An article to sort out Hong Kong’s virtual currency regulatory policy

As one of the three major international financial centers, Hong Kong’s role as a guide and model for virtual currency trading is self-evident.

An article to sort out Hong Kong's virtual currency regulatory policy

In May 2021, the Hong Kong Financial Services and the Treasury Bureau issued a consultation summary on the “Public Consultation on Legislative Proposals to Enhance the Regulation of Anti-Money Laundering and Counter-Terrorist Financing in Hong Kong” (the “Consultation Summary”). The main content of the Consultation Summary can be summarized as Hong Kong’s proposed licensing regime for virtual asset service providers, which requires any person who wishes to engage in virtual asset trading in Hong Kong to apply for a license from the Securities and Futures Commission (SFC) and meet the Fit and Proper Criteria, and the licensee to comply with the anti-money laundering and terrorist financing requirements under Hong Kong’s Anti-Money Laundering and Terrorist Financing Ordinance (AMLO). The licensee will be required to comply with the anti-money laundering and terrorist financing requirements under the Hong Kong Anti-Money Laundering and Terrorist Financing Ordinance and other regulatory requirements designed to protect investors. The consultation summary indicates that the inclusion of VAS in Hong Kong’s licensing requirements signals that legal compliance for VAS can be achieved in Hong Kong.

As one of the three major international financial centers, Hong Kong’s role as a guide and model for virtual currency trading is self-evident. The consultation summary also indicates that Hong Kong is driving virtual asset services into the era of comprehensive regulation. In fact, Hong Kong has been trying to figure out the regulation of virtual assets. Looking at the exploration of virtual assets in Hong Kong over the years, it is easy to see that as a financial center, the Hong Kong SAR is open and compatible.

On September 5, 2017, the Securities and Futures Commission of Hong Kong (hereinafter referred to as the “SFC” or “SFC”) issued a “Statement on Initial Coin Offerings”, which stated that

The terms and features of some ICOs may result in the offering of digital tokens that may be “securities” as defined in the Securities and Futures Ordinance and regulated under the securities laws of Hong Kong, and the provision of trading services or advice in relation to such digital tokens, or the management or promotion of funds investing in digital tokens, may constitute “Regulated activity”. Persons or organizations engaged in “regulated activities”, whether or not located in Hong Kong, are required to be licensed by or registered with the SFC as long as their business activities are directed at the Hong Kong public.

Immediately following the release of the statement, the SFC took regulatory action against a number of cryptocurrency exchanges and some ICO issuers, writing to seven cryptocurrency exchanges located in or connected to Hong Kong warning them that they should not trade in cryptocurrencies that are “securities” without a license.

On December 11, 2017, the Hong Kong Securities and Futures Commission issued a “Circular to Licensed Corporations and Registered Institutions Regarding Bitcoin Futures Contracts and Cryptocurrency-Related Investment Products” (the “Circular”), which states that

Some futures and commodity exchanges in the United States have launched or will soon launch bitcoin futures contracts, and Hong Kong investors may trade these contracts through intermediaries. However, the provision of trading services and related services (including the communication or transmission of trade orders) for Hong Kong investors in respect of these contracts constitutes a regulated activity and requires a license from the SFC regardless of whether the business is located in Hong Kong.

On February 9, 2018, the SFC issued another circular reminding investors of the potential risks involved when trading with cryptocurrency exchanges and making investments in ICOs. and unlicensed regulated activity”, the SFC took immediate regulatory action to stop the ICO being conducted by Black Cell Technology Limited to the Hong Kong public and ordered it to return the relevant tokens to Hong Kong investors to cancel the relevant ICO transactions.

On November 1, 2018, the SFC issued a Statement on the Regulatory Framework for Managers of Virtual Asset Portfolios, Fund Distributors and Trading Platform Operators, accompanied by two circulars (“Circular to Intermediaries Statement on the Regulatory Framework for Managers of Virtual Asset Portfolios, Fund Distributors and Trading Platform Operators” and “Circular to Intermediaries on the Distribution of Virtual Asset Funds”) (hereinafter collectively referred to as the “2018 Statements”). If the previous Circulars were more conservative in Hong Kong, the November 1, 2018 Statement and Circular were bolder, making it clear that virtual assets are regulated in Hong Kong.

In November 2019, the Hong Kong Securities and Futures Commission issued a direct position statement to include licensed virtual asset trading platforms in the regulatory sandbox (“voluntary licensing regime”) and to set out regulatory standards similar to those of licensed securities brokers and automated trading venues.

After combing through a series of Hong Kong legislative documents and circulars, it is easy to see that Hong Kong’s approach to virtual assets has been a process from vague to clear, conservative to enlightened. The regulation of virtual assets in Hong Kong 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 this, instead the Hong Kong Securities and Futures Commission has also publicly prompted and cautioned investors about the risks of cryptocurrency trading and ICOs on several occasions. The 2018 statement, for example, opens with a systematic and detailed risk warning about the risks associated with investing in virtual assets, including “valuation, volatility and liquidity,” “accounting and auditing,” “cyber security and safekeeping of assets,” and “cyber security and safekeeping of assets. cyber security and safekeeping of assets”, “market integrity and soundness”, “money laundering and terrorist financing risks”, “conflicts of interest” and “Fraud” in seven areas. And in mid-2018, restrictions were placed on the audience, requiring that services be provided only to “professional investors. In other words, although Hong Kong is constantly improving its regulatory system, the risk of virtual assets does not stop, and while maintaining a compatible financial center, it also holds cautious views on investment.

2、The scope of regulation is gradually expanding

Taking November 1, 2018 statement release time as the node, earlier Hong Kong’s regulatory system only included cryptocurrency and futures contract transactions with securities nature into regulation, and virtual asset management business that does not involve securities or futures contracts does not belong to the regulatory scope. on November 1, 2018, Hong Kong will include virtual asset management business into the regulatory scope.

In terms of regulatory standards, the SFC in Hong Kong also pointed out that they should not be lower than the existing regulatory standards for similar businesses, for example, they should at least comply with the existing requirements, including the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, the Code of Conduct for Fund Managers, etc., and these businesses may no longer circumvent regulation on the basis that the assets in the portfolio do not constitute securities or futures contracts.

In May 2021, the Hong Kong Consultation Summary further expressly included virtual asset service providers in the scope of regulation, including (i) conducting transactions between virtual assets and legal tender; (ii) conducting transactions between one or more virtual assets; (iii) transferring virtual assets; (iv) providing custody or management services for virtual assets, or providing tools to control virtual assets; and (v) providing financial services related to the issuance of virtual (v) providing financial services related to the issuance of virtual assets. At the same time, Hong Kong does not rule out the possibility of bringing private virtual asset transactions under regulation, which leaves room for possible subsequent regulation of private virtual assets. With the expansion of the scope of regulation, HKSAR is step by step following the traditional industries such as banks and trusts to bring virtual asset business into the regulatory scope and promote virtual assets into the era of compliance.

3、Regulation is mainly in the form of licensing

Hong Kong has been adopting a licensing system for financial business, and should apply for a license to engage in regulated financial business, including securities trading, futures contract trading, leveraged foreign exchange trading and other ten categories. Among them, the most sought-after and widely recognized are license No. 1 (securities trading), license No. 4 (advising on securities) and license No. 9 (providing asset management).

The 2018 Statement re-iterates the licensing requirements, making it clear that if the business engaged in is a regulated financial business, it needs to be licensed even if it is engaged in virtual asset business. Particular emphasis is placed on the need to obtain a No. 9 license if it involves the management of virtual assets of the type of securities or futures contracts, and that a No. 1 license should be obtained for engaging in the distribution of virtual asset funds, even if no securities or futures contracts are involved.

In May 2021, the Hong Kong side again mentioned the licensing regime and clarified the conditions for virtual asset service providers to apply for a license. Hong Kong requires that a virtual asset exchange 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 it can apply for a VSP license. This is also to ensure that the SFC in Hong Kong can effectively regulate the conduct and compliance of licensed VSPs. In addition to the geographical and office location requirements for the company making the application, the fit and proper person criteria also apply to all responsible persons and ultimate owners of the company. Changes in persons are subject to prior approval by the SEC. raising requirements or other regulatory requirements applicable to licensed VSPs; the person’s experience and relevant qualifications; and whether the person is reputable and financially sound (e.g., not subject to bankruptcy or winding-up proceedings). To ensure the quality of management of a licensed VSP, the applicant must appoint at least two responsible persons to ensure the licensee’s future compliance with anti-money laundering and terrorist financing requirements and other regulatory requirements, and to take personal responsibility in the event of any breach or non-compliance by the licensee.

Hong Kong, as the frontier of China’s economy, has always been well positioned for the development of finance and emerging technologies, with a relatively sound legal system, abundant expertise, developed information and multiple funding channels for investment in start-ups. The leading edge of blockchain technology and its benign applications in the fields of credit, smart contracts and judicial forensics have been widely recognized, and Hong Kong is at the forefront this time, so it makes sense for virtual asset services to enter the era of comprehensive regulation in Hong Kong. Looking at the regulatory system of virtual assets in Hong Kong, it can be said that it is progressive and targeted. It can be foreseen that Hong Kong will once again show its status as an international financial center in the regulation of virtual assets.

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