Space has discussed a topic before: Will the Hong Kong SFC, like the US SEC, frantically define securities and then supervise, investigate and impose fines?

The key point of this question is that we cannot just look at what they say (organizational goals), but also need to look at what they do (actual behavior). There is a very simple way to answer this question: understand the business and personnel composition of the SEC and SFC.

1. SEC: Investigation, prosecution and punishment

First, let's take a look at the structure of the SEC. At the top is a committee consisting of the chairman and four members, which consists of six departments, one inspector general's office, and 11 offices. In addition, there are 11 regional offices. It should be noted that these 11 regional offices need to report to both the Enforcement Department and the Examinations Department.

From the organizational structure, we can see that the Enforcement Department and the Examination Department seem to be the most important among all the departments. In the following descriptions of the various departments, we can also see that the Enforcement Department and the Examination Department are also listed first and second.

In addition, there is another more convincing data: financial situation. The SEC's funding sources are roughly composed of three parts:

1) Financial budget;

2) Securities transaction fees and application fees;

3) Confiscated income.

The fines and confiscations are divided into two parts:

A. If there is a need to compensate the victims, the fines and confiscations will be used to compensate the victims and injected into the General Fund of the U.S. Treasury.

B. If there is no need to compensate the victims, the fines and confiscations will be allocated to the investor protection fund, whistleblowers (providers of investigation clues), and to fund the investigation of the Office of the Inspector General.

Next, let's take a look at the SEC's balance sheet. According to the 2022 fiscal year annual report, the SEC's total assets increased from $12.2 billion to $14.1 billion, an increase of $1.9 billion. The investment account increased by $400 million, and accounts receivable increased by $1.5 billion. Most of these two items are composed of fines and confiscations, and the investment account has already deducted the expenses incurred in the supervision process.

In addition to the fines and confiscations, the OMB has approved a reserve fund budget of $50 million for the SEC in 2022, an investor protection fund budget of $390 million, SEC transaction fees of approximately $1.8 billion, and application fees of $640 million. It can be seen that fines and confiscations have become a kind of [pillar income].

After looking at the income and then the expenditure, we can see that the net expenditure of the Enforcement Division and the Inspection Division is the highest, totaling US$1.75 billion, accounting for 65% of the total expenditure. These expenditures eventually turned into enforcement actions: According to another public article of the SEC, the SEC filed a total of 760 enforcement actions in fiscal year 2022, an increase of 9% over the previous year. This includes 462 new or "independent" enforcement actions.

These enforcement actions have brought in a lucrative sum: the total amount of payments ordered, including civil penalties, disgorgement, and prejudgment interest, was $6.439 billion, the highest in SEC history, up from $3.852 billion in fiscal 2021. Of the total amount ordered, civil penalties amounted to $419.4 million, also a record high.

Under this system, the SEC has issued generous rewards to whistleblowers. In fiscal year 2022, the SEC issued approximately $229 million in 103 awards, ranking second in terms of amount and number of awards. At the same time, the number of reports in fiscal year 2022 also ranked first in history, with the SEC receiving a total of 12,300 reports. Gensler's request at the hearing for the SEC to obtain resources to increase its staff from 4,685 to 5,139 people also became reasonable, and these 5,139 people are just the number of employees. Don't forget the 12,300 reports and the $229 million reward.

In summary, the SEC’s path of action is not difficult to understand. This is a post-enforcement. First, let as many people as possible come in and do their own things, then investigate, collect evidence, prosecute, and punish as much as possible. Therefore, it is not difficult to understand the SEC’s statement that everything except BTC is a security. Expanding the enforcement goal is the first step. Of course, whether to choose enforcement in the end and whether the prosecution is established depends on many factors. Recently, the U.S. House of Representatives announced a new crypto draft, proposing to clearly divide the regulatory powers of the SEC and CFTC, which will help provide more certain supervision.

2. SFC: Dealing cards, spreading love and making the world a better place

After talking about SEC, let’s look at SFC. The structure of the SFC is significantly different from that of the SEC. The only ones that may be involved in supervision are the Market Inspection Section and the Intermediary Supervision Section under the Intermediary Agency Department. In addition, the intermediary agency has also set up a [Licensing Department], which is inseparable from the familiar licensing system.

According to the SFC's 2021-2022 annual work summary, the SFC conducted a total of 220 case investigations, initiated 168 civil lawsuits, and imposed a total fine of HK$410.1 million on licensed institutions and individuals. In addition to law enforcement, another important data is that the SFC received 7,163 license applications that year; more than 38,000 license information reviews were processed through WING.

In the specific category of enforcement, although the SFC mentioned that "under appropriate circumstances, we will decisively take enforcement actions against unlicensed platform operators." ], but from the perspective of law enforcement cases, illegal activities in the traditional financial field are still dominated by insider trading and market manipulation, corporate fraud and misconduct, intermediary negligence, improper internal control and other illegal activities.

In terms of revenue and expenses, the composition of SFC is very simple. The total revenue of SFC in 2021-2022 is HK$2.247 billion, of which [transaction levy] accounts for 95.3%, other revenue is 6.7% (mainly levied from market participants), and penalty revenue It does not appear in SFC's revenue sharing. Among the expenditures, 75.7% are personnel expenses. According to the annual report data, SFC has a total of 913 employees as of 2022.

In addition, based on this data, it is not accurate to say that SFC makes money by issuing licenses. Market transactions contribute the vast majority of SFC’s revenue. According to the application fee/annual fee of HK$4,700-129,700 for each activity of licensed legal persons and the application fee of HK$1,790-5,370 for each activity of licensed representatives, 3,231 licensed institutions and more than 40,000 licensed personnel do not contribute much revenue.

Judging from past data, the SFC does not have the same motivation as the SEC. On the other hand, the SFC does not have the same law enforcement capabilities as the SFC. The SFC has only 903 employees, who also need to handle the complicated business of the Stock Exchange and the Futures Exchange, handle a large number of license applications, maintenance and inspections, and even "promote kindness and make the world a better place". It is difficult to allocate so much manpower and material resources to carry out active law enforcement.

3. Summary and New Questions

From the above data, we can see that the SFC does not have the same policy inclination as the SEC, and the SFC/SEC are essentially acting in accordance with the idea of ​​[same business, same principles, same risks]. The SEC has a very strong regulatory inclination towards cryptocurrencies, but it also has the same inclination towards other financial institutions. The SFC is unlikely to give cryptocurrencies special treatment.

In summary, I think it is very unlikely that the SFC will enforce the law on a large scale like the SEC. For entrepreneurs, as long as they do not clearly violate the current laws and regulations of Hong Kong, they do not need to worry about regulatory pressure. But I do not think that the [Hong Kong market] and [active licensing] are suitable for every project party. After all, application and maintenance also require considerable costs. Even without a license, many other Web3-related things can still be done in Hong Kong. Every participant who is eager to try should calmly ask himself a question - do we really need a [license]?

References

https://www.sec.gov/news/press-release/2022-206

https://www.sec.gov/files/sec-2022-agency-financial-report.pdf#chairmessage

https://www.sfc.hk/-/media/files/ER/Annual-Report/21-22/annual-report-21_22-full_c.pdf?rev=29902bf3208d415f9907cb8bed1ef3e9