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JAN 10, 2024

Interview with OK The first overseas lawyer: What are the highlights of Hong Kong’s cryptocurrency compliance this year?

by 吴说猫弟, WuBlockchain

Editor | WuBlockchain
Lawyer Wu Wenqian joined OK in 2017, possibly being the first overseas lawyer for the organization. In 2018, he joined Huobi, contributing to compliance and overseas mergers and acquisitions. Since 2020, he has assisted cryptocurrency businesses in Hong Kong in establishing compliant paths. He is considered one of the lawyers most knowledgeable about the cryptocurrency landscape in Greater China and Hong Kong regulations. This podcast delves into questions about Hong Kong and various hot topics.
Below is a summary of the edited content. The full podcast can be listened to on Youtube: https://www.youtube.com/watch?v=ZWMMNj-KzNo
Introduction:
Please introduce your background.
I joined OK in 2017, probably the first lawyer for the organization. I provided legal services to the OK Group in Hong Kong at that time. Later, in 2018, I switched to Huobi Group, mainly responsible for compliance and overseas mergers and acquisitions, including some important overseas legal affairs. I also participated in the acquisition of listed companies in Hong Kong. By 2020, I had established my consulting company and, in 2022, co-founded a venture capital company with several partners. In the same year, I participated in the application for licenses (1, 4, 9), and successfully obtained them, allowing the company to legally conduct virtual currency-related business. In addition, I serve as a consultant in a law firm, helping many companies apply for licenses and providing consulting services for various virtual currency projects.
Is the current speed of license issuance in Hong Kong normal?
Regarding this, licenses like OSL and Hashkey were applied for early, as well as another HK company that has entered the AIP stage. They started the application process during the sandbox period from 2018 to 2019. Due to the web3 declaration issued by the Hong Kong government in October last year, the applications of these companies have progressed relatively quickly. Other applications are mainly based on the new VASP license passed in December of last year. I think this issue should be viewed in stages. The application speed in 2018 and 2019 was relatively slow because the sandbox program required time for the Securities and Futures Commission to have a deeper understanding and learning of the operation of this industry. However, by June of this year, when the Securities and Futures Commission had a certain understanding of the industry, the new VASP license system began to be implemented. Therefore, future license applications are expected to be faster and smoother. Especially for companies that have been in business in Hong Kong before June 1st, they need to submit applications before March 1st of next year to continue operating. I expect that more than ten, or even dozens of companies will submit applications before this deadline. Therefore, I believe that the Hong Kong government and the Securities and Futures Commission are prepared for this and are expected to process a large number of license applications. With the current preparation and process, I believe the speed of future applications will significantly improve.
How do you view the current phenomenon where compliant exchanges offer only a few tokens to retail users?
In my view, this phenomenon is caused by a series of strict policies and conditions. First, any token that wants to be traded by retail users must have a liquidity history of at least 12 months. This is a basic requirement that ensures the stability and reliability of the token. Secondly, the token needs to be listed on at least two indices, and these indices cannot be limited to the virtual currency field; they also need to include some traditional indices such as Bloomberg, etc. The existence of these conditions ensures that tokens listed on compliant exchanges in Hong Kong are rigorously screened and certified.
However, the situation may be different in the future. Many institutions are already preparing for index-related consultations in Hong Kong and overseas. With the establishment and improvement of these indices, we can foresee an increase in the types of tokens available for trading. This is not only one of the strategies of the Securities and Futures Commission to protect retail investors but also reflects the intention to gradually open the market under the premise of ensuring safety. Of course, given the different security incidents in Hong Kong in recent years, I believe that the Securities and Futures Commission may lean towards protecting retail investors, even possibly sacrificing the speed of listing to ensure security. Overall, although the market will gradually open up in the future, the process will be prudent and cautious.
How do you view the platform points introduced by HashKey?
I think the HSK platform points introduced by HashKey are a very compliant and clear practice. As far as I know, HashKey issued HSK only after obtaining approval from the Securities and Futures Commission, which itself reflects its determination to comply. The functions and uses of HSK are also regulated to a certain extent, providing a good demonstration path for the listing of other currencies or the operation of future exchanges.
Specifically, this path first involves obtaining approval from the regulatory authority, then carrying out promotion and other related activities on the platform, and finally gradually allowing listing and retail trading. This is not only the way the Securities and Futures Commission expects, but also provides the regulatory authority with sufficient time to understand the liquidity and functions of new currencies, ensuring a balance and protection of interests among project parties, regulatory authorities, platforms, and users. This prudent and transparent approach is beneficial to the healthy development of the entire industry.
What are the highlights of Hong Kong's policies this year?
First of all, I want to talk about the issue of OTC trading. OTC plays an important role in the Hong Kong market, especially observing that Hong Kong has been leading in terms of global OTC trading volume this year. Institutions such as OSL have made significant contributions in this area. Since around 2013, Hong Kong has been an important OTC flow center. OTC has profound effects on the entire cryptocurrency circle, especially on the inflow and outflow of funds. The contribution of Hong Kong to the OTC market cannot be underestimated.
Speaking of history, the Hong Kong government issued a statement on bitcoin businesses around 2013, proposing some suggestions that institutions can operate by obtaining the MSO license from the customs. However, Customs later stated that Bitcoin does not belong to the category of currency, and institutions that purely engage in bitcoin business do not need the MSO license. During this time, Hong Kong's attitude towards cryptocurrency regulation seemed quite ambiguous until the Securities and Futures Commission later established a clear regulatory direction. Therefore, although OTC may be mentioned in future regulations, I don't think it will be a focus in the short term.
On the contrary, if Hong Kong plans to become a web3 center, stablecoins may become a more prominent issue. The HKMA has issued documents on stablecoins in 2020 or 2021, mentioning the possibility of introducing a more specific stablecoin regulatory framework this year. Stablecoins play a crucial role in connecting the virtual currency industry with the traditional financial industry, and they are of great significance to the entire cryptocurrency circle. If stablecoins can be effectively regulated, the demand for OTC may be correspondingly reduced.
In addition, regarding the issue of STO, if a stablecoin regulatory framework or license can be introduced, it may effectively connect the ecosystem of virtual currency with the traditional industry. For example, if a brokerage firm with a No.1 license can accept stablecoins, settlement may be able to be conducted internally within the brokerage firm. This will greatly promote the regulation of anti-money laundering and may bring more financial innovations, such as products in the OTC market like lending and derivatives. Therefore, the development of stablecoins may become a key factor for the cryptocurrency circle in Hong Kong to integrate into the traditional industry and develop rapidly. Overall, although OTC is still an important part of the Hong Kong market, in future regulatory policies, the construction and regulation of stablecoins and their related ecosystems may become more important highlights.
What impact will the collapse of non-compliant exchanges have on Hong Kong's regulatory policies?
At a high level, recent collapses of exchanges such as JPex have already attracted investigations from the police and the Securities and Futures Commission. Interestingly, when talking to friends outside the Hong Kong cryptocurrency circle, most of them are not familiar with these platforms, indicating that their impact may be mainly limited to the local Hong Kong area. Although these events have a significant impact on the perception of retail investors, regulatory authorities, the Hong Kong government, and the international industry, I believe that globally compliant exchanges have formed an interconnected network, and compliance has become an inevitable trend.
The virtual currency and web3 declaration made by the Hong Kong government last year have already formulated a clear roadmap, including ETF exchange licenses and policies that may introduce stablecoins this year. Therefore, regardless of what happens to exchanges like JPex, it is unlikely to fundamentally affect the overall policy of the Hong Kong government. With the implementation of the license system, the number of problematic exchanges is expected to decrease. Therefore, concerns about these collapse events should be limited, both within the industry and at the government level, as future strategies are already clear.
Will the Hong Kong Stock Exchange attract blockchain companies to go public in the future?
The position of the Hong Kong Stock Exchange is very special. It has to create profits for shareholders while also playing a regulatory role, responsible for supervising all listed companies in Hong Kong. Therefore, the Hong Kong Stock Exchange must be particularly careful in handling transactions. From my experience in the era of Huobi, communication and announcements with the Hong Kong Stock Exchange were always very cautious. Over time, the Hong Kong Stock Exchange and the Securities and Futures Commission's understanding of the blockchain industry gradually deepened. Therefore, I believe that in the future, they may be more open to virtual currency-related policies. Although recent issues with some exchanges may slow down the pace of policy advancement, if the Hong Kong government does intend to build a web3 center, the Hong Kong Stock Exchange will undoubtedly be involved. With more and more brokerages and licensed companies entering this industry, the Hong Kong Stock Exchange will also actively participate in this field.
How does Hong Kong's regulatory policy compare to Singapore's in terms of advantages and disadvantages?
Hong Kong and Singapore each have their characteristics in the regulation and development of the cryptocurrency circle, and a direct comparison between the two is not straightforward. Hong Kong has traditionally focused more on the capital market, while Singapore may lean towards conservatism or fixed-income investments. Therefore, for crypto fund or financing development, Hong Kong, with its long history of financing and numerous investment institutions, may be a better choice.
In terms of regulatory experience, Singapore has indeed been ahead by two to three years, providing local enterprises with an earlier start and more accumulated experience. This early experience may give Singapore a slight advantage in terms of policy acceptability and corporate adaptability.
However, recent developments suggest that Hong Kong may have certain advantages, particularly over the past year. Hong Kong's proactive handling of cryptocurrency issues demonstrates its determination and proactiveness. For instance, the Hong Kong Monetary Authority has inquired with major banks about their reluctance to allow cryptocurrency companies to open accounts, showcasing a rare globally proactive approach. The Hong Kong government evidently aims to position the city as a hub for Web3, adopting a coordinated strategy across various government departments. In contrast, Singapore's stance may have become more conservative post the FTX incident, with a slowdown in the previous rapid development pace.
Despite these considerations, both Hong Kong and Singapore remain favorable locations for cryptocurrency development, especially against the backdrop of regulatory uncertainties in the United States. Asia is undoubtedly poised to become a hotspot for cryptocurrency development, and personally, I have more confidence in Hong Kong. The Hong Kong government has formulated a clear roadmap, demonstrating a firm commitment to development and a proactive planning attitude.
In summary, while Hong Kong and Singapore each have their advantages, Hong Kong may exhibit more noticeable performance in terms of proactiveness, planning, and government determination. This could potentially secure its position in the future development of the cryptocurrency landscape.
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