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Why regulatory sandboxes make no sense in Hong Kong

November 2, 2018

tl:dr – It doesn’t make any sense to have a sandbox, when you are playing on a beach.

One thing that I find fascinating is that there is this obsession in Hong Kong with regulatory sandboxes, when they in fact make absolutely no sense in Hong Kong.

So let’s start with where this obsession comes from, and this comes with British colonialism.  One of the problems with the HK bureaucracy is that it has a “colonial mindset.”  In the colonial era, all of the important decisions were made in London, and the job of the HK government was to carry out directives that were made elsewhere.  The unique thing about the Hong Kong government is that the colonial institutions and mindset survive to this day.  The Hong Kong government is simply incapable of doing anything new and original, and so when they talk about innovation, they have to just copy somewhere else.  And so when Mother England comes up with a “regulatory sandbox” the natural reaction is to try to set one up in Hong Kong.

But Hong Kong is just different from London and Singapore  One of the difficulties that the English had setting up a bureaucracy in Hong Kong was that they were just overwhelmed in the 1950’s.  In the 1940’s, the British figured that they would be turning Hong Kong over to Chiang Kai-Shek after the war.  By the time it turned out that this was not happening, they had to deal with millions of refugees from the Mainland.  The response on the colonial government was to just figure out what they could regulate, and this minimal the role of the government out of necessity.  By a happy accident, this resulted in a optimal balance between order and chaos, and all of this was frozen by the Sino-British Joint Declaration in 1984 and the Basic Law of Hong Kong.

So the net result for financial regulation, is that in London and Singapore, you start by regulating *everything* and then deregulating certain parts.  So you absolutely *need* a regulatory sandbox because everything is regulated.  In Hong Kong, everything is not regulated, so you don’t need a sandbox.

Once you see this, then it becomes obvious how crazy the SFC’s proposals on using a regulatory sandbox to regulate crypto-exchanges is.  So crypto-exchanges are not regulated *and legally cannot be regulated* under HK law.  So you create a sandbox so that the cryptoexchanges can be voluntarily regulated, and then you provide exceptions to reduce regulations that they can opt-out of regulations that they voluntarily opted-in.  You provide an exception to regulations that are exceptions to non-regulation.


The other thing is that there is a huge amount of paternalism here.  We want to protect the consumer.  This assumes that the regulators understand the consumer which isn’t a good assumption.  People ask, who is going to protect grandmothers from getting ripped off, and my answer is that a grandmother’s grandkids are going to protect her better than any regulator can.


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