Recently, a friend asked about the impact of a series of regulatory policies issued by the Hong Kong SAR government on the entire cryptocurrency industry. What are the regulatory authorities in Hong Kong for the cryptocurrency industry, what regulatory policies have been issued, and what is the overall regulatory approach? The author will answer the above questions through a series of articles.
1. Current Hong Kong financial regulatory system
Over the past few decades, Hong Kong has rapidly emerged as an international financial center. Such impressive achievements are closely related to its free and orderly financial regulatory system. Separate supervision and government supervision in parallel with industry self-discipline are the main features of Hong Kong’s financial regulatory system.
The financial supervision work of the Hong Kong SAR government is mainly carried out by the Financial Services and the Treasury Bureau (Treasury Bureau), the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA )bear.
The Bureau of Treasury plays a managerial role in financial supervision and can formulate financial policies and submit legislative proposals.
The Hong Kong Monetary Authority is equivalent to the central bank of the Hong Kong Special Administrative Region. It is 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.
The Securities and Futures Commission is mainly responsible for supervising and promoting the development of the securities and futures markets, and can issue licenses to activities regulated by the Securities and Futures Commission. The functions of the China Insurance Regulatory Commission are to supervise the insurance industry, protect the interests of policyholders, and promote 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 serve as industry self-regulatory bodies for the banking, securities, and insurance industries respectively to conduct industry supervision.
This forms a two-level regulatory model in which the SAR government assumes management work in financial supervision and industry self-regulatory agencies focus on risk control. Such a multi-level regulatory system can greatly stimulate the creativity and enthusiasm of the financial market while controlling financial risks, thus promoting the steady development of the special economic zone.
2. The Hong Kong SAR government’s regulatory thinking on cryptocurrency and related policies and regulations
The current Hong Kong financial regulatory system does not have specific legislation on cryptocurrency, 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 Declaration on the Development of Virtual Assets in Hong Kong"
On October 31, 2022, the Treasury Bureau issued the "Policy Declaration on the Development of Virtual Assets in Hong Kong". In the declaration, it expressed Hong Kong's open and inclusive attitude towards virtual assets, and will subsequently establish a licensing system for virtual asset service providers. , welcomes the trading of ETFs on exchanges, will also introduce appropriate regulatory policies for stable coins, and is preparing to launch a series of experimental plans such as green bond tokens and digital Hong Kong dollars.
2. "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022"
In December 2022, the Hong Kong Legislative Council passed the "Anti-Money Laundering and Terrorist Financing (Amendment) Bill 2022". The revised draft clarified that virtual asset trading platforms must apply for a license from the Hong Kong Securities and Futures Commission, and unlicensed operations will be punished. 5 million fine and 7 years in prison. The revised draft will take effect on June 1, 2023.
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 the "Circular to Licensed Corporations and Registered Institutions Regarding Bitcoin Futures Contracts and Cryptocurrency-Related Investment Products" issued in September and December 2017 clarified that if ICO projects Securities that comply with the provisions of the Securities and Futures Ordinance, and whose business activities are targeted at the Hong Kong public, need 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 China Securities Regulatory Commission issued the "Circular to Intermediaries - Distribution of Virtual Asset Funds" to stipulate the licensing conditions for virtual asset fund distributors.
4. "Position Statement: Supervision of Virtual Asset Trading Platforms"
The "Position Paper: Supervising Virtual Asset Trading Platforms" released in November 2019 clarified that the China Securities Regulatory Commission has no authority to license or supervise platforms that buy and sell non-security virtual assets or tokens, and that the China Securities Regulatory Commission is willing to provide services to those who have the ability. Licensed platforms develop a set of strict standards consistent with those applicable to licensed securities brokers and automated trading venues. For virtual currency exchanges, you need to apply for a No. 1 license (securities trading) and a No. 7 license (automated trading).
There are ten types of financial licenses issued by the Hong Kong Securities Regulatory 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 customers 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 opinions and research analysis reports on futures contracts.
License No. 6-Institutional Financing Consulting
Allowed to serve as sponsor for clients' IPOs and provide advice on company listing compliance and other matters.
License No. 7-Automated Trading
Provide customers with electronic trading platform services for order matching operations.
License No. 8-Securities Guaranteed Financing
Provide customers with pledged stock financing services.
License No. 9-Asset Management
Provide customers with fully entrusted fund management, securities and futures contract investment management services.
License No. 10-Credit Rating
Allows rating of 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.
brass bureau
1. "Discussion Paper on Cryptoassets and Stablecoins"
In January 2022, the Hong Kong Monetary Authority released the "Discussion Paper on Crypto-Assets and Stablecoins", proposing a regulatory model for crypto-assets, especially payment stablecoins.
3. Outlook and Thoughts
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 traditional financial regulatory ideas and is consistent with the regulatory principle of "same business, same risk, same rules" to prevent legal financial activities from becoming a tool for criminal activities such as money laundering and terrorist funding, and to protect investors to the greatest extent. Reduce the huge asset losses caused to investors due to non-compliance or even illegal behavior of the trading platform 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 exchange deposits and withdrawals, use the black and gray address tag library, establish a complete set of on-chain risk control and early warning mechanisms, intercept high-risk transfers, and actively report to anti-money laundering organizations and regulatory authorities, cooperate with investigations, and combat terrorism. financing and other forms of illegal and criminal activities.
2. Strengthen the KYC review of exchanges, purchase third-party KYC review products, conduct strict KYC reviews of global registered users, and store and protect users' personal information as the highest level data to ensure data security.
3. Establish an exchange currency listing and delisting mechanism based on liquidity, market value, project quality and other indicators, distinguish projects with different risk levels, match investors' risk tolerance, and provide investors with highly liquid trading targets and users Education and investor protection.
4. Make regular POR reports of the platform's virtual assets public. Merkel trees, zero-knowledge proofs and other technical means can be used to open up asset transparency on and off the chain of the trading platform, and prove solvency to regulatory authorities and users.
The entire industry experienced black swan events such as FTX and LUNA last year, which resulted in the bankruptcy of a large number of institutions and companies and huge property losses for banks and users. This led to the US regulatory authorities suspending a series of on-chain pledge products on some exchanges and punishing illegal transactions. A series of measures including huge fines and regulatory reviews were carried out. But at the same time, there are also behaviors in the industry that include Korean exchange Upbit cooperating with supervision to provide early warnings on telecom cyber crimes and return victim assets, and OKX to investigate and deal with illegal projects, compensate damaged users, and protect investors. A rapidly developing industry does require regulatory authorities, exchanges, institutions, security companies and even users to work together. After experiencing ups and downs, there will always be a rainbow.
