AUG 1, 2023
Six Key Observations on Hong Kong's Cryptocurrency Policy in the Upcoming Year
by 吴说猫弟, WuBlockchain
1. Hashkey and OSL Open Retail Trading
On April 28th, Hashkey Pro, a Hong Kong compliant cryptocurrency exchange under HashKey Group, announced its opening to professional investors (PI) worldwide. On June 1st, in line with the newly effective Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615), Hashkey Pro submitted an application for a VASP license to provide retail services in Hong Kong.
On the same day, OSL, another exchange, also applied to upgrade its existing license to permit retail trading of crypto assets. Currently, HashKey and OSL are the only two crypto asset platforms granted permission by the Hong Kong Securities and Futures Commission.
On July 8th, according to Hong Kong media DongWang, Hashkey Pro is expected to receive approval for its upgraded license within the next few weeks, enabling it to begin offering virtual asset services to retail investors. Currently, Hashkey Pro only provides BTC, ETH, USDT, USDC, USD and one STO token. It remains uncertain whether the token services provided to retail investors will increase, and whether HSK points issued by Hashkey will be launched.
2.Possible Tokens for Retail Trading
According to new regulations issued by Hong Kong in March, licensed platform operators wishing to provide virtual assets to retail customers must ensure that the selected virtual assets are qualified major virtual assets and meet the following specific token inclusion criteria: "Qualified major virtual assets" refer to virtual assets included in at least two "accepted indices" launched by at least two independent index providers; licensed platform operators should ensure that at least one of the two indices is launched by an index provider with experience in issuing indices for traditional non-virtual asset financial markets, such as those who have launched indices tracked by SFC-approved index funds.
According to statistics from @tier10k, of the indices currently launched by five mainstream traditional institutions, Bitcoin (BTC) and Ethereum (ETH) are listed in all; Litecoin (LTC) and Polkadot (DOT) rank second with inclusion in four indices; Bitcoin Cash (BCH) and SOL rank third with inclusion in three indices; and Cardano, Avalanche, Polygon, and Chainlink rank fourth with inclusion in two indices. In addition, EOS, BNB, ATOM, FIL, ETC, XLM, UNI, and others are listed once. However, it should be noted that the contents of major indices may vary with market changes.
William believes that, under the requirements of the SFC, there are currently 13 cryptocurrencies that could potentially be made available for retail trading, namely: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH, and CRV. Of course, not all of these tokens will necessarily be allowed for retail trading. Because the assets available for retail trading need to meet the conditions of "Exchange's due diligence + Qualified major virtual asset + SFC written approval", for instance, the current operational situation of SOL and BCH is not optimistic, and they may be excluded by the SFC.
3.Brokers and Banks Allow Ordinary Citizens to Buy Tokens
On June 26, HSBC, the largest bank in Hong Kong, permitted its customers to buy and sell virtual asset ETFs listed on the Hong Kong Stock Exchange, making it the first bank in Hong Kong to do so. This move expands the access of local users in Hong Kong to cryptocurrencies. The crypto ETFs currently listed in Hong Kong include the Southern Dongying Bitcoin Futures ETF, Southern Dongying Ethereum Futures ETF, and Samsung Bitcoin Futures Active ETF.
BC Technology, the parent company of the Hong Kong compliant exchange OSL, CFO Hu Zhenbang said, last year, the SFC and the Monetary Authority issued a very clear guideline. If banks and brokers want to provide digital asset services to their customers, they must cooperate with digital asset licensed institutions. There are two ways to cooperate: one is to directly refer customers, and the other is to apply to the SFC on the basis of existing stock and bond services, and through cooperation with licensed digital asset service providers, to include digital asset services in their business scope. Brokers can open an account on a licensed digital asset trading platform to buy and sell digital assets for their end customers. Of course, banks can also develop their own trading systems and apply for licenses, but after all, digital assets are not the main products of bank business, so the more efficient way should be to cooperate with external licensed digital asset platforms.
4. The Third, Fourth, and Subsequent Hong Kong Licenses
After June 1, the Hong Kong government began to implement the Virtual Asset Service Provider licensing system (VASP licensing system). Before this, they implemented the "License 1 and License 7" system, i.e., licenses for Type 1 (securities trading) and Type 7 (providing automated trading services) regulated activities. Currently, only the aforementioned Hashkey and OSL have obtained these two licenses.
The main differences between the VASP licensing system and the previous system are the addition of opening up to retail trading, mandatory licensing (previously it was only for professional investors and voluntary licensing), and enhanced investor protection. However, it also sets more thresholds to achieve the goal of screening quality crypto exchanges, such as the need to establish a physical office in Hong Kong, the need for at least two Responsible Officers (ROs) with years of traditional financial institution management experience and virtual currency trading experience, the need to have a certain number of cryptocurrency users and trading volume before June 1, the need to obtain a TCSP license as well as License 1 and License 7, and the need to be in official operation for a year and receive regulatory approval before obtaining the official license.
Currently, at least 10 institutions have announced that they will apply for the Hong Kong VASP license, including crypto institutions such as HashKey, OKX, Huobi, BitgetX, BitMart, Bybit, BitMEX, and Gate, as well as traditional institutions such as Yibo Finance.
Hu Zhenbang believes that the number of exchanges that will eventually obtain licenses will not be too many, estimating about four to five. This is because there is a need for sufficient capital, the provision of custody services, the assurance of the maintenance and stability of trading systems, investment in network security, compliance requirements close to traditional finance, and back-end support. For companies that do not themselves operate compliant businesses, meeting these requirements is not easy.
5. Regulatory Framework for RWA (Real World Assets)
WuBlockchain reported exclusively on July 6 that Elizabeth Wong, head of the FinTech Unit of the Hong Kong Securities and Futures Commission (SFC), indicated in an interview with Eliptic that the SFC would soon launch an update, changing its view on STOs from 4 years ago (2019). Securities Tokens or RWAs will no longer be defined as complex products, and they may be open to retail investors. RWAs will be regulated based on the underlying assets. Analysts pointed out that this could potentially trigger a new wave of RWA enthusiasm.
6. Regulatory Framework for Stablecoins
Hong Kong's regulatory framework for stablecoins can be traced back to the first policy address after Hong Kong Chief Executive Lee Ka-chiu took office in October 2022. He then stated that the Hong Kong Monetary Authority (HKMA) was studying market opinions on stablecoin regulation and would ensure that the regulatory system is in line with international regulatory suggestions and suitable for local conditions.
On January 31, 2023, the HKMA issued a consultation summary on the discussion document on crypto assets and stablecoins, suggesting that certain activities related to stablecoins be brought under regulation, and outlining the expected regulatory scope and main regulatory requirements in the summary document. Meanwhile, Binance, Deloitte, Alipay, Animnoca, Circle (issuer of USDC), HSBC, Mastercard, Xinhuo Technology, WeChat, and others all provided suggestions on the HKMA's "Cryptocurrency and Stablecoin Discussion Document".
On March 20, Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury, said in a speech that the HKMA was studying the regulatory system for "stablecoins", with the aim of implementing related regulations in 2024. On April 29, the HKMA released its 2022 annual report, emphasizing that the first to be regulated will be those stablecoins that claim to be pegged to the value of one or more legal tenders. In 2023, more detailed regulatory requirements will be developed, taking into account a number of factors, including the latest market developments, recommendations and best practices on stablecoin regulation proposed by international organizations, and responses received on the discussion document on crypto assets and stablecoins. On May 9, Eddie Yue, the Chief Executive of the HKMA, stated that in addition to licenses for virtual asset platforms, the mandatory licensing system for stablecoins will be launched between 2023 and 2024.
On May 23, a document from the Hong Kong Securities and Futures Commission stated that non-securities tokens should have at least 12 months of performance records. The regulatory arrangements for stablecoins are expected to be implemented in 2023/24. Before stablecoins are regulated in Hong Kong, we believe that stablecoins should not be included for retail trading. On June 12, the Deputy Secretary for Financial Services and the Treasury, Chan Ho Lim, said that the HKMA has launched a public consultation on stablecoins and will gradually establish a regulatory framework, aiming to roll it out before the end of next year.
In addition, different opinions were expressed on the issue of whether to use HKD stablecoin or USD stablecoin by individuals such as Hu Zhenbang, the Vice President of Hong Kong University of Science and Technology, Wang Yang, and Fang Hong, the co-chair of the Hong Kong Blockchain Association. Hu Zhenbang believes that the probability of the appearance of the HKD stablecoin is not too high; however, the international demand for USD stablecoin is very large. If issuers choose Hong Kong as the issuing place and accept the regulation of the Hong Kong Securities and Futures Commission, it is possible. Wang Yang and Cai Wensheng called on the Hong Kong government to issue HKD stablecoins backed by Hong Kong's foreign exchange reserves; they believe that a strong HKDG can challenge the dollar hegemony in this ecosystem, thereby achieving de-dollarization in substance; under proper supervision, it can also be used to reshape the international strategy of the HKD by transporting stablecoins to other countries. Fang Hong criticized the article by Wang Yang and Cai Wensheng, stating that the notion that the HKD stablecoin should be backed and regulated by the government is a fundamental misunderstanding of the role of the government in a market economy; it makes sense to issue HKD stablecoins, but it should not be issued by the Hong Kong government, but by private institutions under the supervision of the Hong Kong government; promoting "de-dollarization" with HKD stablecoin is impossible, given that the HKD and the USD have a linked exchange rate and can be freely exchanged in Hong Kong.