In recent years, crypto asset trading and investment activities including Bitcoin have become increasingly active.
As a global financial center and the first stop for the mainland to go to sea, Hong Kong is not far behind in terms of blockchain and cryptocurrency. Previously, many politicians actively advocated to seize the opportunity of blockchain, and even warned: “If Hong Kong loses the opportunity of global virtual assets based in Hong Kong this time, the consequences will be more serious than the loss of Ali.”
However, the decentralization and anonymous transactions of cryptocurrency have also brought challenges to financial supervision. This article will give you a glimpse of the current status of Hong Kong’s cryptocurrency, from the regulatory framework to policy developments, from citizen holdings to trading, from exchange licenses to legal cryptocurrencies…
Regulatory attitude is cautious and open
In recent years, international standard-setting agencies have been closely monitoring and exploring how to deal with the risks involved in virtual assets. Various local securities regulatory agencies have also adopted different countermeasures. From the overall trend, Hong Kong has always been cautious and open to blockchain and cryptocurrency.
There are three main regulatory agencies involved: the Hong Kong Securities Regulatory Commission (SFC), the Hong Kong Financial Supervisory Authority, and the Hong Kong Insurance Regulatory Authority.
The Hong Kong Securities Regulatory Commission is responsible for overseeing the operation of Hong Kong’s securities and futures markets and is also the main regulator of cryptocurrency. The Hong Kong Monetary Authority is responsible for Hong Kong’s financial policy, banking and currency management, and assumes a role similar to that of the central bank. In addition, other institutions such as the Hong Kong Insurance Regulatory Authority will also conduct coordinated supervision of cryptocurrencies. At present, these regulatory agencies use sandbox supervision to test and supervise cryptocurrency and blockchain technology in a controlled environment.
In Hong Kong, cryptocurrencies are divided into security cryptocurrencies, functional cryptocurrencies, and virtual commodities (such as Bitcoin). For different types, Hong Kong regulators have adopted different regulatory policies.
Hong Kong regulation first emphasizes the protection of investors’ interests. There are relatively clear regulatory requirements and implementation rules for securities-based cryptocurrencies; there are relatively few regulatory policies for non-securities-based cryptocurrencies. However, Hong Kong does not have legislation specifically for cryptocurrency and related businesses. Regulatory requirements are mainly reflected in the provisions of other laws, such as anti-money laundering, anti-fraud, and anti-terrorist financing.
In addition, as the influence of cryptocurrencies continues to increase, regulators have successively introduced a series of regulatory policies to better protect the interests of investors.
At the Hong Kong Fintech Week held in November last year, the Secretary for Financial Services and the Treasury, Xu Zhengyu, announced a new policy measure to regulate the licensing system of Virtual Asset Service Providers. Unlike the Hong Kong Securities Regulatory Commission’s voluntary regulatory pilot program in the regulatory sandbox at the end of 2019, the proposed licensing system this time is mandatory and will comprehensively supervise the trading services of securities and non-securities tokens. All encryption will be required. Asset trading platforms operate in the sun. They need to obtain a license issued by the China Securities Regulatory Commission, and implement relevant measures under the “Anti-Money Laundering and Terrorist Fund Raising Regulations” and other requirements to protect investors and prevent market manipulation.
Currently, the proposal for a new licensing system is undergoing public consultation.
Inventory of key regulatory policies
With the development and changes of the industry, Hong Kong’s regulatory policies have become clearer and clearer.
In September 2017, the Hong Kong Securities Regulatory Commission issued the “Statement on Initial Token Issuance”. The statement aims to clarify that, depending on the facts and circumstances of individual ICOs, the digital tokens sold or sold may fall under the Securities and Futures Ordinance “Securities” as defined by “Securities” are regulated by Hong Kong securities laws.
The statement emphasized that if the digital tokens involved in the ICO meet the definition of “securities”, the provision of trading services or advice on such digital tokens, or the management or promotion of funds investing in digital tokens, may constitute a “regulated activity” “. Persons or organizations engaged in “regulated activities”, regardless of whether they are located in Hong Kong, as long as their business activities target the Hong Kong public, must be licensed by the SFC or registered with the SFC.
In December 2017, the Hong Kong Securities Regulatory Commission issued the “Circular to Licensed Corporations and Registered Institutions: Regarding Bitcoin Futures Contracts and Cryptocurrency Related Investment Products”. Intermediaries who provide investors with bitcoin futures contract trading services and related services (including communicating or transmitting trading instructions) need to apply for a license from SFC and be subject to supervision. At the same time, SFC also reminds investors to guard against investment risks.
In November 2018, the Hong Kong Securities Regulatory Commission issued the “Statement on the Regulatory Framework for Virtual Asset Portfolio Management Companies, Fund Distributors, and Trading Platform Operators” (hereinafter referred to as the “Regulatory Framework”), targeting cryptocurrency and other virtual asset investments Issue new regulations.
This “Regulatory Framework” provides a compliance channel for platform operators who are capable and willing to follow strict standards and operating practices, and distinguishes operators who hold licenses from those who do not intend to apply for a license. The “Regulatory Framework” provides a path to become a licensed platform: First, at the preliminary stage, the Hong Kong Securities Regulatory Commission does not issue licenses to exchanges, but communicates with applicants on regulatory standards (including anti-money laundering, anti-terrorist financing, etc.) And the real operation of the virtual asset trading platform; secondly, some exchanges will be included in the supervision sandbox of the CSRC. Based on the performance of these platforms in the sandbox, we will rigorously judge whether they are suitable for supervision by the CSRC before issuing licenses. ; Finally, to obtain a license, it is necessary to enter the next stage of the sandbox. Platforms need to report more frequently, be monitored and reviewed, so that they can formulate strict internal control measures under the close supervision of the Securities Regulatory Commission; it will not be possible until 12 months later. Apply to exit the sandbox.
In March 2019, the Hong Kong Securities Regulatory Commission once again hoped to remind investors of the risks associated with virtual assets (including tokens related to STO, that is, security tokens), and issued the “Statement on the Issuance of Security Tokens” to remind investors to The applicable laws and regulatory requirements of companies or individuals issuing securities tokens.
The statement emphasized that in the case of security tokens as “securities”, anyone who wants to promote and distribute security tokens (whether in Hong Kong or targeting Hong Kong investors) must be based on The Securities and Futures Ordinance is licensed or registered for Type 1 regulated activity (securities trading). Anyone who engages in regulated activities without a license is a criminal offence unless exempted.
In October 2019, the Hong Kong Securities Regulatory Commission issued the “Standard Terms and Conditions for Licensed Corporations Applicable to the Management of Investment Portfolios in Virtual Assets”. From the perspective of virtual asset fund management companies, it proposed company qualifications, risk management, and Specific requirements for compliance audits, anti-money laundering and anti-terrorism.
In November 2019, the Hong Kong Securities Regulatory Commission successively issued the “SFC Issues Warnings Concerning Virtual Asset Futures Contracts” and the “Position Paper Regulating Virtual Asset Trading Platforms” to clarify the new regulatory framework for virtual asset trading platforms. The article emphasizes that starting from November 6, 2019, companies that operate a central virtual asset trading platform in Hong Kong and intend to provide trading services for at least one security token on its platform can apply to the Securities Regulatory Commission for Sections 1 and 7. A license for a regulated activity. Once the virtual asset trading platform operator is licensed, it will be placed in the sandbox of the Securities Regulatory Commission. This generally means that more frequent reporting, monitoring and inspection will be required. Through strict supervision, the SFC will be able to highlight the areas that operators should improve in terms of internal control and risk management.
In November 2020, the Financial Services and Treasury Bureau of the Hong Kong Special Administrative Region Government conducted a public consultation on the legislative proposal to strengthen the regulation of anti-money laundering and terrorist financing, and recommended the establishment of a licensing system for virtual asset service providers. The industry is expected to become the 11th license in addition to the 10 financial licenses currently issued by the Hong Kong Securities Regulatory Commission. According to the consultation document, the activities covered by the regulation include virtual asset trading, transfer, custody and management, and the provision of financial services for the issuance of virtual assets. According to the special organization’s definition, virtual assets are “assets that express value in digital form, and related assets can be bought and sold or transferred in digital form, or used for payment or investment purposes.”
Fintech is booming
Although supervision continues to be strengthened, the financial technology industry is highly valued in Hong Kong.
“Hong Kong is one of the world’s leading international financial centers. In recent years, the local financial technology industry has developed vigorously. It has good conditions to explore the development and application of digital currency and other financial technology at a relatively high starting point.” Financial Secretary Chen Maobo last year Said when attending the Solidarity Hong Kong Fund Solidarity Zall Forum on November 23.
As early as 2017, the Monetary Authority conducted a study on the central bank’s digital currency (Project LionRock), and found that since Hong Kong already has an efficient retail payment system and services, the application of central bank’s digital currency at the wholesale and cross-border payment level will More potential.
“Hong Kong has been paying attention to the development of the People’s Bank of China’s digital renminbi. The Financial Development Bureau has organized a working group to study how Hong Kong can seize the opportunities of digital renminbi development.” Chen Maobo said that if digital renminbi can be used in cross-border payments, it will further promote The interconnection between Hong Kong and the Mainland, especially the Guangdong-Hong Kong-Macao Greater Bay Area.
“The government and the Hong Kong Monetary Authority are ready to actively discuss various feasible plans with the People’s Bank of China to improve and expand the two-way circulation of cross-border RMB funds.”
In fact, apart from the central bank’s digital currency, Hong Kong has been in close communication with relevant mainland authorities and actively promoted cross-border cooperation in financial technology between the two places. Especially in the field of cross-border payment, the Monetary Authority is currently working with the Digital Currency Research Institute of the People’s Bank of China to study the use of digital renminbi for cross-border payment technology testing, and make corresponding technical preparations.
There are currently more than 600 fintech start-ups and companies in Hong Kong, world-renowned innovation laboratories and accelerator programs, such as the International Settlement Bank Innovation Hub Center, Accenture Fintech Innovation Laboratory and Deloitte Asia Pacific Blockchain Experiment All rooms have been settled in Hong Kong.
According to the Ernst & Young Global Financial Technology Application Index, Hong Kong’s consumer financial technology application rate reached 67% last year, ranking it among the world’s leading positions, ranking higher than the United States and Japan. A number of financial technology projects and measures promoted by the SAR government have also been implemented, including the fast payment system “FPS”, the trade financing platform “Trade Link”, the new licensing of virtual banks, virtual insurance companies, and virtual asset trading platforms Frame etc.
Judging from the overall financing performance of China’s blockchain industry in 2020, Hong Kong has a developed economy, a good innovation environment, and more support policies for the development of blockchain-related industries, and blockchain companies/projects have also received more capital Of favor.
According to the incomplete statistics of the Zero One Blockchain, in 2020, there will be a total of 81 financing incidents in China’s blockchain industry, and the total amount of specific financing publicly disclosed is 1.112 billion yuan. In terms of the amount of financing, Hong Kong ranked first in the country with 17 deals. In terms of financing amount, Hong Kong is far ahead with 592 million yuan, accounting for more than 50% of the country.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.