023, which is a 5% increase from the previous year and a 50% increase from 2020 levels.

To facilitate cross-border transactions, HKEX will establish a connection with Hong Kong's Depository Trust and Clearing Corporation through its Institutional Trade Processing service. This connection will enable the central matching of transactions across borders.

As a result, settlement instructions will be automatically generated and transmitted back to the Synapse platform, streamlining the trade confirmation process.

Meanwhile, Hong Kong has been rapidly positioning itself as a hub for Web3 companies with the approval of retail trading for licensed cryptocurrency exchanges in August.

Surging Crypto Activity in Hong Kong May Influence China's Crypto Policies

This being said, China might be reconsidering its stance on cryptocurrencies as Hong Kong, its neighboring country takes a more favorable approach to blockchain technology.

According to a recent report by blockchain data platform Chainalysis, the volume of cryptocurrency transfers to Hong Kong has been comparable to that of transfers to mainland China over the past year, despite Hong Kong having only 0.5% of mainland China's population.

Chainalysis revealed that Hong Kong has become a highly active cryptocurrency market, with an estimated $64.0 billion in cryptocurrency transactions recorded between July 2022 and June 2023. In comparison, China received $86.4 billion in cryptocurrency transactions during the same period.

While China imposed a series of bans on cryptocurrencies in 2021, Hong Kong has taken proactive steps to promote the development of Web3 technologies. The region introduced a regulatory framework in June that subjects crypto and traditional financial services to the same regulatory standards. In August, it issued its first retail cryptocurrency exchange license to HashKey.

This shift in trends "may indicate that the Chinese government is reconsidering its stance on digital assets and becoming more open to cryptocurrency initiatives," noted Chainalysis. However, the majority of cryptocurrency activity in the region still occurs over the counter (OTC), in private environments designed for large institutional transfers that do not impact the broader market.

Nevertheless, in contrast to Hong Kong, China has a higher share of "retail" cryptocurrency volume (transfers valued under $10,000) at 8.5% compared to Hong Kong's 4%. China also has a larger share of "professional" transfers (ranging from $10,000 to $1 million) at 34.8%, whereas Hong Kong's share in this category is 25.1%.

Notably, most cryptocurrency activity in China (73.5%) still occurs through centralized exchanges, while in Hong Kong, the majority (68.3%) is associated with decentralized finance (DeFi).

Chainalysis Head of APAC Policy Chengyi Ong explained that China's blanket bans on all crypto transactions have not been entirely effective, and cryptocurrency activity remains substantial.

She suggested that clear regulatory frameworks would be a better approach to protect users by enabling them to engage with digital assets in a safer manner.

During the analyzed period, Eastern Asia accounted for 8.8% of global cryptocurrency activity, according to Decrypt.