On October 31, 2022, during the launch of Hong Kong Fintech Week, the Financial Services and Treasury Office issued a policy statement (the “Policy Statement”) providing further details on the government’s plans for the development of a regulatory regime for virtual assets (“Virginia“) in Hong Kong.
Many are watching developments in this space closely. On the one hand, Hong Kong is one of the major financial centers in the region, having made significant investments in recent years in digital banking infrastructure and various policy initiatives aimed at fostering a more robust environment for start-ups. fintech. On the other hand, commentators worry that Hong Kong lacks the freedom to properly defend VA, given mainland China’s successive crackdowns on cryptocurrencies and its government-backed prioritization of its digital currency. State, the e-CNY. Hong Kong’s conservative regulatory environment for financial services, in many ways an advantage, is also a potential weakness for policymaking in the VA space, where regulatory innovation is seen as critical to success.
The policy statement provides a solid basis for believing that Hong Kong will be able to continue charting its own course for VA trade. Importantly, the policy statement suggests that the government could take a more flexible approach by allowing a retail market to emerge (albeit gradually), with the initial possibility of offering exchange-traded funds (“ETFs”) dealing with Bitcoin and Ether futures. A critical point for the development of AV in Hong Kong has been the government’s proposal to restrict AV service providers (“VASP”) authorized to deal or advise on AVs to a clientele of professional investors (i.e. individuals with portfolios of at least HK$8 million (approximately US$1 million)). We discuss this restriction and the government’s latest comments on it in more detail below.
A quick recap on the current state of Hong Kong VA regulations
Under current regulations, virtual asset trading platforms operating in Hong Kong can opt for a licensing regime regulated by the Securities and Futures Commission (“SFC“), provided that at least one of the virtual assets traded on the platform falls within the definition of “securities” under the Securities and Futures Ordinance (“FSO”). While Bitcoin is currently unregulated in Hong Kong and has been referred to by regulators as merely a virtual commodity, tokens that represent underlying economic rights, such as a share of profits or revenue, would be considered “securities”.
The law project
On 24 June 2022, the Anti-Money Laundering and Terrorist Financing (Amendment) Bill 2022 (the “Invoice”) was published. The bill introduces a new licensing regime for virtual asset exchanges that will come into effect on March 1, 2023.
According to the bill, anyone who engages in the business of providing (or purporting to provide) an AV service in Hong Kong must be licensed by the SFC. The ban is extended to persons who actively market an AV service from outside Hong Kong to the Hong Kong public. Details of the scope of the licensing scheme can be found in our July post – Do you need a permit? SFC licenses virtual asset service providers in Hong Kong.
VA service providers who operate in Hong Kong before March 1, 2023 will be able to continue their activities under a transitional arrangement until February 29, 2024. Thereafter, they must obtain a license from the SFC in order to continue their operations. activities.
Professional investor restriction
During meetings of the Anti-Money Laundering and Anti-Terrorist Financing (Amendment) Bills Committee of Bill 2022 after the publication in the Official Gazette of the Bill, significant concerns were raised regarding the proposal that VASPs could only offer their services to professionals. investors, which would prevent Hong Kong VASPs from engaging in retail. The SFC was asked to consider relaxing this restriction to allow VASPs to provide VA services to retail customers in low-risk situations, including where the products are not complex, or where a client, despite not meeting the HK$8 million (US$1 million) monetary threshold required if a professional investor demonstrates sufficient knowledge of AVs to effectively manage risk. It was feared that the restriction of professional investors would push the Hong Kong retail public to overseas VA exchanges, resulting in potential loss of Hong Kong capital and talent, and also leave inadequate protection for Hong Kong investors. Kong if the market moves overseas. The SFC has indicated that it will conduct a public consultation to explore this suggestion further. Note that this requirement of professional investors is not a legal restriction, but rather a condition that the SFC seeks to impose on all licensed VASPs.
The bill extends the licensing requirement to persons who actively market a VA service from outside Hong Kong to the Hong Kong public. There are similar provisions in the Securities and Futures Ordinance (the “FSO”) which prohibit the active marketing of regulated activities to Hong Kong investors. The current uncertainty regarding the interpretation of the terms “public” and “active commercialization” in the context of the SFO is expected to apply equally to the new VA licensing regime due to concepts and similar arrangements.
Since the details of the VASP licensing scheme have been compiled with reference to existing regulations for automated trading services under the OFS (Regulated Activity Type 7), many VASP license application requirements are similar to those that apply to applicants for a license to engage in regulated activities under the SFO. For instance:
All VASP license applicants and their administrators must be fit and proper.
All applicants for a VASP license must either be incorporated in Hong Kong or be registered as a non-Hong Kong Part 16 company under the Companies Ordinance.
Premises to be used for record keeping purposes must be approved by the SFC. The SFC has not yet confirmed VASP’s ability to use offshore service providers to store regulatory records, but if the VASP regime is in line with current SFC policy, VASP managers will need to commit to this. arrangements are in place to ensure that records will remain available for inspection.
All applicants for a VASP license must appoint at least two managers (“GOLD”) to monitor VA activity. The SFC also requires that at least one RO ordinarily reside in Hong Kong and be available at all times. This is similar to the requirement that applies to people with CFS to conduct regulated activities. Applicants should keep in mind that although the requirement is to have two managers, in practice, to ensure business continuity, at least three managers are recommended. When an RO ceases term for any reason (e.g. due to resignation or death), if a VASP licensee does not appoint a replacement on or before the departure of the existing RO, the SFC will most likely ask the VASP to suspend its activities until a new DS is appointed.
The policy statement
The policy statement contains promising initiatives to advance Hong Kong VA’s market and regulatory framework to align with international standards and practices. Key points include:
- Regarding the possibility of allowing retail public access to AV under the new VASP licensing regime, the government has indicated that the SFC will soon launch a public consultation to explore how retail investors could have access to AV under the new licensing regime. Initially, VA exchange-traded funds authorized by the SFC will be made available to the public in Hong Kong. On the same day, the SFC announced a new licensing regime for ETFs offering exposure to Bitcoin and Ether futures traded on the Chicago Mercantile Exchange. A Circular on Virtual Asset Futures ETFs, which sets out the details and criteria for such exchange-traded funds to obtain authorization under Sections 104 and 105 of the SFO, has also been issued.
- The government has signaled its readiness to engage with global AV exchanges and invite them to enter Hong Kong for new business opportunities.
- In the policy statement, the government also indicated that it was open to a future review of the ownership rights of tokenized assets and the legality of smart contracts, and referred to the discussion paper that the Monetary Authority of Hong Kong published in early 2022 on linked payment regulations. stablecoins that may not fall under the stored value facility licensing regime.
- To demonstrate its support for the global VA community, the government has announced some pilot programs it plans to launch, including issuing NFTs for Hong Kong FinTech Week 2022 which offer holders a chance to create their own avatar to discover the Metaverse, the tokenization of the government’s green bond issuance for subscription by institutional investors and the issuance of the Central Bank of Hong Kong’s digital currency, e-HKD, in three phases.
The policy statement is a welcome move for those interested in the development of the AV market in Hong Kong. Hong Kong’s ‘opt-in’ approach to AV regulation has resulted in few successful applications and raised concerns that Hong Kong is focused on developing an awkward halfway house for AV regulation, driving a number of key players in Singapore and other regional destinations.
As Singapore has moved in recent months to tighten its VA regulatory regime, the policy statement suggests the two financial centers are moving closer together in their approach to regulation, marking a concerted effort by Hong Kong to re-establish itself as a major hub. financial technology at the regional level. Much remains to be ironed out in detail, but if there were an opening in the Hong Kong retail market and it became recognized as an accepted destination for Chinese crypto investments, Hong Kong would have a clear line of sight for the successful development of a VA market.