1. What are the regulations?
The new rules mean retail investors can trade coins on exchanges licensed by the city's Securities and Futures Commission. Hong Kong says its approach is focused on consumer protection, with strict criteria on which virtual assets can be bought and sold. Some of the factors that platforms should consider when choosing which tokens to offer include how long a coin has been in circulation, its market cap, and average daily trading volume. The tokens must also be incorporated into at least two cryptocurrency indices from leading institutions, one with a background in traditional finance. Additionally, the SFC requires crypto firms to put other safeguards in place before accepting clients, such as assessing whether users have essential knowledge of digital assets before investing, and setting trading or trading limits. position "with reference to the client's financial situation".
2. Why is Hong Kong embracing crypto?
Hong Kong's political pivot is part of a broader effort to restore the city's credentials as a cutting-edge financial hub. It's a reputation that's been put at risk by years of tough Covid-19 restrictions and political unrest, which have slowed the economy and caused talent to leave. Financial Secretary Paul Chan called cryptocurrencies and other virtual assets "unstoppable new financial innovations" at an event hosted by the Hong Kong Banking Association in November last year, and said that it was "necessary to adopt them". The government allowed exchange-traded funds to invest in CME Group's Bitcoin and Ether futures, and sold its first digital green bonds, which use digital ledgers to speed up the settlement and coupon payment process.
3. Is this Hong Kong's first foray into crypto?
Hong Kong was once a hub of digital assets before taking a more skeptical stance. Exchanges such as FTX and Crypto.com (formerly known as Monaco) were founded in the city. Prior to the new regulatory regime, the SFC had a voluntary licensing program. Only two exchanges – OSL and HashKey – have opted for this legacy framework, which has allowed them to provide services only to professional investors with portfolios of at least HK$8 million ($1 million). The rules came after mainland China asked platforms to stop trading cryptocurrencies and banned initial coin offerings, or ICOs, in 2017. The mainland banned crypto transactions and committed to eradicating mining of digital assets in September 2021.
4. How significant is the ban on crypto trading in mainland China?
A possible risk is that China's ban could extend to semi-autonomous Hong Kong. However, Hong Kong regulators have pushed back on the idea, citing the "one country, two systems" principle that allows the former British colony to have its own economic and political system. There are also signs that Hong Kong's approach may have Beijing's tacit approval. Representatives of China's Liaison Office and other officials have been spotted at crypto gatherings in the city, according to people familiar with the matter, who also described the encounters as friendly. The muted support may indicate that China wants to use Hong Kong as a testing ground for digital assets. However, Beijing has not indicated any easing of its stranglehold on the sector locally amid concerns over consumer protections, the potential use of crypto to evade capital controls and the environmental impact of gold mining. Energy-hungry bitcoin.
5. What obstacles remain?
Regulatory ambiguity is a key issue for crypto businesses. There are a number of areas that are not specifically addressed by the SFC. These include so-called “NewFi” categories such as decentralized finance, derivatives and staking when it comes to digital assets. NFTs and utility tokens such as those used for gambling also do not fall under clearly regulated activities. Virtual asset companies operating in these areas must determine whether their business offerings constitute securities and, if so, require a license. The task is complex and the SFC has indicated that decisions will be made on a case-by-case basis. Other hurdles include access to banking services, as crypto businesses face strict know-your-customer and anti-money laundering rules. The SFC and the Hong Kong Monetary Authority have urged lenders to support the sector and held meetings in April and June to encourage lenders to open accounts for regulated crypto companies. Recruiting talent is another challenge. Responsible officers - who bear primary responsibility for compliance in a licensed company - are rare. Institutional-level crypto traders and developers are also frequently cited as hard to find.
6. How has the Hong Kong crypto kingpin been received?
Hong Kong's crypto kingpin has sparked interest from local and overseas companies given the city's potential to serve as a conduit for Chinese wealth should the mainland ever loosen its restrictions on digital assets. Companies such as Huobi, OKX and Amber Group said they intended to secure licenses, but no major investment pledges immediately followed the rollout of the new regime. It is unclear whether the regulations are attractive enough to induce companies to invest heavily. The focus on protecting retail investors could hurt profitability if areas such as margin trading, staking and derivatives remain banned. Additionally, the global crypto market is yet to fully recover from its $1.5 trillion rout last year.
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