Author: Nancy, BlockingNews
Hong Kong used to be the hub for cryptocurrency companies, but its uncertain policies caused it to fall behind in the cryptocurrency wave. With the successive issuance of cryptocurrency policies and an open attitude, Hong Kong has shown its determination to compete as a “global virtual asset center,” and major cryptocurrency institutions have begun to heavily invest in the Hong Kong market. Especially recently, the Hong Kong Securities and Futures Commission (SFC) released a summary of the consultation on the “Guideline on the Regulatory Framework for Virtual Asset Trading Platform Operators,” announcing that it will start accepting applications from virtual asset trading platforms on June 1 and providing clear regulatory guidance, which also means that Hong Kong has opened the process of legalizing cryptocurrency trading.
Under the frequent warm winds of policy, trading platforms such as OKX, BitgetX, BitMEX, Gate.HK, and Huobi HK have all launched in Hong Kong. So, how can cryptocurrency trading institutions obtain a license under the new regulations in Hong Kong? What are the attractions of Hong Kong’s cryptocurrency regulation compared to other countries? What impact does it have on ordinary investors? BlockingNews spoke with industry experts from OKLink, Invest Hong Kong, Matrixport, Beosin, and JunHe Hong Kong Law Firm to see how they interpret Hong Kong’s policies.
Hong Kong’s cryptocurrency regulation tends to be conservative and rigorous, but still exceeds expectations
In February of this year, the Hong Kong Securities and Futures Commission announced that it would consult on proposed regulations related to the regulation of virtual asset trading platform operators. The consultation on the document ended on March 31 to coincide with the new licensing system that will officially take effect on June 1. Based on BlockingNews’ interpretation of this consultation document, the Hong Kong Securities and Futures Commission mainly consulted the industry on issues such as “whether trading platforms are allowed to face retail investors, which assets retail investors can participate in, security protection, and anti-money laundering.”
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During the more than one-month consultation period, the Hong Kong Securities and Futures Commission received a total of 152 submissions, including those from the industry and professional organizations, professional and consultancy firms, market participants, licensed corporations, individuals, and other stakeholders, such as Binance.com, OKX Hong Kong, OKLink, Amber Group, Ripple Labs, and Beosin.
From the opinions of these organizations, the majority of respondents support the Hong Kong Securities and Futures Commission’s licensing management, and the main opinions are related to retail investors’ use of licensed virtual asset trading platforms, token inclusion criteria, compensation arrangements for risks related to the custody of clients’ virtual assets, trading of virtual asset derivative instruments, implementation details, and transition arrangements.
“As one of the consulting parties, SFC’s response revision exceeded our expectations. Eucloud Chain’s advice is reflected in the revised update part of this consultation summary document, especially in the two major blocks of security solution and risk management, including the storage of seed keys, multi-confirmation and building their own chain firewall (such as situational awareness). The consultation summary released this time also reflects the Hong Kong Securities Regulatory Commission’s open attitude and transparent regulatory thinking. From the Hong Kong Securities Regulatory Commission’s emphasis on technological solutions to security issues and the deliberate mention of blockchain analysis tools and the active absorption of supplements from all parties on risks, such as cross-regional issues of related transactions and on-chain and off-chain issues, it can be seen that handing virtual assets to operators who understand them better and using technological means to solve technological problems is the appropriate path chosen by the Hong Kong Securities Regulatory Commission. However, while protecting innovation, emphasis should also be placed on risk. Eucloud Chain has also put forward opinions and analysis on the risk of virtual asset trading platforms, and suggestions involving regulatory, security and risk aspects are very important, which can help virtual asset trading platform operators and financial institutions better comply with regulatory requirements and ensure user safety. From the revised draft, we can also see that the Hong Kong Securities Regulatory Commission is more rigorous in wording and emphasizes risk management and security measures.” Hedy, chief researcher of Eucloud Chain Research Institute, said in an interview with BlockingNews.
“Hong Kong’s regulatory requirements are relatively comprehensive, and Beosin has given its own opinions on security audits for coin listing and security custody of exchanges. In fact, we can see that the Hong Kong Securities Regulatory Commission is not familiar with technological solutions, so it has adopted a relatively conservative attitude to understand the mainstream solutions in the market, and the institution has not explicitly stated which technical solutions meet compliance requirements, which also makes its regulation more flexible.” Alvin Lu, the BD person in charge of blockchain security audit company Beosin, pointed out.
Hong Kong regulatory authorities also recognize the importance of the positive interaction between regulation and innovation. Ashley Alder, CEO of the Hong Kong Securities Regulatory Commission, said earlier that “providing clear regulatory expectations can promote responsible development. Hong Kong’s comprehensive virtual asset regulatory framework follows the principle of ‘same business, same risk, same rules’, which aims to provide proper investor protection and control major risks, thereby promoting sustainable development of the industry and supporting innovation.”
With the new regulations set to take effect on June 1, this will be a watershed moment for cryptocurrency operations in Hong Kong, with all institutions required to be “licensed”. Institutions must apply within nine months after June 1, and can only continue to operate in Hong Kong after receiving approval from the Securities and Futures Commission (SFC). Operators who do not intend to apply for a license should begin the process of orderly cessation of their business in Hong Kong.
Hong Kong Regulatory Framework Draws on Experiences from Multiple Countries, Suggests Simultaneous Application for Virtual Asset and Securities Licenses
Globally, there is an increasing emphasis on prudent regulation of cryptocurrencies, with most regulatory bodies requiring cryptocurrency service providers to be licensed, registered, and authorized. At the same time, cryptocurrency regulation is becoming increasingly strict overall, with Singapore, for example, increasing resistance to retail cryptocurrency trading and reducing licenses for operating cryptocurrency businesses. The frequent interventions by US regulatory institutions have caused many cryptocurrency practitioners to flee, and this provides an opportunity for Hong Kong’s development of Web3.
So, how does Hong Kong differ from other countries in terms of overall regulatory framework and implementation details? “From the interviews with Ouke Cloud Chain and US experts on the regulatory situation in Hong Kong and Singapore, it can be seen that Singapore’s cryptocurrency regulatory policy is relatively open, Hong Kong has always adopted advanced and relatively cautious regulation, and the United States currently does not have a comprehensive regulatory framework because of the uncertainty caused by regulatory agencies’ struggle for power and differences and complexities between states and federal agencies. However, regulatory agencies in these regions are exploring ways to regulate the cryptocurrency market in order to protect investors’ interests and maintain market order.” Hedy also revealed that Ouke Cloud Chain will focus on promoting new product lines in the Hong Kong region, which cover data from 40+ mainstream public chains and provide comprehensive compliance analysis, on-chain security checks, and trend-aware warning monitoring, among other things, to comprehensively help financial institutions and related enterprises meet their corresponding compliance and security needs.
Alvin Lu believes that the clarity of Hong Kong’s regulation will encourage many projects to choose to settle there. “From the perspective of the regulatory environment in the United States, the uncertainty of US regulation has brought great risks to many US cryptocurrency projects, especially the struggle for power between the US Securities and Exchange Commission and the Commodity Futures Trading Commission over cryptocurrency regulation. In addition, although Singapore had an open attitude towards cryptocurrency holding, the FTX, LUNA and other events have prompted the government to tighten relevant regulatory policies. In fact, from Japan’s regulation of virtual assets a few years ago, we can also see that regulatory policies gradually relaxed as trading matured. Therefore, we can also expect that as the market acceptance and education of retail investors increase, Hong Kong’s regulation may become increasingly relaxed after defining regulatory standards.”
According to Christopher Liu, Chief Compliance Officer at Matrixport, Hong Kong’s new regulatory rules have learned from the experiences of places such as Singapore. After applying for a license on a trading platform, it will not only be regulated by the Securities and Futures Ordinance, but also by the Anti-Money Laundering Ordinance. In fact, the Hong Kong Securities Commission has also explicitly required in the consultation document that virtual asset trading platforms (along with responsible personnel and licensed representatives) should apply for dual licenses under the existing system under the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance. Even virtual asset trading platforms such as OSL Exchange and HashKey Pro, which have already been licensed, need to reapply.
Terry Chan, Senior Manager of Financial Technology at the Hong Kong Investment Promotion Bureau, suggested that “virtual assets and securities products have the same attributes, so the Hong Kong Securities Commission has referred to some existing securities regulatory frameworks in formulating risk control, capital requirements, and licensing and other regulations. I recommend that you apply for securities licenses while applying for virtual asset licenses, because some tokens will have securities attributes.”
It is worth mentioning that the Hong Kong Securities Commission also pointed out in the guidance that it will continue to pay attention to the development of the virtual asset market and make modifications or updates to the guidance as needed.
Regarding this, Qiao Zheyuan, partner of Junhe Hong Kong Law Firm, also pointed out in an interview, “The SFC will continuously adjust regulatory and risk control measures based on the market’s acceptance and understanding, as well as the business needs of various types of industry players. For example, stablecoins, financial derivatives, etc. Although the Securities and Futures Commission does not allow licensed operators to sell, trade, or buy virtual asset futures contracts or related derivative tools, it understands the industry’s interest in virtual asset derivative tools, so there may be an independent review at the appropriate time in the future.” Qiao Zheyuan, partner of Junhe Hong Kong Law Firm, pointed out.
Licensed platforms have more room for development, but limited attraction of funds outside the circle
As Hong Kong’s virtual asset trading platform license application is about to open on June 1st, Hong Kong retail investors are expected to buy and sell virtual assets on licensed trading platforms in the second half of the year. According to Hong Kong’s new regulations, retail investors are only allowed to trade mainstream cryptocurrencies such as BTC and ETH, and services such as stablecoins, proprietary trading, and lending are temporarily prohibited. Retail investors must understand the risks involved in virtual asset investment. Before making any type of investment decision, investors should understand the relevant characteristics and risks and be prepared to accept losses.
Meanwhile, the Hong Kong Securities and Futures Commission also emphasized that approving a licensed virtual asset trading platform to include a certain virtual asset for retail trading does not constitute a recommendation or endorsement of the virtual asset, nor does it guarantee the commercial viability or performance of the virtual asset. The Hong Kong Securities and Futures Commission will continue to work with investors and the Investor Education Council to educate investors on all aspects of virtual assets and their trading. Of course, before a licensed virtual asset trading platform provides trading services to retail investors, it should follow a series of proper investor protection measures that cover establishing business relationships with customers, governance, disclosure, and token due diligence and inclusion.
In response, Terry Chan believes that the Hong Kong government is mainly providing protection for all retail investors while giving more freedom to professional investors. Although there are not many investment products that can be allowed at present, in the long run, regulatory agencies will make adjustments based on the actual situation, and will gradually provide various types of products like traditional finance does.
“Hong Kong has a very good environment naturally because there are many financial institutions, which also provides a great opportunity for compliant exchanges.” said Qiao Zheyuan, a lawyer.
Meanwhile, Alvin Lu believes that Hong Kong’s approval to provide services to retail investors will only attract external funds to a certain extent. “In fact, after the policy is implemented, retail investors in Hong Kong can conduct transactions. The implementation of this policy only means that the trading behavior of retail investors will be regulated, and investment will have some protection. At the same time, under the same risk and regulatory conditions, it is also unlikely for mainland individual investors to open accounts in Hong Kong.”
In response, Hedy also believes that the impact of retail investors on the amount of funds may not cause too many ripples. She explained, “Traditional financial institutions will actually pursue higher returns, especially now that there is a shortage of assets, they will pay more attention to this (virtual assets) opportunity. However, from an investment perspective, its impact may be relatively small, and traditional financial institutions may be more attractive in terms of what business they can carry out. Of course, employees of traditional financial institutions may also participate in the encrypted market as retail investors, but everyone is also clear that if looking at the market size, institutional investors will be much larger than retail investors. For example, in A shares, 80% are retail investors and 20% are institutional investors in terms of numbers, while 80% are institutional investors and 20% are retail investors in terms of funds.”
The new policy in Hong Kong indicates that mainland Chinese users are not allowed to participate, and licensed platforms are required to ensure that their customers do not trade through “climbing the wall” and that the IP address does not come from areas where virtual assets cannot be bought and sold, emphasizing the need to comply with relevant regional regulations.
Overall, Hong Kong has used multiple regulatory measures to mitigate actual and potential risks as much as possible, while ensuring the sustainable development of virtual asset innovation, greatly protecting the interests of investors and financial market stability. BlockingNews will continue to follow up on platform development after the policy is implemented.