Regulators announced Hong Kong’s aim to become a hub for virtual assets at the start of Hong Kong FinTech Week. The government declared it is willing to investigate virtual asset futures exchange-traded funds and would hold talks on allowing ordinary investors to invest on authorised platforms (ETFs).
The irony is that Hong Kong was already a hub a few years ago. People who have been around the cryptocurrency market for a while may mention how Bitmex had a location with a shark tank directly above Hong Kong’s financial regulator, the Securities and Futures Commission (SFC).
When the SFC started knocking on doors, exchanges began to fear that they might be penalized for listing tokens without first seeking legal advice on whether they qualified as securities under local laws. As obtaining a legal opinion could cost up to US$10,000 per token, the fees were exorbitant.
Leverage-related cautions were issued by the regulator. Virtual asset service providers (VASP) might now apply for licenses to trade in securities and offer automated trading services through an opt-in process. It was strict. Only two companies received good news: HashKey Group received an in-principle clearance, and BC Group, which operates exchange OSL, is the only company with licenses.
And it appeared that platforms would not be able to serve ordinary investors once its licencing regime went into effect and was no longer opt-in. Retail investors kept using unregistered exchanges in the meantime.
China has outlawed businesses that provide cryptocurrency services. Politicians in Hong Kong argued that the city was still administered in accordance with the “one nation, two systems” principle, which stipulates that although the city is a part of China, It is permitted to do its own business. But businesses questioned if Hong Kong could maintain its independence when it came to choosing how to regulate cryptocurrency. They departed in large numbers for Singapore and other countries.
Restrictions related to COVID-19 made things more difficult for enterprises. Hong Kong has some of the strictest Covid-19 regulations in existence at this time last year, including a three-week hotel quarantine for visitors. The talent drained from the city. Incoming travellers are no longer required to be quarantined, although they are still required to undergo testing. The city claims that operations are back to normal. The issue is whether companies and talent will reappear.
A strict licencing framework is in place
There will be a nine-month grace period for applicants before the VASP licencing scheme takes effect in March 2023. Opt-in policies will no longer be in place in Hong Kong. Exchanges can only operate in the city if they have a licence.
The VASP regime provides precision. Without explicit regulations, the Amber Group managing partner Annabelle Huang explained, they were effectively self-regulating, evaluating ourselves against the strongest regulatory norms. She continued by saying that the business had held itself to the strictest standards of cryptocurrency regulation in the countries where it operates.
The proposed system, in the words of Padraig Walsh, partner at the law firm Tanner De Witt, brings Hong Kong up to the expected norms under the Financial Action Task Force. He stated that anti-money laundering and KYC for virtual assets were two areas where advancement was anticipated.
He claimed that Hong Kong’s strategy was created with the long term in mind. According to him, the licences are not intended for the masses, but the few.
According to a government, market participants have stated that they believe the VASP system is rigorous. Given that they must insure their assets, they see significant operational costs and store a sizable portion of their assets in cold wallets.
Ultimately, this insider claimed, the government is focused on protecting investors. It appears to be primarily focused on spot trading at this time and does not permit staking, lending, copy trading, or leverage, which is the mainstay of many exchanges. The SFC essentially does not want to see anything that is not present in the conventional stock market.
Other governments have enacted regulations before changing them. Singapore, for instance, has informed the market that its compliance requirements will increase. Hong Kong started off with a very high standard.
Comparisons
According to HashKey Chief Operating Officer David Leahy, Hong Kong “clearly lost ground to a few of surrounding jurisdictions.” However, in his opinion, Hong Kong continues to be a dominant power in the area due to the robustness of its capital markets.
There is a lot of demand, he said, according to investment banks, licensed intermediaries, and digital asset departments.
According to BC Group Executive Director Gary Tiu, Hong Kong devised “a pretty thorough set” of laws for authorized crypto firms. The group’s digital platform company, OSL, had to wait more than two years for the SFC to get it the necessary licences before it could begin trading stocks and offering automated trading services.
Tiu claimed that compared to Hong Kong, many people believed Singapore to be more tolerant of cryptocurrencies. He claimed that the two regimes are beginning to converge in the middle.
Its strictness is liked by some investors. According to Tiu, a lot of institutional interests from outside of Hong Kong spend a lot of time learning about the Hong Kong platform.
According to him, they feel that the Hong Kong administration offers them the appropriate amount of security that they don’t see in other areas.
Walsh claimed that there was a point, possibly a year ago, when it appeared that Singapore was making progress and Hong Kong wasn’t. I don’t think that’s the situation right now, he asserted, citing the difficulty of the application procedure in Singapore and the lengthy processing period for licencing requests, which even the regulator has called painfully sluggish.
Open to talking about retail
Only professional investors, defined as people or businesses with a portfolio worth more than HK$8 million ($1 million), and crypto did not count, were permitted to invest in cryptocurrencies as of January, according to the SFC.
The SFC’s willingness to reevaluate retail investors and have a public consultation on the matter is applauded by the sector.
Leahy of HashKey, which intends to launch its exchange in Q2 of next year, said, “It’s a wonderful opportunity.
He is anxious to learn if the professional investor label will be abolished or if listing requirements will be the same for retail and professional investors.
He characterized the SFC as being extremely concerned on the quality of the projects that are offered on exchanges.
The SFC would provide legitimacy to what is already taking place if it permitted regular investors to invest. According to Michael Wong, partner at law firm Dechert, if they don’t open to retail, given that this asset class is becoming popular, these retail investors would participate through unregulated service providers outside of Hong Kong. At least you have some control if you regulate it.
According to Wong, the SFC may introduce an appropriateness requirement and force investors to complete questionnaires to demonstrate their understanding of the risk profiles of the products they are purchasing. Retail investors may need to have access to hotlines or physical branches of SFC-licensed trading platforms so they may contact the regulator if the platforms act dishonestly, he said.
According to him, unless unregulated exchanges provide investors with services like financing and staking, they will most likely go to regulated ones.
Door open
Firms still desire additional clarity in a few areas. Walsh is awaiting the instructions for the application.
We have enough information, he stated, to determine whether a specific business is included or excluded from the need for a licence. But we really don’t have enough information to know what they would need to do.
Exchanges are required by the licencing framework to have two accountable officers to ensure, among other things, that the anti-money laundering and counter-terrorist financing criteria are being followed. Viven Khoo, a co-founder of Asia Crypto Alliance, noted that despite having such credentials, some people could not be conversant with virtual assets. People with this qualification have called her asking how they may protect themselves when managing a company that uses virtual assets.
There is concern that some unregulated businesses would take advantage of the grace period by submitting an application even though they know they won’t be approved in order to use up all of their available options, she continued. In the meanwhile, some market participants are pushing for minimal limits.
However, Khoo noted that the regime leaves some room going forward. Legislators don’t need to go through another set of legislative amendments if they decide they want to open it more broadly.
If the government does ease up, it probably won’t happen overnight. According to the government source, the regulator has stated that they will watch the first-stage licence holders and consider subsequent revisions. Generally speaking, they will not say so if they don’t intend to do so.
