On June 12, 2024, the Hong Kong Securities and Futures Commission held a briefing. Currently, two exchanges are confirmed to be officially licensed, and 11 exchanges continue to be treated as licensed. At the same time, the Hong Kong Securities and Futures Commission requires unlicensed exchanges to stop trading services on June 1 and to clear all Hong Kong customer assets before August 31. Prior to this, according to PANews, due to policy and regulatory issues, many crypto exchanges have withdrawn their compliance license applications, including many well-known platforms such as Binance and OKX.
In fact, although regulatory authorities around the world have issued various rules and policies for cryptocurrency trading platforms, and have restricted and banned crypto exchanges that do not meet the requirements, there are still crypto trading platforms that "secretly" provide illegal financial functions to users in relevant regions. For example, users in mainland China can still log in to overseas exchanges through VPN and other means, complete KYC and conduct virtual currency transactions. Therefore, can the Hong Kong Securities Regulatory Commission's move promote compliance in crypto transactions in Hong Kong? Obviously, "clearing but not returning" will still exist.
In response to this phenomenon, Liu Honglin, director of Mankiw LLP, was invited to participate in an exclusive interview with Web3.0 professional news media DeThings, and expressed his in-depth views from the perspective of a senior Web3.0 player and blockchain lawyer. The following is the core content of the interview.
DeThings is a Web3 media based in Singapore and covering the Chinese-speaking world. It has long focused on tracking and reporting news in the fields of cryptocurrency, blockchain, and Web3.
Regarding the end of the transition period, the Hong Kong Securities and Futures Commission requires unlicensed crypto exchanges to gradually complete the liquidation regulations. Liu Honglin, a lawyer at Mankiw Law Firm, believes that this means "no license, you are out". Not only that, even if you hold a compliance license from another country after being "out", it is still illegal to continue to provide offshore virtual transactions for Hong Kong crypto users. According to the Anti-Money Laundering Ordinance of Hong Kong, China, any act of actively promoting services to the Hong Kong public will be regarded as providing virtual asset services, regardless of whether the service is provided in Hong Kong or the service provider. Compliance licenses issued by specific countries and regions are subject to the laws of the country where they are located. Holding a license in another country does not mean that you can conduct business globally. Therefore, virtual currency exchanges only hold qualified licenses from other countries and still cannot conduct virtual currency exchange business for mainland China or Hong Kong, China.
After June 1, 2024, all virtual asset trading platforms operating in Hong Kong must be licensed by the SFC or be applicants for virtual asset trading platforms that are "deemed to be licensed", otherwise operating in Hong Kong will be a criminal offense. Lawyer Liu Honglin of Mankiw Law Firm pointed out that if convicted through public prosecution procedures, a fine of HK$5 million and 7 years' imprisonment may be imposed. If it is a continuing offense, an additional fine of HK$100,000 may be imposed for each day during which the offense continues. If convicted through summary procedures, a fine of HK$5 million and 2 years' imprisonment may be imposed. If it is a continuing offense, an additional fine of HK$10,000 may be imposed for each day during which the offense continues. If the statutory AML/CTF regulations are not complied with, the licensed service provider and its responsible personnel will be guilty of an offense. Once convicted of public prosecution, each person may be fined HK$1 million and 2 years' imprisonment. In addition to criminal liability, they will also be subject to disciplinary sanctions by the SFC, including suspension or revocation of licenses, reprimands, orders to take remedial actions and fines.
At the same time, applicants who are “deemed to be licensed” will not have much promotion in terms of marketing to individual customers, as they are still the key regulatory targets of the Hong Kong Securities Regulatory Commission, which may affect their formal approval.
Can crypto exchanges that have failed or withdrawn their applications choose to change their entities and reapply? Lawyer Liu Honglin of Mankiw LLP believes that, judging from existing media reports, exchanges that are applying for a license again cannot use a brand similar to that of offshore exchanges. The main reason should be to avoid confusion among the public about whether the exchange is licensed in compliance with regulations. For those crypto exchanges that "withdraw but fail to clear up", it is best not to have a fluke mentality, and accepting supervision is the best way.
Regarding the issue of offshore crypto exchanges providing services to mainland Chinese residents, Liu Honglin, a lawyer at Mankiw LLP, reiterated that according to China's existing regulatory policies, virtual currency exchanges cannot operate in China or for Chinese citizens. On September 15, 2021, ten ministries and commissions issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (Yinfa [2021] No. 237), clarifying that overseas virtual currency exchanges providing services to Chinese residents through the Internet are also illegal financial activities. Domestic staff of relevant overseas virtual currency exchanges, as well as legal persons, non-legal organizations and natural persons who knowingly or should have known that they are engaged in virtual currency-related businesses and still provide them with marketing, payment settlement, technical support and other services, shall be held accountable in accordance with the law.
Domestic staff of overseas exchanges may be suspected of financial crimes such as illegal business operations, illegal absorption of public deposits, fund-raising fraud, and organizing and leading pyramid schemes due to their involvement in illegal financial activities.
For domestic service providers for overseas exchanges (such as third-party technology outsourcing, media public relations, and bank settlement), since the business of the service objects is illegal financial activities, the service providers may be held accountable according to law. If the circumstances are serious, they may be suspected of committing a joint crime or a separate crime of aiding and abetting.
If an overseas exchange provides virtual currency services to Chinese citizens through the Internet outside of my country and takes corresponding actions that violate Chinese laws, it will still be subject to Chinese laws. As long as the location of the information network system used by the victim, the location where the victim was violated, and the location where the victim's property loss occurred are in China, my country's judicial organs have extraterritorial jurisdiction.
