Decoding Hong Kong's Fresh Cryptocurrency Regulations

Decoding Hong Kong’s Fresh Cryptocurrency Regulations

Updated: 14 June 2023

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Hong Kong initiated its Virtual Asset Trading Platform (VATP) manual at the beginning of the month, reflecting its ambition to emerge as a significant player in the cryptocurrency landscape. The country’s Securities and Futures Commission (SFC) is responsible for furnishing these guidelines for cryptocurrency firms seeking to operate within Hong Kong’s jurisdiction, along with supervising the entire licensing process. The guidelines have been broken down and interpreted by Gilbert Ng, a legal practitioner in the High Court of the Hong Kong Special Administrative Region, and Chris Lee, the initiator of TKX capital. Their analysis was translated and made publicly available by Wu Blockchain.

The concept of “transitional agreements” has been introduced to provide crypto businesses operating within the region a trial period lasting one year. Upon fulfilling certain prerequisites, these businesses can pursue a commercial license in 2024. As per the translated document, a firm can operate only if the SFC verifies the authenticity of its operations and business practices. Notably, this condition is applicable solely to non-securities trading platforms.

The SFC has outlined various factors that would classify as genuine operations and practices. These include: the company having its foundation in Hong Kong, being managed and controlled by employees based in the city, having a physical presence there, and several other considerations.

The new directives put greater accountability on those managing cryptocurrency exchanges, referred to as operators. The idea of “regulated individuals,” such as company directors, accountable officers, and managers, is recognized. As per the recently approved regulations, these people will be subjected to a “fit and proper” examination. This implies that officers of crypto firms must demonstrate pertinent experience in regulated sectors, even if this experience was garnered abroad.

In addition, the handbook specifies that firms “actively marketing to Hong Kong residents” fall within the regulatory authority’s scope. There are rules determining if a company needs an SFC license, like the presence of a comprehensive marketing strategy targeting local retail investors or permission to trade in Hong Kong dollars.

Hong Kong’s regulatory stance seems to be a response to the underwhelming and unsatisfactory performances of certain crypto companies this year. Nevertheless, even with its geographical proximity to China, known for its strict anti-crypto stance, Hong Kong is working towards fostering a regulatory environment conducive to digital asset companies worldwide.

Hong Kong on its way to become a major cryptocurrency hub

Earlier in May of this year, we reported that Hong Kong has been seeking to establish itself as a major crypto hub. Proper regulation is a major part of that, which is contrary to what has been happening in the U.S. In this regard,

Such efforts in Hong Kong are quite contrary to the stance on the Chinese mainland, which has banned cryptocurrency transactions since September 2021. Choy from the SFC has placed the responsibility on exchanges to prevent mainland investors from participating in retail crypto trading.

The city’s two licensed crypto exchanges, HasKey Pro and OSL, have already initiated partnerships with local securities brokers to enable professional investors to trade in crypto assets.

By permitting direct retail trading of digital assets, Hong Kong aims to entice exchanges and fund companies to the city. In the previous year, the regulators allowed retail investors to trade Bitcoin and Ethereum futures on the Chicago Mercantile Exchange via exchange-traded funds (ETFs) listed on the Hong Kong exchange.

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