Author｜Chu Yan
Recently, a friend asked about the series of regulatory policies issued by the Hong Kong SAR government. What impact will it have on the entire cryptocurrency industry? Which regulatory departments are there in Hong Kong for the cryptocurrency industry? What regulatory policies have been issued? What is the overall regulatory thinking? The author will answer the above questions through a series of articles.
The current financial regulatory system in Hong Kong
In the past few decades, Hong Kong has rapidly risen to become an international financial center. Such impressive achievements are closely related to its free and orderly financial regulatory system. The main characteristics of Hong Kong's financial regulatory system are the separation of industry supervision and the parallel of government supervision and industry self-discipline.
The financial regulatory work of the Hong Kong Special Administrative Region Government is mainly undertaken by the Financial Services and the Treasury Bureau (FSTB), the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA).
The Treasury Department plays the role of a manager in financial supervision, can formulate financial policies and submit legislative proposals.
The HKMA is equivalent to the central bank of the Hong Kong Special Administrative Region, mainly responsible for maintaining the stability of the financial system and banking industry, and managing the foreign exchange fund to maintain the stability of the Hong Kong dollar.
The CSRC is primarily responsible for supervising and promoting the development of the securities and futures markets., can issue licenses to companies applying for activities regulated by the SFC.
The function of the CIRC is to supervise the insurance industry, safeguard the interests of policyholders and promote the stable development of the insurance industry.
In addition, the Hong Kong Association of Banks, the Hong Kong Exchanges and Clearing Limited and the Hong Kong Federation of Insurers serve as self-regulatory bodies for the banking, securities and insurance industries respectively to carry out industry supervision.
This has formed a two-level regulatory model in which the SAR government takes on management responsibilities in financial supervision, and industry self-regulatory organizations focus on risk control. Such a multi-level regulatory system can greatly stimulate the creativity and enthusiasm of the financial market under the condition of controlling financial risks, thereby promoting the steady development of the SAR economy.
Cryptocurrency regulatory ideas and policies and regulations
The current Hong Kong financial regulatory system does not have specific legislation for cryptocurrencies, but with the rapid development of the cryptocurrency industry, relevant government departments have issued a series of policies, statements and notification documents.
Treasury Bureau
1.Policy Statement on the Development of Virtual Assets in Hong Kong
On October 2022, 10, the Treasury Department issued the "Policy Statement on the Development of Virtual Assets in Hong Kong", which expressed Hong Kong's open and inclusive attitude towards virtual assets. It will subsequently establish a licensing system for virtual asset service providers, welcome ETFs traded on exchanges, and introduce appropriate regulatory policies for stablecoins. It is also preparing to launch a series of experimental plans on green bond tokens, digital Hong Kong dollars, etc.
2.Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022
2022年12月香港立法会通过了《2022年打击洗钱及恐怖分子资金筹集（修订）条例草案》，该修订草案明确了虚拟资产交易平台必须要向香港证监会申请牌照，对无牌经营可处500w罚款和7年监禁，该修订草案将会在2023年6月1日生效。
Securities Regulatory Commission
1. Statement on Initial Coin Offering
2.Circular to Licensed Corporations and Registered Institutions Regarding Bitcoin Futures Contracts and Cryptocurrency-related Investment Products
The "Statement on Initial Coin Offerings" and "Circular to Licensed Corporations and Registered Institutions Regarding Bitcoin Futures Contracts and Investment Products Related to Cryptocurrencies" issued in September and December 2017 clarified that if an ICO project meets the requirements of securities as stipulated in the Securities and Futures Ordinance and its business activities are aimed at the Hong Kong public, it needs to apply for a license from the Hong Kong Securities and Futures Commission.
3.Circular to intermediaries - Distribution of virtual asset funds
In 2018, the CSRC issued the "Circular to Intermediaries - Distribution of Virtual Asset Funds", which stipulates the licensing conditions for virtual asset fund distributors.
4.Position Paper: Regulating Virtual Asset Trading Platforms
The Position Paper: Regulating Virtual Asset Trading Platforms, published in November 2019, clarified that the CSRC has no authority to license or regulate platforms that buy and sell non-security virtual assets or tokens, and that the CSRC is willing to set a set of strict standards for platforms that are capable of obtaining licenses, which are similar to those applicable to licensed securities brokers and automated trading venues. For virtual currency exchanges, it is necessary to apply for license No. 11 (Securities Trading) and license No. 1 (Automated Trading).
There are ten types of financial licenses issued by the Hong Kong Securities and Futures Commission:
- License No. 1 - Securities Trading
It provides clients with stock, stock options, bond trading and brokerage services, and is also able to provide mutual funds, unit trust fund placements and underwriting securities.
- License No. 2 - Futures Contract Trading
Provide clients with index or commodity futures trading and brokerage services.
- License No. 3 - Leveraged Foreign Exchange Trading
Provide foreign exchange trading services to customers.
- License No. 4 - Securities Investment Consulting
Provide clients with securities investment advice and research and analysis reports.
- License No. 5 - Futures Contract Investment Consulting
Provide clients with investment advice and research and analysis reports on futures contracts.
- License No. 6 - Institutional Financing Consulting
It is allowed to act as a sponsor for a client's IPO and provide advice on compliance and other matters related to the company's listing.
- License No. 7 - Automated Trading
Provides electronic trading platform services for customers to match buy and sell orders.
- License No. 8 - Securities-backed Financing
Provide customers with pledge stock financing services.
- License No. 9 - Asset Management
Provide clients with fund management, securities and futures contract investment management services in the form of full entrustment.
- License No. 10 - Credit Rating
Allows for rating the creditworthiness of companies, bonds and sovereigns.
Currently, OSL and HashKey have obtained licenses No. 1 and 7, and Huobi Technology has obtained license No. 9.
Hong Kong Monetary Authority
1. Discussion Paper on Crypto Assets and Stablecoins
In January 2022, the HKMA released the "Discussion Paper on Crypto Assets and Stablecoins", proposing a conceptual regulatory model for crypto assets, especially payment stablecoins.
Judging from the relevant policy documents issued by the above-mentioned government departments,The main regulatory focus is on anti-money laundering and investor protection..It draws on the regulatory thinking of traditional finance and is consistent with the regulatory principle of "same business, same risks, same rules", so that legal financial activities can be prevented from becoming tools for criminal activities such as money laundering and terrorist funding, and investors can be protected to the greatest extent possible, reducing the huge asset losses caused to investors by non-compliance or even illegal activities of trading platforms, and allowing investors to invest in targets that are inconsistent with their risk tolerance.
Regarding exchange compliance, I think the following aspects can be improved and optimized in the future:
1. Strengthen the risk control of deposits and withdrawals on exchanges, use the black and gray address label library, and establish a complete set of on-chain risk control early warning mechanisms.
Intercept high-risk transfers, actively report them to anti-money laundering organizations and regulatory authorities, cooperate with investigations, and combat terrorist financing and other forms of illegal and criminal activities.
2.Strengthen KYC review of exchanges.We purchase third-party KYC review products, conduct strict KYC reviews on registered users worldwide, and store and protect users' personal information as the highest level of data to ensure data security.
3.Establish a mechanism for listing and delisting coins on exchanges based on indicators such as liquidity, market value, and project qualityDifferentiate projects with different risk levels to match investors’ risk tolerance, provide investors with highly liquid trading targets and user education, and provide good investor protection.
4.Make regular POR reports on virtual assets on trading platforms public.Through technical means such as Merkle trees and zero-knowledge proofs, the transparency of assets on and off the trading platform chain can be improved, and solvency can be proved to regulators and users.
The entire industry experienced black swan events such as FTX and LUNA last year, which caused a large number of institutions and companies to go bankrupt and banks and users to suffer huge property losses, leading to a series of measures taken by US regulators, including suspending a series of on-chain pledge products of some exchanges, imposing huge fines and regulatory reviews on illegal exchanges. At the same time, the industry also saw the emergence of Korean exchanges such as Upbit cooperating with regulators to issue early warnings for telecommunications network crimes and return assets to victims, and OKX investigating and punishing illegal projects, compensating damaged users, and protecting investors.A fast-growing industry does need regulators, exchanges, institutions, security companies and even users to build together. There will always be a rainbow after the storm.
