Hong Kong faces a big fiscal challenge, with a HK$135.4 billion deficit as of July 2024. Because of this, lawmaker Wu Jie has proposed an innovative solution: add Bitcoin to the city’s fiscal reserves. This proposal comes during a sensitive time when Hong Kong’s fiscal reserves are HK$599.2 billion, with a consistent decline from past quarters.
Hong Kong’s economic growth has moderated to 1.8% in the third quarter of 2024, down from 3.2% in the previous quarter. This has added urgency to the search for new financial strategies to stabilize the economy and gain power to manage the deficit effectively.
Wu’s proposal comes as the city continues to solidify itself as a forefront leader in adopting crypto. Hong Kong currently has 12 crypto-linked ETFs worth HK$7.4 billion, and it has a regulatory framework that has spurred an 85.6% year-over-year growth in its crypto market. Notably, this is the highest in Eastern Asia.
Wu Jie strongly believes that Bitcoin (BTC), having a capped supply and reduced storage expenses relative to conventional assets such as gold, has big potential as a hedge against inflation. This could make Hong Kong a leader in the global crypto market. However, this move raises critical questions about risk management, given Bitcoin’s history of volatility.
Inside Hong Kong’s Bitcoin Strategy
Wu Jie’s proposal stems from Hong Kong’s unique “one country, two systems” idea to experiment with Bitcoin as a reserve asset, potentially activating value from China’s substantial Bitcoin holdings.
Hong Kong’s regulatory framework has systematically evolved by implementing a stablecoin regulatory sandbox in early 2024, culminating in the comprehensive Stablecoin Bill, published on December 6.
This clarity in regulation has attracted seven licensed trading platforms, with HashKey Exchange leading the way. They achieved a historic HK$10 billion in asset scale and HK$580 billion in trading volume by December 2024.
The strategy also includes tax incentives for hedge funds and private equity firms investing in crypto, clearly showing Hong Kong’s commitment to becoming a worldwide crypto hub.
The logic behind Wu’s Bitcoin proposal
Wu Jie’s reasoning for including Bitcoin in Hong Kong’s reserves comes from several interesting economic factors. The proposal comes as Bitcoin’s market capitalization has climbed towards $2 trillion, although this remains modest compared to gold’s $20 trillion valuation.
Wu notes Bitcoin’s unique advantages over traditional reserve assets, specifically its lower storage and transaction costs compared to gold and silver. His strategy aligns with a growing global trend, as evidenced by El Salvador and Bhutan’s integration of Bitcoin into their strategic reserves.
“If major economic powers take the initiative to include Bitcoin in strategic reserves, the value of Bitcoin will be more stable, causing more and more other countries to follow suit and reduce their holdings of traditional assets,” Wu says.
The proposal gained significant attention considering China’s large Bitcoin holdings of 194,000 BTC, making it second just after the United States in government Bitcoin reserves. Wu’s idea suggests a calculated move to leverage Hong Kong’s position within the “one country, two systems” framework, potentially activating significant value from the holdings while protecting against inflation.
The timing seems to be strategic, as Hong Kong’s Exchange Fund could heavily benefit from Bitcoin’s deflationary nature and limited supply of 21 million coins, offering a hedge against traditional market volatility.
This financial logic goes beyond just asset diversification. He targets positioning Hong Kong as a leader in what could become a worldwide trend in reserve asset management.
Expert opinions on Bitcoin as a reserve asset
Expert opinions on Hong Kong’s Bitcoin reserve proposal reveal an alignment between the most important stakeholders. Johnny Ng, the chairman of the Subcommittee on Issues Relating to the Development of Web3 and Virtual Assets, emphasizes that a substantial Bitcoin allocation could provide a meaningful fiscal impact amid Hong Kong’s HK$135.4 billion deficit.
“If major economic powers take the initiative to include Bitcoin in strategic reserves, the value of Bitcoin will be more stable, causing more countries to follow suit and reduce their holdings of traditional assets,” Ng explains.
The People’s Bank of China has noticed Hong Kong’s leadership in crypto regulation in its 2024 Financial Stability Report, significantly praising their advancements in managing and integrating cryptocurrencies.
Joseph Chan, Acting Secretary for Financial Services and the Treasury, notes that while the Exchange Fund’s total assets stand at HK$4,133.9 billion, their approach to digital assets remains cautious but open-minded about the innovation through external fund managers. This balanced perspective from both regulatory bodies and lawmakers shows a carefully considered approach to integrating Bitcoin into Hong Kong’s financial infrastructure.
How this Bitcoin proposal impacts traders and investors globally
For institutional investors, Hong Kong’s proposed tax exemptions on cryptocurrency gains specifically target hedge funds, private equity, and family investment vehicles. This tax-friendly environment and the potential Bitcoin reserve status create a unique value proposition for large-scale investors looking to establish a presence in Asia’s crypto markets.
Retail traders can benefit from Hong Kong’s comprehensive regulatory framework, which includes mandatory platform licensing and consumer protection measures. Trading platforms must now evaluate tokens based on specific criteria, including circulation duration, market capitalization, and average daily trading volume.
The framework also requires platforms to assess users’ knowledge of digital assets and set trading limits based on financial status, providing a safer trading environment.
The timing is particularly important as Hong Kong’s spot Bitcoin and Ethereum ETFs have already shown promise, with Bitcoin rising nearly 3% within 24 hours of receiving conditional approval.
This market response shows a strong potential for increased liquidity and trading volumes during Asian trading hours, with possible new opportunities for global traders to participate in a regulated, institutional-grade market.
Hong Kong’s proposal to integrate Bitcoin into its fiscal reserves is a huge moment in the global adoption of cryptocurrency. By leveraging its advanced regulatory framework, robust crypto ecosystem, and strategic position under the “one country, two systems” model, Hong Kong is poised to lead in financial innovation.
For traders and investors, this move points out the growing institutional acceptance of Bitcoin and opens new opportunities in a regulated market. As the world watches, Hong Kong’s strategy could be an example for other economies exploring cryptocurrencies as part of their financial future.
