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Introduce Hong Kong’s current cryptocurrency regulatory system from the three dimensions of regulatory agencies, regulatory policies and related licenses.
Original title: “Hong Kong’s Encrypted Currency Regulatory Tracking Research”
Written by: Hao Kai, working at HashKey Capital Research
Audit: Zou Chuanwei, Chief Economist of Wanxiang Blockchain, PlatON
Recently, the Securities and Futures Commission (SFC) of the Hong Kong Securities Regulatory Commission (SFC) approved in principle the OSL platform of the BC Technology Group to apply for a virtual asset trading platform license, which means that Asia’s first licensed virtual asset trading platform will be in Hong Kong, China Born. Hong Kong’s regulation of cryptocurrency has a great impact on the participants in the ecology. This article mainly studies the regulation of cryptocurrency in Hong Kong, which is divided into five chapters. The first three chapters introduce Hong Kong’s current regulatory system from the three dimensions of regulatory agencies, regulatory policies and related licenses. Chapter four analyzes the participants of cryptocurrency, and chapter five summarizes.
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. SFC’s regulatory objectives include: maintaining and promoting the fairness, efficiency, competitiveness, transparency and order of the securities and futures industry; improving public understanding of the operation and functions of the securities and futures industry; providing protection to the public who invest in or hold financial products ; Minimize criminal and misconduct in the securities and futures industry; reduce systemic risks in the securities and futures industry; take appropriate steps related to the securities and futures industry to assist the Financial Secretary in maintaining Hong Kong’s financial stability.
The Hong Kong Monetary Authority (HKMA) is responsible for Hong Kong’s financial policy, banking and currency management, and plays a role similar to that of the central bank. The main functions of HKMA include: maintaining currency stability within the framework of the linked exchange rate system; promoting the financial system, including the stability and soundness of the banking system; helping to consolidate Hong Kong’s status as an international financial center, including maintaining and developing Hong Kong’s financial infrastructure and managing exchange funds .
In addition to SFC and HKMA, other institutions such as the Hong Kong Insurance Authority (HKIA) 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.
Related regulatory policies
In Hong Kong, cryptocurrencies are mainly divided into security cryptocurrencies, functional cryptocurrencies, and virtual commodities (such as Bitcoin). For different types of cryptocurrencies, Hong Kong regulators have adopted different regulatory policies. SFC’s interpretation of security-type cryptocurrencies is: representing equity (the right to receive dividends and the right to participate in the distribution of remaining assets when the company is liquidated); representing debentures (the issuer can hold tokens on a specified date or at the time of redemption) People repay the investment principal and pay interest to them); can be used to obtain the income of the “collective investment plan”.
Hong Kong does not specifically enact legislation on cryptocurrency and related businesses, but previous regulations made by relevant laws, such as anti-money laundering, anti-fraud, and anti-terrorist financing, must be complied with. In addition, as the influence of cryptocurrency continues to increase, regulators have successively introduced a series of regulatory policies to better protect the interests of investors. The regulatory policies related to cryptocurrency mainly include the following.
Securities and Futures Ordinance
The Securities and Futures Ordinance is the main law of Hong Kong’s securities and futures market. The Securities and Futures Ordinance integrates more than 10 relevant laws and regulations, and the scope of supervision is very wide. The Securities and Futures Ordinance can supervise security-type cryptocurrencies, but if the cryptocurrency involved does not fall within the scope of the legal definition of securities or futures contracts, investors will not enjoy the protection provided by the Securities and Futures Ordinance.
“Statement on Initial Token Issuance”
In September 2017, SFC issued the “Statement on Initial Token Issuance”. SFC stated that the cryptocurrencies involved in the initial token issuance may belong to the securities defined in the Securities and Futures Ordinance, and the team or fund engaged in the initial token issuance must be registered and regulated with SFC.
“Circular to Licensed Corporations and Registered Institutions: Regarding Bitcoin Futures Contracts and Cryptocurrency-related Investment Products”
In December 2017, SFC issued the “Circular to Licensed Corporations and Registered Institutions: Regarding Bitcoin Futures Contracts and Cryptocurrency Related Investment Products.” SFC stated that 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.
“Statement on the Regulatory Framework for Virtual Asset Portfolio Management Companies, Fund Distributors, and Trading Platform Operators”
In November 2018, SFC issued the “Statement on the Regulatory Framework for Virtual Asset Portfolio Management Companies, Fund Distributors, and Trading Platform Operators” (hereinafter referred to as the “Statement”). In this document, SFC mentioned “Regulatory Guidelines for Virtual Asset Portfolio Management Companies and Fund Distributors” and “Explore the supervision of platform operators.” For virtual asset portfolio management companies and fund distributors, if their virtual assets exceed 10% of the total asset size, they must be registered with SFC and can only be sold to professional investors. For virtual asset trading platforms, SFC provides a regulatory conceptual framework, and stated that it will cooperate with standard-compliant virtual asset trading platforms, include them in the regulatory sandbox, and consider issuing licenses to standard-compliant trading platforms when appropriate .
“Statement on the Issuance of Security Tokens”
In March 2019, SFC issued the “Statement on the Issuance of Security Tokens.” SFC stated that security tokens may be classified as securities under the Securities and Futures Ordinance and should be regulated. Unless applicable exemptions are obtained, teams or funds engaged in the issuance of security tokens must register or apply for a license with SFC and be subject to supervision.
“Standard terms and conditions applicable to licensed corporations that manage investment portfolios in virtual assets”
In October 2019, SFC issued the “Standard Terms and Conditions for Licensed Corporations that Manage Investment Portfolios in Virtual Assets”, which is regulated by licensed institutions that manage funds that invest in virtual assets and meet the minimum exemption requirements . The regulatory rules in this document are the specific extension and implementation of the “Statement”, which further proposes the operational guidelines and regulatory norms for fund investment in virtual assets.
“Warning on Virtual Asset Futures Contracts” and “Position Paper: Regulating Virtual Asset Trading Platforms”
In November 2019, SFC issued the “Warning on Virtual Asset Futures Contracts” and “Position Paper: Regulating Virtual Asset Trading Platforms.” SFC is empowered to approve and issue licenses to entities engaged in regulated activities as defined by the Securities and Futures Ordinance. Under this regulatory framework, trading platform operators that provide security-type cryptocurrency fall under the supervision of SFC and need to hold relevant regulatory licenses. The main conditions for the issuance of licenses include that platform operators can only provide services to professional investors, and must strictly screen virtual assets that can be traded on their platforms.
The SFC stipulates a total of 12 types of regulated activities, that is, to engage in the following 12 types of related activities, you need to obtain the corresponding license and accept supervision in order to legally carry out the corresponding financial activities in Hong Kong. Among them, the 11 and 12 licenses related to OTC derivatives have not yet been implemented.
Table 1: Regulatory License
According to the current regulatory framework, licenses related to cryptocurrency-related trading platforms, funds and fund management platforms mainly include Type 1, Type 4, Type 7, and Type 9 regulatory licenses. For example, funds and sales platforms that invest in virtual assets need to hold Type 1 licenses; asset management platforms need to hold Type 9 licenses.
The OSL platform is Asia’s leading digital asset and financial technology company, mainly providing brokerage services and digital asset custody services. The OSL platform has been approved in principle for Type 1 and Type 7 regulatory licenses.
Huobi Asset Management (Hong Kong) Co., Ltd., a subsidiary of Huobi Technology Holdings Co., Ltd., provides securities consulting and asset management services for professional investors, and has obtained Type 4 and Type 9 regulatory licenses.
For the HashKey ecosystem, HashKey Capital has obtained a Type 9 license; HashKey Pro is applying for Type 1 and Type 7 regulatory licenses; HashKey Trading is applying for Type 1 and Type 4 regulatory licenses.
Analysis of participants
After the OSL platform’s regulatory license application is approved, the trading platform will be most affected. For trading platforms that want long-term development in the industry, they are willing to achieve compliance through supervision and attract more customers with a compliant image. With the precedent of the OSL platform, other trading platforms will actively apply for regulatory licenses.
Of course, compliance also means that the business flexibility of the trading platform is limited. At present, after obtaining the regulatory license, the main trading category provided by the trading platform is security-type cryptocurrency, and it needs to meet a series of requirements such as anti-money laundering, anti-terrorist financing and KYC.
At present, as long as the cryptocurrency is legally obtained, investors will not be subject to any regulatory restrictions on holding or trading cryptocurrency. Note that if the cryptocurrency held by an investor is classified as a security or futures contract, then the investor’s behavior will be regulated by the Securities and Futures Ordinance.
The approval in principle for the regulatory license application of the OSL platform can increase investors’ confidence in the security and compliance of the cryptocurrency market and attract more investors, especially institutional investors, to enter this market. What needs to be pointed out is that Hong Kong regulators are more cautious about cryptocurrency. They have repeatedly reminded investors to guard against risks and have also taken many measures to protect their interests.
For cryptocurrencies that are mined through “Proof of Work” such as Bitcoin, miners use computing power to mine. Currently, there are no specific regulations on cryptocurrency mining in Hong Kong, and no regulatory agency has issued any guidance on restricting or prohibiting mining. However, Hong Kong’s electricity bills are very high, and mining in Hong Kong is not economical. Reasonable miners will not choose to mine in Hong Kong. At the same time, a large number of mining machines will be used to participate in mining. This kind of business is very similar to large-scale data center business. Related policies applicable to big data centers may be applicable to cryptocurrency mining.
Recently, several well-known cryptocurrency mining machine manufacturers have chosen to list on the Hong Kong stock market. However, due to their inability to meet the listing adaptability, the plans of these cryptocurrency mining machine manufacturers to list on the Hong Kong stock market have failed.
For the project party, the most likely activity to be regulated is fundraising through the issuance of tokens. According to the type of cryptocurrency, it can be subdivided into ICO and STO. SFC has issued separate statements for ICO and STO.
Regarding ICOs, regulators have a relatively negative attitude towards cryptocurrencies that do not have securities attributes. SFC reminds the public that there is a lot of uncertainty in participating in ICOs, and educates the public about the risks involved in cryptocurrency, so that investors can fully assess the risks before making investment decisions. In March 2018, SFC suspended Black Cell’s ICO activities and required Black Cell to return investors’ funds.
For STO, the issuance and trading of security-type cryptocurrencies will be regulated by the Securities and Futures Ordinance. Therefore, the project team engaged in the issuance of security tokens must register or apply for a license with SFC and be subject to supervision.
to sum up
Hong Kong has unique advantages in terms of its geographical location, social system, and financial resources. It has attracted many cryptocurrency project parties and companies. For example, Huobi and OKEx have successively bought the shell resources of Hong Kong-listed companies. Hong Kong’s regulatory policies are an important factor affecting these project parties and enterprises.
After the OSL platform’s regulatory license application is approved in principle, more industry participants will embrace regulation, actively apply for regulatory licenses, and promote the development of the entire industry in compliance with laws and regulations. Of course, participants need to meet various regulatory requirements, which places higher demands on them.
Hong Kong regulatory agencies have relatively clear regulatory requirements and implementation rules for securities-based cryptocurrencies; there are relatively few regulatory policies for non-securities-based cryptocurrencies. For both types of cryptocurrencies, supervision is required to protect the interests of investors. At present, cryptocurrency is still in the early stage of development, and over-regulation may stifle innovation. Regulators should balance regulation and development.