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Hong Kong is the most vibrant financial hub in the Asian region. Though it is a part of China, it enjoys a special status, which allows the territory to create policies independently to an extent. Formaley, it was a colony of the British Empire. Its economy still cherishes some of the liberal characteristics gifted to them by their former European masters. The territory is one of the most densely populated regions in the world. The city boasts one of the highest per capita incomes, though income inequality is one of the serious issues that troubles its population. The city is known for its welcoming attitude towards technology. No wonder why it is now a favourable destination of financial technology enthusiasts. Interestingly, in recent years, Hong Kong has turned its attention towards becoming a major hub for cryptocurrencies and virtual assets. The local government of Hong Kong has recently introduced several policies to establish a comprehensive crypto regulation framework. If you are someone who wishes to learn about the Hong Kong crypto regulation environment, you should never miss this article.
1. Crypto Regulations in Hong Kong: An Overview
In Hong Kong, cryptocurrencies are not considered legal tender. The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) define virtual assets as digital representations of value used for various purposes. The definition aligns with international standards set by the Financial Action Task Force. Cryptocurrencies are generally categorised either as security tokens or non-security tokens. Security tokens are digital tokens classified as ‘securities’ under the Securities and Futures Ordinance. Non-security tokens are considered virtual commodities. The SFC regulates Virtual Asset Service Providers dealing with digital tokens. The Mandatory VASP Licensing Regime provides stringent criteria for retail investor access, compliance with AML/CTF regulations and restrictions on activities like algorithmic trading. Managing a portfolio of virtual assets over 10% of its value requires a Type 7VA licence in the city. This SFC’s licensing regime includes specific terms on fund management, risk management, and reporting. Crypto fund managers must also adhere to similar rules. The crypto regulation framework of Hong Kong literally covers almost all the prime crypto-related activities, from trading to investing.
2. Crypto Regulations in Hong Kong: What’s New
Here are the latest developments in the crypto regulations environment in Hong Kong.
June 3, 2023: Hong Kong implemented new regulations focusing on virtual asset trading platforms.
Jan 2, 2024: The Hong Kong Monetary Authority launched a consultation on stablecoin issuers.
Feb 2, 2024: Plans were announced for a consultation on over-the-counter crypto venues.
May 25, 2024: OKX withdrew its application to offer digital asset services in Hong Kong.
May 31, 2024: The grace period for crypto exchanges to acquire operational licences ended, with unlicensed entities required to cease operations by this date.
July 4, 2024: Lawmakers began reviewing Hong Kong’s crypto regulations amid concerns they could deter exchanges.
July 22, 2024: CertiK’s proposals for a stablecoin regulatory regime were accepted by the HKMA and the Financial Services and Treasury Bureau.
July 29, 2024: The Hong Kong Securities and Futures Commission warned the public about Proxinex, a suspected crypto platform engaging in fraudulent activities.
July 31, 2024: Politician Johnny Ng proposed that Hong Kong should consider stockpiling crypto assets.
3. Crypto Taxation Framework in Hong Kong Explained
In Hong Kong, the taxation of cryptocurrencies is guided by the Inland Revenue Department’s Departmental Interpretation and Practice Notes No. 39 (DIPN 39). The document, which discusses extensively about how different types of digital assets are taxed, was actually released in early 2020.
The document primarily categories cryptocurrencies into two types: security tokens and utility tokens. Proceeds from security tokens are not taxable, as the document considers these tokens as capital assets. Proceeds from utility tokens are taxed if sourced in Hong Kong. Digital assets held for long-term investments are considered capital assets and any gains from their disposal are not subject to tax. Proceeds from Initial Coin Offerings are taxed based on the nature of the issued tokens.
For business dealing in cryptocurrencies, new tokens received, such as airdrops or forks, are treated as business income and taxed accordingly. Cryptocurrencies received as employee remuneration are considered taxable income.
Some latest developments in the crypto sector like staking and NFTs are not covered in the DIPN 39 document.
Cryptocurrency are not included in the Unified Fund Exemption regime, and standard provisions for stock borrowing and lending or interest on money do not apply.
4. Crypto Mining in Hong Kong: What You Should Know
In Hong Kong, crypto mining is a grey area. Starting a crypto mining business in Hong Kong is less likely to be profitable, for the territory’s high electricity cost and its limited land availability. Crypto mining is a process which requires a substantial power supply. High operational cost affects the survival of this business operation. If one starts a crypto mining business, the prime thing is that the mining facility should comply with the Buildings Energy Efficiency Ordinance.
5. Timeline of the Evolution of Crypto Regulations in Hong Kong
Here is the timeline of the evolution of cryptocurrency regulation in Hong Kong.
September 2016: The Hong Kong Monetary Authority launched the Fintech Supervisory Sandbox to facilitate the pilot trials of Fintech innovations before broader implementation.
September 2017: The Securities and Futures Commission (SFC) clarified that the digital tokens could be considered ‘securities’ if they represent equity, debt, or offer returns like dividends, in their statement of ICO.
November 2018: The SFC issued a circular establishing the SFC Regulatory Sandbox, providing a controlled environment for testing new financial technologies, and differentiating between utility and security tokens.
October 2019: The SFC introduced the Type 9VA Licensing Regime for businesses managing portfolios with significant holdings of virtual assets.
December 2022: The Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill, introducing a mandatory licensing regime for VASPs, covering non-security token trading.
January 2023: The HKMA announced a proposal for a Mandatory Stablecoin Licensing Regime to regulate entities dealing with stablecoins.
January 2023: the SFC and HKMA released a joint circular expanding regulations to include distribution, dealing and advisory services related to VAs.
June 2023: The SFC’s mandatory licensing regime for Virtual Asset Trading Platforms came into effect.
Endnote
In conclusion, Hong Kong’s proactive approach to cryptocurrency regulations in 2024 marks an important moment in its financial evolution. By embracing digital asset ETFs and enabling the tokenization of traditional securities, the city has positioned itself as a beacon of innovation in Asia. This regulatory clarity not only attracts global fintech investment but also fosters a fertile ground for local cryptocurrency startups to thrive. With major conferences and events further boosting its profile, Hong Kong is proving that responsible regulation can coexist with technological advancement, paving the way for sustained economic growth and reaffirming its status as a dynamic financial hub in the digital age.
