Hong Kong’s “virtual asset trading” regulation of the new motion: not to adopt a one-size-fits-all management

In the long run, the implementation of compliant and effective regulatory measures for virtual asset trading can promote the development of the entire market in a formal and orderly direction. At the same time, the future legal regulatory framework of Hong Kong will provide regulatory ideas for other countries and regions.

Hong Kong's "virtual asset trading" regulation of the new motion: not to adopt a one-size-fits-all management

In the long run, the implementation of compliant and effective regulatory measures for virtual asset trading can promote the development of the entire market in a formal and orderly direction. At the same time, the future legal regulatory framework of Hong Kong will provide regulatory ideas for other countries and regions.

On May 21, the HKSAR government published a paper stating that it proposes to refer to similar empowering provisions in the Securities and Futures Ordinance to give the Securities and Futures Commission (SFC) the power to intervene to restrict or prohibit the operation of licensed virtual asset service providers and their associated entities when necessary.

Conducting regulated virtual asset activities without a license is punishable by a fine of $5 million and imprisonment for seven years, and in the case of a continuing offence, a further fine of $100,000 for each day during which the offence continues.

It was also re-emphasized that cryptocurrency exchanges operating in Hong Kong must be licensed by the Hong Kong market regulator and can only provide services to professional investors.

Just a few days before the HKSAR government issued this announcement, on May 19, the entire cryptocurrency market experienced one of the most devastating turmoil ever, with Bitcoin falling through the $30,000 mark, dipping to $29,000 at one point.

Ether, on the other hand, fell below $2,000 to a low near $1,600, with a maximum 24-hour drop of 48%, down as much as 60% from its high. None of the other mainstream coins and cottage coins were spared and suffered a severe cut.

Against such a backdrop, the updated regulation in Hong Kong was interpreted by the industry as “a tougher regulatory crackdown on crypto asset trading in Hong Kong”.

In reality, this view is more based on the panic caused by the market turmoil. “Hong Kong will not adopt a one-size-fits-all approach to the regulation of virtual asset trading, as it focuses on the balance between regulation and openness,” said Fu Rao, executive director of the Hong Kong International Institute of New Economy and executive director of the Digital Cornerstone – Blockchain Creation Camp of Shenzhen High Gold, in an interview with Chaintech In an interview with Chaintech App, Fu Rao said.

On May 23, the Secretary for Financial Services and the Treasury of the Hong Kong, China government said that the changes in virtual assets are mind-boggling, in addition to the huge price fluctuations and the emergence of cryptocurrencies, I can’t draw a conclusion without a “crystal ball”.

He believes that considering the complexity of the technology behind virtual assets, the risks involved and the volatility of prices are different from traditional financial products, at least in the early stage of the licensing system, virtual asset service providers (VASPs) should only be allowed to serve professional investors.

At the same time, the definition of VASPs may change in the future, and the proposed legal framework will provide some flexibility for the SFC to specify the qualities that constitute a VASP.

From the remarks of the Secretary for Financial Services and the Treasury, it can be seen that Hong Kong has only re-emphasized the dangers behind the trading of virtual assets this time, reinforcing the legal responsibilities that should be borne by the subjects of trading institutions, and not imposing a ban on cryptocurrency trading.


Cautious and open regulatory attitude, highlighting the main position of the market
The Hong Kong government’s regulatory principle is “to leave it to market practice to make judgments, and most importantly, to balance the needs of regulation and development.” This is the primary premise of Hong Kong’s regulation of crypto-asset trading, which is also different from that of other countries and regions.

On May 21, the State Council’s Financial Stability Development Committee called for resolute prevention and control of financial risks. Adhere to bottom-line thinking, strengthen the all-round scanning and early warning of financial risks, promote the reform of small and medium-sized financial institutions to reduce risks, focus on reducing credit risks, and strengthen the supervision of financial activities of platform enterprises.

Crack down on bitcoin mining and trading practices, and resolutely prevent the transmission of individual risks to the social sector. Once the news was launched, the whole market experienced another shock, so much so that people have been chanting “the strongest regulation is coming again, it’s time to flee crypto digital currency.”

According to Fu Rao, compared to the mainland government’s tough regulatory policy of “cracking down on bitcoin mining and trading”, Hong Kong has also imposed high fines and even harsh legal imprisonment for unlicensed regulated virtual asset activities.

However, this does not mean that such trading is completely prohibited in Hong Kong, rather, to a certain extent, Hong Kong places more emphasis on highlighting the main position of the market, which is also in line with Hong Kong’s regulatory principles.

Judging from the three releases of the Hong Kong Securities and Futures Commission’s regulatory policies for cryptocurrencies in November 2018, November 2019, and May 2021, Hong Kong is now a global leader in the legal system for cryptocurrency regulation.

On December 15, 2020, the OSL digital asset platform announced that it had been granted the first digital asset licenses by the Hong Kong Securities and Futures Commission, namely License No. 1 (securities trading) and License No. 7 (provision of automated trading services), which are necessary for a compliant platform in Hong Kong.

This is a major milestone in the regulation of the Hong Kong virtual asset market and means that Hong Kong has become the first regulated virtual asset trading market in the world.

It is important to note that while OSL has received its first digital asset license, investors trading on OSL can only be professional investors in Hong Kong.

The requirements for professional investors include a threshold of HK$8 million or US$1 million for individuals and HK$40 million or US$5 million for institutions for their financial assets (cash, stocks and other highly liquid assets).

In addition, the exchange is required to conduct a KYC process for clients as well as confirm professional investors for each client as well as a risk assessment to ensure that the client has sufficient net worth to bear the risk and possible incurrence of trading losses.

As you can see, the requirements for professional investors in Hong Kong are relatively high, and they will not account for more than 20% of all investors in the Hong Kong market. This has resulted in lower trading liquidity for OSL, although it is currently the only compliant exchange in Hong Kong.

In addition, due to the tightening of regulatory policies in the mainland, the regulation in Hong Kong also needs to wait and see, except for BC Technology’s OSL platform, the second license is likely to be “difficult to produce”.

Pay Rao talked about this situation in Hong Kong commodity futures and other financial segments have also appeared, the relevant exchange institutions spend a relatively high cost of time. In other words, it is basically impossible to get a compliant exchange license in Hong Kong in the short term.

Hong Kong regulators’ thinking is initially to find the essence of blockchain-related concepts from the established laws and to resolve the blockchain issue into a problem under the existing legal framework,” said Fu Rao.

Once digital currencies are considered securities, they are subject to regulation under the Securities and Futures Ordinance.” The Ordinance provides that only licensed institutions can operate a particular type of regulated activity or hold themselves out as operating a regulated activity.

A person or organization engaged in a regulated activity must be licensed by or registered with the SFC as long as it is directed to the public in Hong Kong.


Compliance regulation makes Hong Kong a “window” for global virtual asset trading
Hong Kong, as the first stop for mainland companies going abroad and the hub for overseas companies entering the mainland, has an international financial center status and an open financial philosophy and policy that makes it more friendly in terms of legal regulation of virtual asset trading.

On September 4, 2017, seven ministries and commissions, including the central bank, jointly issued an announcement that clearly defined ICOs as illegal fundraising and strictly prohibited them, leading to a plunge in cryptocurrency prices and the shutdown of then-larger cryptocurrency platforms such as Bitcoin China and Cloudcoin.com. Overnight, there was a collective exodus of projects related to virtual currencies.

The following day, the Hong Kong Securities and Futures Commission (SFC) also issued a statement on initial token offerings. Unlike the regulatory attitude of the Mainland at the time, the SFC’s statement aimed to clarify that, depending on the facts and circumstances of individual ICOs, the digital tokens offered or sold may be “securities” as defined by the Securities and Futures Ordinance.

They are regulated by the securities laws of Hong Kong. The statement emphasizes that if the digital tokens involved in an ICO meet the definition of “securities”, providing trading services or advice on such digital tokens, or managing or promoting funds that invest in digital tokens, may constitute “regulated activity”.

This slightly more moderate regulatory policy in Hong Kong has led many companies in the cryptocurrency space on the mainland to relocate to Hong Kong in search of “sanctuary”, and many exchanges have even moved their headquarters directly to Hong Kong.

“SFC is exploring regulation of locally-operated digital currency trading platforms, but will not consider banning cryptocurrency platforms altogether, as it has done on the mainland.”

On Oct. 15, 2018, former SFC Hong Kong chairman Tang Ka-shing had said, “When transactions can cross borders, a country’s ban will not play any role in today’s internet world.

Even if regulators ban these cryptocurrency trading platforms, trading can still be easily conducted through overseas platforms. The SFC will carefully consider various approaches, as these platforms are new technologies and cannot be treated as securities.”

In November 2018, the Hong Kong Securities and Futures Commission issued a Statement on the Regulatory Framework for Managers, Fund Distributors and Trading Platform Operators of Virtual Asset Portfolios (the “Regulatory Framework”), issuing new regulations for investments in virtual assets such as cryptocurrencies.

Emphasis was placed on the need to apply for Class 1 and Class 9 licenses, the need for users to be professional investors, the need for new ICO tokens on the shelves to have been in operation for 12 months or to have started making profits, the need to purchase insurance for users’ virtual assets, etc.

Later in October 2019, the Hong Kong Securities and Futures Commission issued the “Standard Terms and Conditions Applicable to Licensed Corporations Managing Portfolios Invested in Virtual Assets”, which sets out specific requirements for company qualifications, risk management, compliance audits, anti-money laundering and anti-terrorism from the perspective of virtual asset fund management companies.

In November last year, the Financial Services and the Treasury Bureau of the HKSAR Government conducted a public consultation on legislative proposals to strengthen the regulation of anti-money laundering and terrorist financing, proposing to establish a licensing regime for virtual asset service providers.

In response, the Chief Executive Officer of the Hong Kong Securities and Futures Commission, Mr. O’Dell, said that after the launch of the licensing regime, all virtual platforms operating in Hong Kong or targeting Hong Kong investors will be required to apply for a license and be regulated by the authorities.

All virtual asset trading platforms will operate under last year’s regulatory framework and licensing system. Any person who engages in regulated virtual asset activities without a license commits a criminal offence and is liable on conviction to imprisonment for seven years and a fine of $5 million.

A scene very similar to that of four years ago occurred on May 23, 2021, when the Mainland tightened its regulation of virtual assets, and the Hong Kong government once again refined and emphasized the relevant regulatory rules, encouraging compliance development while cautiously seeking ways to regulate.

Going forward, the question that Hong Kong regulators need to address is how to strike a balance between regulatory compliance and encouraging development, which will not only have an important impact on virtual asset trading in the local Hong Kong market, but will also provide new governance ideas for other countries and regions around the world in terms of legislation and regulation.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/hong-kongs-virtual-asset-trading-regulation-of-the-new-motion-not-to-adopt-a-one-size-fits-all-management/
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