Hong Kong’s new crypto guidelines explained by industry experts

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Earlier this month, Hong Kong took a significant step towards establishing itself as a major cryptocurrency hub by unveiling its virtual asset trading platform (VATP) handbook. Released by the city’s Securities and Futures Commission (SFC), the handbook comprises comprehensive guidelines for cryptocurrency companies seeking to operate within the island, with strict oversight and licensing requirements.

Legal expert Gilbert Ng and TKX Capital founder Chris Lee provided an explanation of the guidelines, which have been translated and published by Wu Blockchain.

One of the key features of these guidelines is the introduction of “transitional agreements,” allowing crypto firms to undergo a one-year trial period in Hong Kong. These companies can apply for a business license in 2024 if they meet the specified criteria.

Per the translated publication, the SFC will permit companies to operate if they are deemed to have “genuine operations and genuine business practices,” with the condition that they are non-securities trading platforms.

To determine the authenticity of operations and practices, the SFC considers various factors, such as the company’s location in Hong Kong, control and operation by employees based in the city, the presence of a local office and other specific requirements.

The new guidelines aim to increase the responsibility of operators and individuals running cryptocurrency exchanges. The framework introduces the concept of “regulated individuals,” including directors, responsible officers and managers.

According to the recently approved rules, these individuals must pass a “fit and proper” test, demonstrating relevant experience in regulated environments, even if gained in other countries.

The handbook also specifies that companies actively targeting Hong Kong residents fall under the purview of regulators. Specific criteria are also outlined to determine whether a company requires an SFC license, such as having a detailed marketing plan targeting the city’s retail investors or allowing trading in Hong Kong dollars.

These stringent measures are a direct response from Hong Kong regulators to the underwhelming performances of certain cryptocurrency companies earlier this year.

Despite mainland China having taken a firm anti-crypto stance, Hong Kong aims to create a regulatory environment that attracts digital asset firms from around the globe.

Attracting crypto firms

Amid the U.S. Securities and Exchange Commission (SEC) crypto crackdowns, Hong Kong SFC’s new crypto regulations provide a clear framework for compliance.

The regulations can potentially divert capital away from the U.S., as they prioritize the protection of customers’ crypto assets, the prevention of money laundering and listing only a select few cryptocurrencies. This has already attracted the attention of industry participants.

Joy Lam, a partner at the law firm Baker McKenzie in Hong Kong, told the South China Morning Post that the significant compliance obligations had not dampened the interest of crypto firms looking to establish a foothold in the city. Instead, the firm has received numerous requests from both existing and new market entrants seeking licensing in Hong Kong.

In March, Christopher Hui, Hong Kong’s secretary for financial services and the treasury, announced that over 80 companies from mainland China and abroad had expressed interest in setting up Web3 businesses in Hong Kong.

Notable exchanges, such as OKX and Huobi, have publicly disclosed their applications for licenses in the city. Despite being founded in mainland China, both exchanges rank among the largest in the world. While working towards compliance with the new regulations, they have already admitted retail users in Hong Kong.

BitMEX, a prominent exchange known for offering derivative products with high leverage, recently launched a separate app focused on spot trading for Hong Kong users. According to CEO Stephan Lutz, this move ensures alignment with the expectations of Hong Kong regulators.

Gate.io, a ten-year-old cryptocurrency exchange, also unveiled a dedicated platform called Gate.HK specifically for the Hong Kong market. The company is actively pursuing licensing in the city due to its strategic significance as a global financial hub and the introduction of the SFC’s licensing regime, says CEO Kevin Lee.

Future expectations

Retail investors in Hong Kong can now utilize crypto exchanges that have launched their services in the city. However, the new rules restrict retail traders to tokens with significant market capitalization, such as bitcoin and ether. Not all exchanges will be fully licensed initially due to the grace period.

“This means that during this one-year transitional period, we are going to have a mix of both licensed exchanges and unlicensed exchanges operating with varying standards,” said Lam. “Investors need to be cautious and do their homework before selecting a crypto exchange to use.”

To ensure investor protection, the SFC plans to enhance investor education, particularly regarding the risks associated with trading on unregulated exchanges, said Elizabeth Wong, the SFC’s director of licensing.

The local crypto industry hopes that regulators will expand the scope of legitimate virtual asset activities in the future, including derivatives and stablecoins.

These developments could drive institutional interest, facilitate stablecoin issuances, and foster partnerships between traditional financial institutions and licensed exchanges for services like fiat currency conversions.

“There is a huge demand from institutional players such as hedge funds for well-regulated crypto derivatives markets,” Peter Brewin, co-leader for crypto and Web3 at PwC Hong Kong, told the South China Morning Post.

“However, the current [virtual asset trading platform] regime does not allow Hong Kong exchanges to offer these products, potentially forcing this activity offshore.”

Brewin suggested that providing a regulated trading venue for crypto derivatives could attract substantial business to Hong Kong, with potentially higher volumes than spot trading.

Gaven Cheong, head of investment funds at Tiang & Partners, the PwC legal network firm in Hong Kong, predicts that increased interest in the coming year will lead to an expansion in the types and number of tokens accessible to retail investors.

It could also drive the issuance of stablecoins and foster partnerships between traditional banking and financial institutions and licensed exchanges for services like fiat currency conversions.

While the new regulations offer much-needed clarity in crypto, industry insiders are already looking to the future.

“[Hong Kong] regulators have done a splendid job presenting the lay of the land for virtual assets with guardrails in place,” said Esme Pau, head of internet and digital asset research for Hong Kong and China at Macquarie Capital.

Pau underscores the significance of maintaining regulatory standards and optimizing the value chain within the virtual assets ecosystem.


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