A Review of Hong Kong’s Cryptocurrency Regulatory Policy Process Hong Kong has become another treasure trove in the encrypted world

Exploring Hong Kong's Cryptocurrency Regulatory Policy A Comprehensive Review of the Process and ImpactUncovering Hong Kong's Cryptocurrency Regulatory Framework A Detailed Analysis and Evaluation

Article Author: Meta Era Guest Author “Crypto Big Brother”

With the announcement by the Hong Kong government in 2022 of the opening and inclusiveness of the Crypto market, many capitals have chosen to return to their own “battlefield”. So, on the one-year anniversary of the launch of virtual assets in Hong Kong, what heavyweight policies are being implemented to promote the development of virtual assets?

Introduction

It has been a whole year since the Hong Kong Financial Services and Treasury Bureau published the “Policy Statement on the Development of Virtual Assets in Hong Kong” in October 2022. This article will review the policies and regulations released by the government over the past year. With the prosperity of the previous cryptocurrency world, more and more markets are turning their attention to the field of cryptocurrency. Many institutions and individual investors are eager to try, but due to the uncertainty of policies around 2021, a large amount of capital and institutions have “fled” to cryptocurrency-friendly countries such as Singapore and the United States. With the announcement by the Hong Kong government in 2022 of the opening and inclusiveness of the Crypto market, many capitals have chosen to return to their own “battlefield”. So, on the one-year anniversary of the development of virtual assets in Hong Kong, what heavyweight policies are being implemented to promote the development of virtual assets? This article will introduce and follow up on the relevant policy content!

Inventory of Hong Kong Web 3.0 Support Policies

After vigorously supporting the development of NFT, GameFi, and other tracks, the Hong Kong government first announced on October 16, 2022, that it would promote the digital Hong Kong dollar as the first bridge to link virtual assets, followed by the issuance of government tokenized green bonds to demonstrate support for distributed ledger technology (efficiency, cost reduction, increased trust).

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During Hong Kong Tech Week (October 30, 2022), the Hong Kong government announced the establishment of a $4 billion fund to support the start-ups of blockchain, Web3, and other technology-based enterprises. The Hong Kong government supports the industry’s development with solid policies. The subsequent result is the approval of ETFs.

On the same day, the Securities and Futures Commission of Hong Kong issued a letter authorizing the public sale of ETFs for the trading of virtual asset futures exchanges.

Figure 1 SFC ETF Explanatory Letter

The SFC only allows the issuance of index funds for virtual asset futures traded on traditional regulated futures exchanges, and only approves Bitcoin futures and Ether futures index funds traded on the Chicago Mercantile Exchange.

Building on the basis of the first round of funding, Hong Kong Financial Secretary Paul Chan Mo-po will allocate HKD 50 million for the ecological construction of Web3 in April 2023. If the extent of government’s attention and financial support for Web3 can be seen during the bear market, it is believed that in the bull market, outstanding Web3 entrepreneurs can receive greater assistance from the government, both economically and in terms of policy support.

Figure 2: Director Chen Maobo’s speech on Web3

Regulatory Policy Progress

As early as November 2019, Hong Kong began regulating cryptocurrency exchanges, allowing only licensed CEXs to provide services to investors. However, only one CEX (OSL) obtained a license. It wasn’t until the Hong Kong government announced its full support for the development of the crypto industry that a turning point was finally reached.

According to the official website of the Hong Kong SFC, there are now many exchanges queuing up to apply for licenses. The exchanges approved in 2022 are HashKey, and Meex is currently a Hong Kong exchange that has not had its application rejected since 2023. The results of the applications will be announced before 10th December 2023.

In 2022, exchanges are only available to professional investors and do not provide retail services to individual investors. However, in August 2023, the Hong Kong government announced that listed exchanges can sell to individual investors, which demonstrates the government’s determination to promote the globalization of crypto asset.

There are differences in the licenses issued by the Hong Kong SFC, with the most crucial being License 1 and License 7 (securities trading and providing automated trading services, respectively). These are necessary conditions for compliant exchanges to operate. License 9 is also a point of focus in the market, as it allows custodial management of user funds, which is a necessary condition for private or public funds. Currently, exchanges do not need to change their licenses.

Regarding the regulation of NFTs, the Hong Kong SFC stated in its announcement on 6th June 2022, titled “Reminder to Investors to Pay Attention to NFT Risks,” that most NFTs are intended to represent their related assets, such as unique versions of digital images, artworks, music, or films. In general, if an NFT is a true digital collectible, activities associated with it would not fall within the scope of regulation by the Securities and Futures Commission (SFC).

Gamefi and NFTs are similar in that any token that can generate income, such as tokens, will be included in the list of regulated policies to ensure consumer rights.

As for the cryptocurrency trading aspect, Tang Yi, President of the Hong Kong Blockchain Association, said: “Tokens like Bitcoin and Ethereum are defined as utility tokens, so they do not require registration and auditing. Every token circulating in the market needs to be determined as either a security token or a utility token through independent judicial cases or even legal disputes. Just like Ripple, you can submit legal opinions to the SFC and litigate with them to argue that their interpretation is incorrect.”

Figure 3 Tradable Currencies

Stablecoin Regulation, according to the Hong Kong Monetary Authority’s “Discussion Paper on Cryptocurrencies and Stablecoins” released in 2023, stablecoins should be fully backed and allow face value redemption, with high liquidity. Stablecoins based on arbitrage or algorithms will be rejected, such as DAI, which will exempt algorithmic stablecoins like LUNA from potential financial loss for investors.

Exchange Safeguards, according to the Securities and Futures Commission of Hong Kong’s published document, platform operators must maintain a minimum paid-up share capital of not less than 5 million Hong Kong dollars (“Minimum Paid-Up Share Capital”). Platform operators should always possess assets with sufficient liquidity in Hong Kong, such as cash, deposits, treasury bills, and certificates of deposit (but not virtual assets), the amount of which should be equal to the actual operating expenses of the platform operator calculated based on a continuous benchmark for at least 12 months. In addition, platform operators should establish and implement strict internal monitoring measures and governance procedures for private key management to ensure the secure generation, storage, and backup of all cryptographic seeds and private keys. Seeds and private keys are stored in Hong Kong.

Summary

From supportive policies to regulatory policies, it can be seen that the Hong Kong government is determined and committed to the development of the virtual asset industry. In terms of support, an open policy and financial assistance are used to attract more entrepreneurs to embrace the cryptocurrency industry in Hong Kong.

In terms of regulatory policies, the most direct assistance is the permission for retail trading, not limited to professional investors alone. This will significantly expand the user base of the cryptocurrency industry in Hong Kong and also strictly regulate the listing of coins and exchange operations, giving users more trading rights while ensuring their safety to a great extent. Hong Kong is destined to become a cryptocurrency-friendly harbor and regain its peak!

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