Recently, with the high attention and support of the government, Hong Kong is actively trying to become the development center of the Asian cryptocurrency market. This article will introduce readers to the Hong Kong authorities’ regulatory attitude, framework and infrastructure in the field of cryptocurrency, so as to help readers better understand Hong Kong’s local cryptocurrency regulatory environment and industry development.
Hong Kong’s Crypto Regulatory Attitude
1. Shift to openness, tolerance and support
The Financial Services and the Treasury Bureau of Hong Kong officially released the "Policy Declaration on the Development of Virtual Assets in Hong Kong" on October 31, 2022, indicating that the Hong Kong government is actively involved in public participation in virtual asset transactions, property rights protection of tokenized assets and the development of stable coins. On the other hand, we should hold an attitude of openness, compatibility and embracing innovation.
In addition, the Hong Kong government is also actively participating in three experimental projects: NFT issuance, green bond tokenization and digital Hong Kong dollars to test the benefits of virtual asset technology and try to further apply these technologies to the financial market.
2. Prudent control
Although Hong Kong has a relatively open attitude towards the regulation of cryptocurrencies, it also focuses on risk management and market regulations. Major regulatory agencies have issued public statements or claimed that they will clearly supervise virtual asset trading platforms, stable coins, CBDC, etc. to control market risks and protect investor interests.
What are the encryption regulatory agencies and division of labor in Hong Kong?
Hong Kong’s financial supervision work mainly consists of the Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA). The specific division of labor includes:
- Ministry of Finance: plays a management role in financial supervision and can formulate financial policies and submit legislative proposals;
- Hong Kong Monetary Authority: Mainly responsible for maintaining the stability of the financial system and banking industry, and managing the Exchange Fund to maintain the stability of the Hong Kong dollar;
- Securities and Futures Commission: Responsible for supervising and promoting the development of the securities and futures markets, and can issue licenses for regulated activities;
- Insurance Regulatory Bureau: Responsible for supervising the insurance industry, protecting the interests of policyholders, and promoting the stable development of the insurance industry.
In addition, the Hong Kong Association of Banks, the Hong Kong Stock Exchange and the Hong Kong Federation of Insurance Companies, as self-regulatory bodies for the banking, securities and insurance industries, are responsible for industry supervision.
For the supervision of crypto assets and the crypto industry, Hong Kong does not have a separate regulatory agency, but is jointly responsible for multiple financial regulatory agencies. Institutions including the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have issued relevant guidance documents in this area.
Hong Kong’s crypto regulatory development history
- In September 2017, the "Announcement on Initial Coin Offerings" was released: ICOs need to apply for a license from the Hong Kong Securities and Futures Commission;
- In December 2017, the "Circular to Licensed Corporations and Registered Institutions Regarding Bitcoin Futures Contracts and Cryptocurrency-Related Investment Products" was released;
- In November 2019, Hong Kong began to regulate cryptocurrency exchanges, requiring CEXs to obtain licenses to provide corresponding services to investors;
- In June 2022, an announcement "Warning Investors to Pay Attention to NFT Risks" was released, mentioning that most NFTs are intended to represent their related assets;
- In October 2022, the Treasury Bureau released the "Hong Kong Virtual Asset Development Policy Announcement", expressing Hong Kong's open and inclusive attitude towards virtual assets;
- In December 2022, the Hong Kong Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022;
- In January 2023, the "Crypto-Assets and Stablecoin Discussion File" was released, requiring that stablecoins should fully support and allow face value redemption;
- In February 2023, the Hong Kong Securities and Futures Commission released a consultation document on proposed regulatory requirements for virtual asset trading platform operators;
- In May 2023, the "Guidelines on Combating Money Laundering and Terrorist Financing" were released;
- In June 2023, the virtual asset service provider (VASP) licensing system will be implemented;
- In August 2023, the Hong Kong government announced that listed exchanges could sell to retail investors;
- In January 2024, the "Strategic Focus from 2024 to 2026" was released, stating that technological innovation centered on encryption will be a development focus.
Classification of financial licenses
There are ten types of financial licenses issued by the Hong Kong Securities and Futures Commission:
- License No. 1: Securities trading, providing customers with stocks, stock options, bond trading and brokerage services, and also being able to provide mutual funds, unit trust fund placement and underwriting securities;
- License No. 2: Futures contract trading, providing customers with index or commodity futures trading and brokerage services;
- License No. 3: Leveraged foreign exchange trading, providing foreign exchange trading services to customers;
- License No. 4: Securities investment consulting, providing clients with securities investment advice and research and analysis reports;
- License No. 5: Futures contract investment consulting, providing customers with investment opinions and research analysis reports on futures contracts.
- License No. 6: Institutional finance consulting, approved to serve as sponsor for clients’ initial public offerings and provide advice on company listing compliance and other matters;
- License No. 7: Automated trading, providing customers with electronic trading platform services for order matching operations;
- License No. 8: Guaranteed financing, providing customers with stock pledge financing services;
- License No. 9: Asset management, providing customers with discretionary fund management and securities and futures contract investment management services;
- License 10: Credit Ratings, allowing the rating of companies, bonds and sovereign credit.
It is worth noting that the most critical of these licenses are No. 1 and No. 7 licenses (for securities trading and provision of automated trading services respectively), which are necessary conditions for the implementation of compliance exchanges. No. 9 license is also the focus of the market. The difference is that it can host user funds, which is a necessary condition for private placement or public placement.
Further reading: Hong Kong VASP license application deadline! OKX and other 24 companies caught up with the application, but Binance and Coinbase were not seen
Specific measures for Hong Kong’s encryption supervision
Virtual Asset Service Provider (VASP) Licensing System
Starting from June 1, 2023, Hong Kong has officially implemented the Virtual Asset Service Provider (VASP) licensing system. Under this system, all virtual asset exchanges operating in Hong Kong must apply for and hold a license from the Hong Kong Securities and Futures Commission (SFC). VASPs are required to comply with a series of compliance requirements, including but not limited to anti-money laundering (AML) and combating terrorism financing (CTF) regulations, fund security, segregation of client assets, auditing and reporting, appropriate internal controls, etc.
Since the VASP license system was officially launched last year, the Hong Kong Securities and Futures Commission website shows that currently only OSL and HashKey have obtained cryptocurrency trading licenses. At the time of writing, the Hong Kong Securities and Futures Commission has received applications for CEX operating licenses from 22 companies, including OKX, Bybit, Bullish, Crypto.com, Huobi HK and Matrixport HK, etc.
For operating CEX, according to the filing requirements announced by the Hong Kong Securities and Futures Commission, the following are:
- CEX platform operators must maintain a paid-up share capital of no less than HK$5 million at all times (i.e., the minimum amount of paid-up share capital);
- Platform operators should establish and implement strict internal control measures and governance procedures in terms of private key management to ensure the safe generation, storage and backup of all encryption seeds and private keys. Seeds and private keys are stored in Hong Kong;
- Platform operators should hold fully liquid assets in Hong Kong, such as cash, deposits, treasury bills and certificates of deposit (but excluding virtual assets), the amount of which should be at least equivalent to the platform operator's actual operations on a continuing basis for 12 months expenditure;
- Platform operators should establish and implement strict internal control measures and governance procedures in terms of private key management to ensure that all encryption seeds and private keys are securely generated, stored and backed up, and that these seeds and private keys are stored in Hong Kong .
Cryptocurrency ETFs
On December 22, 2023, the Hong Kong Monetary Authority and the Securities and Futures Commission jointly released the updated "Joint Circular on Virtual Asset-Related Activities of Intermediaries", expressing their readiness to accept applications for virtual asset spot ETFs and futures ETFs, and proposed meet regulatory requirements.
On the same day, the China Securities Regulatory Commission issued the "Circular on Funds Recognized by the China Securities Regulatory Commission for Investment in Virtual Assets" (hereinafter referred to as the ETF Circular). The ETF Circular replaces the circular on virtual asset futures ETFs released by the China Securities Regulatory Commission on October 31, 2022, and proposes new regulatory requirements for virtual asset ETFs (including futures ETFs and spot ETFs):
- Manager qualifications: ETF managers should have good regulatory compliance records; have at least one competent employee with experience in virtual asset and related product management; and hold an upgraded No. 9 license;
- Underlying Assets: ETFs may only invest (directly or indirectly) in assets tradable by retail users on licensed exchanges in Hong Kong;
- Investment strategy: ETFs do not allow leverage at the fund level;
- Subscription and redemption: The China Securities Regulatory Commission allows subscription and redemption in two ways: cash (in-cash) or in-kind (in-kind);
- Custody arrangements: Assets held by ETFs need to be hosted in Hong Kong's licensed exchanges or financial institutions and their subsidiaries recognized by the Hong Kong Monetary Authority.
Extended reading: Hong Kong Bitcoin and Ethereum spot ETFs have passed! Harvest International receives in-principle approval from the China Securities Regulatory Commission
Stablecoin Regulation
Stablecoins are linked to specific assets (such as legal tender, gold, etc.), have small price fluctuations, and play the role of "currency" in the crypto market. The Hong Kong government is very concerned about the development of stable currencies and actively promotes relevant legislation:
- It is planned to introduce new legislation rather than amend existing legislation (such as the Payment Systems and Stored Value Facilities Ordinance (Chapter 584 of the Laws of Hong Kong) or the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615 of the Laws of Hong Kong)).
- The proposed regulatory regime for stablecoins only applies to fiat-referenced stablecoins (FRS), which are cryptographically protected digital forms of value that maintain a relatively stable value with one or more fiat currencies.
- An FRS issuer license is required to issue FRS in Hong Kong, to issue Hong Kong dollar-linked FRS in any region, or to actively promote the issuance of FRS to the Hong Kong public.
- The main licensing conditions and regulatory requirements that FRS issuers need to meet include: requirements related to reserve assets and stabilization mechanisms, redemption of FRS at face value in the reference currency, and the need to obtain approval from the Monetary Authority before any new business.
- Only FRS issued by FRS issuers licensed by the HKMA can be sold to retail investors. All other types of FRS can only be sold to professional investors.
Central Bank Digital Currency (CBDC)
The Hong Kong Monetary Authority has been researching and testing a retail-level central bank digital currency (CBDC), a digital Hong Kong dollar. The research is part of Hong Kong’s regulation of digital finance and virtual assets.
sandbox system
The Hong Kong Monetary Authority (HKMA) and the SFC have established a Fintech Regulatory Sandbox to allow cryptocurrency businesses and startups to test their products and services in a controlled environment. This facilitates the development of innovative technologies while also ensuring regulatory agencies control risks.
Virtual Asset Fund
Hong Kong allows virtual asset funds to be established and operated locally, but these funds can only be open to professional investors. Fund management companies need to obtain a license from the SFC, and the SFC requires virtual asset fund management companies to fully disclose risks to investors to ensure that investors understand the risks involved.
Anti-Money Laundering and Combating Terrorist Financing (AML/CTF)
All cryptocurrency-related businesses, including exchanges and wallet service providers, must comply with Hong Kong’s anti-money laundering and counter-terrorism financing regulations. They are required to conduct customer due diligence (KYC) and report suspicious transaction activity.
In addition, these companies also need to establish internal control and monitoring mechanisms to regularly audit and report relevant activities to ensure compliance.
investor protection
Currently, only recognized virtual asset trading platforms can provide services in Hong Kong. The SFC requires platforms to protect the security of customer assets, establish insurance measures, and ensure that the storage locations of customer assets comply with regulations.
Compilation of news related to Hong Kong’s encryption regulations
. 2024/8/28
Hong Kong Monetary Authority launches Project Ensemble sandbox to promote tokenized applications
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Hong Kong lawmakers support the inclusion of Bitcoin in fiscal reserves: Digital gold consensus is heating up... Can Trump lead the world to buy BTC and prepare for an arms war?
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Readers’ Contributions” Hong Kong users can register for multiple “unlicensed exchanges”! There are loopholes in government supervision
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. 2024/7/25
“JD.com” enters Hong Kong’s stablecoin market. Can China’s largest e-commerce ignite a crypto payment revolution?
One of China's largest e-commerce companies, JD Coin Chain Technology (Hong Kong), a subsidiary of JD Technology Group, announced yesterday that it will launch a cryptocurrency stablecoin in Hong Kong linked to the Hong Kong dollar (HKD) at a 1:1 ratio. Take an important step in the field of blockchain and financial technology.
. 2024/7/19
The Hong Kong Monetary Authority’s “Stablecoin Issuer” sandbox list is released: Animoca joins forces with Standard Chartered Bank, JD Coin Chain Technology, and Yuancoin Innovation to lead the way
The Hong Kong Monetary Authority (HKMA) announced yesterday (18th) the first batch of participants in the stablecoin issuer sandbox, including three institutions: Standard Chartered Bank, Animoca and Hong Kong Telecom, JD Coin Chain Technology, and Yuancoin Innovation Technology.
. 2024/7/3
Full text of Wang Yang’s speech at Hong Kong University of Science and Technology: China’s ban on mining is a big loss! It is recommended that the government re-evaluate cryptocurrency policy
This article is a shocking speech delivered by Wang Yang, Vice President of Hong Kong University of Science and Technology, at the first Hashkey New Vision event. He talks about the outflow of funds and tax revenue caused by China’s ban on mining, which is a pity.
. 2024/6/29
Investment in virtual assets in Hong Kong is exempt from paying "VAT"! OSL Chief Financial Officer: Low tax rate can attract international investors
The chief financial officer of Hong Kong Ta Kung Pao and the licensed digital asset platform OSL Group pointed out that investment in virtual assets in Hong Kong will not be levied asset value-added tax, and a series of advantages such as low tax rates and clear supervision have allowed a large number of related companies to return to Hong Kong, showing that investors are interested in Hong Kong virtual assets. There is confidence in market development.
. 2024/6/19
OSL Chief Financial Officer: Hong Kong will soon launch an "OTC currency dealer" licensing system, and security token STO may become a mainstream fundraising model
The chief financial officer of Hong Kong's licensed digital asset platform OSL Group revealed in an exclusive interview today that the previously rumored licensing system for cryptocurrency OTC merchants may be launched in the short term. He is optimistic that Hong Kong will become the leader in Asia's virtual asset market, and said that securities-based agents Token (STO) may become the mainstream fundraising model in Hong Kong.
. 2024/6/6
President of the Securities and Futures Commission of Hong Kong: Bitcoin has proven the advantages of decentralized ledger (DLT) and will continue to promote financial innovation through supervision
Hong Kong Securities and Futures Commission Chief Executive Officer Leung Fengyi delivered a speech on the 5th, praising the potential of distributed ledger technology (DLT), emphasizing that the Hong Kong Securities and Futures Commission’s responsibility as a regulator is to provide a clear regulatory framework and promote the market to expand use cases in an environment that protects investors. She also expressed her affirmation of Bitcoin, saying that Bitcoin has experienced multiple boom and bust cycles in the past 15 years, which fully proves its ability to survive as an alternative asset.
