In May 2021, the Hong Kong Financial Services and the Treasury Bureau issued a consultation summary (hereinafter referred to as the “Consultation Summary”) on the “Public Consultation on Hong Kong’s Legislative Proposals for Strengthening the Regulation of Anti-Money Laundering and Terrorist Financing Regulations”. The main content of the consultation summary can be summarized as Hong Kong’s plan to establish a licensing system for virtual asset service providers, requiring any person who intends to engage in virtual asset trading business in Hong Kong to apply for a license from the Securities and Futures Commission (SFC) and comply with The fit and proper person criteria, and the licensee must comply with the anti-money laundering and terrorist financing requirements set out in the Hong Kong “Anti-Money Laundering and Terrorist Financing Ordinance” and other regulatory requirements designed to protect investors. The consultation summary indicated that Hong Kong included virtual asset services into the requirements of license supervision, indicating that the legality of virtual asset services could be implemented in Hong Kong.
As one of the three major international financial centers, Hong Kong’s guiding and exemplary role in virtual currency transactions is self-evident. The consultation summary also shows that Hong Kong is pushing virtual asset services into the era of comprehensive supervision. In fact, Hong Kong has been trying to monitor virtual assets. Looking at Hong Kong’s discussions on virtual assets over the years, it is not difficult to see that as a financial center, the Hong Kong Special Administrative Region is open and compatible.
On September 5, 2017, the Hong Kong Securities and Futures Commission (hereinafter referred to as the “Hong Kong Securities Regulatory Commission” or the “SFC”) Hong Kong Securities Regulatory Commission issued the “Statement on Initial Token Issuance”, which talked about:
The terms and characteristics of some ICOs may cause the digital tokens to be sold as “securities” as defined by the Securities and Futures Ordinance, and are regulated by Hong Kong securities laws, and provide trading services or provide for such digital tokens Opinions, or the management or promotion of funds investing in digital tokens, may constitute “regulated activities.” People 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.
After the announcement, the Hong Kong Securities Regulatory Commission immediately took regulatory actions against a number of cryptocurrency exchanges and some ICO issuers, and successively wrote to seven cryptocurrency exchanges located in or connected to Hong Kong, warning them not to Buy and sell cryptocurrencies that are “securities” without a license.
On December 11, 2017, the Hong Kong Securities Regulatory Commission issued the “Circular Letter to Licensed Corporations and Registered Institutions Regarding Bitcoin Futures Contracts and Cryptocurrency-related Investment Products” (hereinafter referred to as the “Circular”), which contains Bright,
Some futures and commodity exchanges in the United States have launched or will soon launch bitcoin futures contracts, and Hong Kong investors can also buy and sell these contracts through intermediaries. However, providing Hong Kong investors with trading services and related services (including communicating or transmitting trading instructions) for these contracts constitutes a regulated activity, and regardless of whether the relevant business is located in Hong Kong, a license must be obtained from the SFC.
On February 9, 2018, the Hong Kong Securities Regulatory Commission issued another circular to remind investors that they should guard against potential risks when trading with cryptocurrency exchanges and investing in ICOs. In March 2018, because Black Cell Technology Limited’s issuance activities may fall into “unapproved promotional activities and unlicensed regulated activities”, the Hong Kong Securities Regulatory Commission immediately took regulatory action and stopped Black Cell Technology Limited’s The Hong Kong public conducted an ICO and ordered them to return the relevant tokens to Hong Kong investors in order to cancel the relevant ICO transactions.
On November 1, 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”, accompanied by two circulars (“To Intermediaries “Statement on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators of Virtual Asset Portfolios” and “Circular to Intermediaries for Distribution of Virtual Asset Funds”) (hereinafter collectively referred to as “2018 Statement” ). If the attitude of the Hong Kong side in the previous circulars is still relatively conservative, then the statement and circular on November 1, 2018 have become more bold, clarifying that virtual assets are subject to supervision in Hong Kong.
In November 2019, the Hong Kong Securities Regulatory Commission directly issued a position paper to include licensed virtual asset trading platforms in the regulatory sandbox (“voluntary licensing system”), and listed standards similar to those of licensed securities brokers and automated trading venues Regulatory standards.
After combing through a series of Hong Kong legislative documents and circulars, it is not difficult to see that Hong Kong’s attitude towards virtual assets has gone from vague to clear, conservative to enlightened. Hong Kong’s supervision of virtual assets has the following characteristics:
1. Openness and prudence coexist
Although Hong Kong currently allows virtual asset trading to be legal, Hong Kong does not encourage it. On the contrary, the Hong Kong Securities Regulatory Commission has repeatedly publicly reminded and warned investors to pay attention to the risks of cryptocurrency trading and ICO. Take the 2018 statement as an example. The statement begins with systematic and detailed risk warnings on the risks of investing in virtual assets, including “valuation, volatility and liquidity”, “accounting and auditing”, “network security and There are seven aspects: “Safe custody of assets”, “Market integrity and soundness”, “Money laundering and terrorist financing risks”, “Conflict of interest” and “Fraud”. In mid-2018, the audience was restricted, requiring only “professional investors” to provide services. In other words, although Hong Kong is constantly improving its regulatory system, it has not stopped its risk warnings for virtual assets. While maintaining a compatible financial center structure, it also holds a cautious view on investment.
2. Gradually expand the scope of supervision
Taking the announcement date of November 1, 2018 as the node, the previous regulatory system in Hong Kong only included securities-based cryptocurrency and futures contract transactions under supervision. Virtual asset management business that does not involve securities or futures contracts does not fall into the scope of supervision. On November 1, 2018, Hong Kong will bring virtual asset management business into the scope of supervision.
In terms of regulatory standards, the Hong Kong Securities Regulatory Commission also pointed out that they should not be lower than the current regulatory standards for similar businesses. For example, they should at least comply with current regulations, including the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, and The Code of Conduct for Fund Managers, etc., and these businesses can no longer evade supervision by assuming that the assets in the portfolio do not constitute securities or futures contracts.
In May 2021, the Hong Kong Consultation concluded that it clearly stipulated that virtual asset service providers should be included in the scope of supervision, including (i) conducting transactions between virtual assets and legal tender; (ii) conducting one or more virtual asset transactions; (iii) ) Transfer virtual assets; (iv) Provide custody or management services for virtual assets, or provide tools to control virtual assets; and (v) Provide related financial services for the issuance of virtual assets. At the same time, Hong Kong does not rule out the possibility of private virtual asset transactions being subject to supervision, which leaves room for possible private virtual asset supervision in the future. With the expansion of the scope of supervision, the Hong Kong Special Administrative Region is step by step by following traditional industries such as banks and trusts to incorporate virtual asset business into the scope of supervision, and promote the entry of virtual assets into the era of compliance.
3. The supervision method is mainly in the form of licensing
Hong Kong has always adopted a licensing system for financial businesses, and it is necessary to apply for a license to engage in regulated financial businesses, including ten categories such as securities trading, futures contract trading, and leveraged foreign exchange trading. Among them, the most popular and widely recognized by the market are No. 1 (securities trading), No. 4 (advising on securities) and No. 9 (providing asset management).
The 2018 statement once again reiterated the licensing requirements, clarifying that if the business is a regulated financial business, even if it is engaged in virtual asset business, it must be licensed to operate. It is particularly emphasized that if it involves the management of virtual assets such as securities or futures contracts, it needs to obtain the No. 9 license; for the distribution of virtual asset funds, even if it does not involve securities or futures contracts, it should also obtain the No. 1 license.
In May 2021, the Hong Kong side once again mentioned the licensing system and clarified the conditions for virtual asset service providers to apply for a license. Hong Kong requires that virtual asset exchanges that can apply for a license from the SFC must be established in Hong Kong and have a fixed place of business in Hong Kong before they can apply for a virtual asset service provider license. This is also to ensure that the Hong Kong Securities Regulatory Commission can effectively supervise the conduct and compliance of licensed virtual asset service providers. In addition to the geographical and office location requirements of the company making the application, the fit-and-fit criteria also apply to all responsible personnel and ultimate owners of the company. Changes to the relevant persons must be approved by the Securities Regulatory Commission in advance. When considering whether an individual is a suitable candidate, the SFC will consider various relevant factors, including whether the individual has been convicted of money laundering or terrorist financing offences or other serious crimes, or has been convicted of fraud, fraud or other serious crimes. Crimes related to dishonesty; whether the person has violated or is likely to fail to comply with the anti-money laundering and terrorist financing regulations or other regulatory requirements applicable to licensed virtual asset service providers; the person’s experience and relevant qualifications; and Whether the person is in good standing and financially sound (e.g. is not in bankruptcy or liquidation proceedings). To ensure the quality of management of licensed virtual asset service providers, applicants must appoint at least two responsible officers to ensure that the licensee complies with the anti-money laundering and terrorist financing requirements and other regulatory requirements in the future. In case of violation of regulations or non-compliance with requirements, personal responsibility shall be imposed.
As the forefront of China’s economy, Hong Kong has always had high-quality soil for the development of finance and emerging technologies, with a relatively complete legal system, abundant professionals, advanced information and information, and multiple funding channels for investment in start-ups. The leadership of blockchain technology and its benign applications in the fields of credit, smart contracts, and judicial forensics have been widely recognized. Hong Kong is at the forefront again this time. It is reasonable for virtual asset services to enter the era of comprehensive supervision in Hong Kong. Looking at Hong Kong’s regulatory system for virtual assets, it can be said that it is gradual and targeted. It can be foreseen that Hong Kong will once again demonstrate its status as an international financial center in the supervision of virtual assets.
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.