Hong Kong's revitalisation as Crypto Hub and China's quiet support

Hong Kong has rolled out the red carpet for crypto companies, aiming to reinvigorate its embattled financial landscape. However, recent events suggest that the city's efforts have received subtle support from Beijing, sparking renewed interest from mainland Chinese firms.

China's Liaison Office and other officials have conspicuously appeared at Hong Kong's crypto events, exchanging business cards and WeChat details.

This clandestine support is helping to alleviate doubts about China's stance towards Hong Kong's aspiration to become a crypto hub. It also indicates officials' eagerness to use the city's laissez-faire environment as a laboratory for digital assets while maintaining strict control over such activity on the mainland.

As a result, both domestic and foreign firms are flocking to Hong Kong to register their businesses and re-establish a presence in the Chinese territory.

This starkly contrasts with just 15 months ago when Beijing banned the crypto industry, leading many firms to shop overseas.

Hong Kong by the numbers

Hong Kong is a critical player in crypto financial services, ranking 4th out of 26 countries surveyed in Finder's Crypto Adoption November 2022 report. With 21% of Hong Kongers owning crypto, the city surpasses the global average of 15%. Men are more likely to hold crypto than women, with those aged 18-34 leading the way.

In terms of specific cryptocurrencies, Bitcoin (BTC) reigns supreme as the most popular option among Hong Kong's crypto owners, followed by Ethereum (ETH) and Cardano (ADA). This data highlights the growing trend of crypto adoption in Hong Kong and the city's position as a significant player in the digital asset landscape.

Hong Kong plans to lift the ban on retail crypto trading

Hong Kong plans to lift its ban on retail crypto trading, allowing individual investors to trade digital tokens such as Bitcoin and Ethereum. This move comes as the city aims to position itself as a fintech hub, following in the footsteps of China's recent endorsement of Hong Kong's ambitions.

However, while the mainland representatives have been attending crypto events in Hong Kong and reporting back to their superiors, Beijing has yet to indicate a relaxation of its ban on crypto trading, citing concerns about consumer protection and environmental damage.

Hong Kong's foray into cryptocurrencies is gaining momentum as the city's regulators propose a relaxation of rules banning retail investors from trading digital assets.

However, the new proposal has strict conditions on CEX, DEX and DeFi in general, requiring exchanges to be licensed and comply with safeguards to protect investors.

The move comes after pressure from lawmakers to relax the ban, which had led investors to use unregulated offshore platforms. The SFC also announced that all crypto trading platforms must be approved by June 2024, and failure to comply would result in enforcement action.

Understanding the Comprehensive Licensing Requirements for Virtual Asset Service Providers (VASPs) in Hong Kong

As a recap, the Amended AMLO will introduce a licensing regime for Virtual Asset Service Providers (VASPs) in Hong Kong and impose statutory anti-money laundering and counter-terrorist financing obligations.

Under this new regime, operating a virtual asset service will become a "regulated function," requiring VASPs to apply for a license from the Securities and Futures Commission (SFC) before operating in Hong Kong.

The SFC will have the power to impose a range of licensing conditions on VASP licensees, including financial resource and risk management policies, management of client assets, virtual asset listing and trading policies, and prevention of market manipulation and abusive activities, among others.

Licensed VASPs must also comply with existing requirements under the AMLO on customer due diligence and record-keeping conditions comparable to traditional financial institutions.

In addition, the Amended AMLO will introduce a new enforcement regime for VASPs, making it a criminal offence to carry on a business of providing virtual asset services without a VASP license or to issue advertisements relating to an unlicensed person's provision of virtual asset services.

The SFC will also have a significant range of supervisory powers over licensed VASPs, including investigating non-compliance and imposing disciplinary sanctions against them in contravention.

Furthermore, the Amended AMLO will have implications for non-fungible tokens (NFTs). While the proposed definition of "virtual asset" did not initially capture NFTs, the SFC has clarified that assessing whether an NFT is a virtual asset will depend on its terms and features.

Suppose an NFT contains fungible elements or allows holders to vote on its arrangement. In that case, it may be considered a "medium of exchange accepted by the public" or "a digital representation of value that provides holders with rights, eligibility or access to voting," falling under the ambit of a virtual asset.

However, if the trading of a specific NFT occurs on a peer-to-peer basis, the individuals involved would not be deemed as operating an exchange, and their activities would not fall within the scope of a "virtual asset service," thus not requiring a VASP license.

Finally, it is worth noting that the licensing regime for VASPs will, at the initial stage, stipulate that VASPs can only provide services to professional investors (PI Restriction) and that the SFC will impose this restriction as a license condition.

While this restriction may be lifted in the future, it underscores the government's commitment to promoting investor protection in the virtual asset market.

Critical dates for Hong Kong's Virtual Asset Service Providers (VASPs)

Hong Kong's VASPs are entering a new era of regulation, and it's essential to understand the key dates that will impact their operations.

The Amended Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) comes into effect on April 1, 2023, and with it, criminal offences for fraudulent or reckless misrepresentations, or employing deceptive or fraudulent devices, schemes or acts in relation to virtual assets (VA) transactions. This is a critical date for VASPs to keep in mind to ensure compliance with the new regulations.

The VASP Regime Commencement Date is set for June 1, 2023, which marks the beginning of the new licensing regime for VASPs. During the 12-month transitional period starting from this date, existing VASPs providing a VA service in Hong Kong can continue without a VASP licence. However, it's important to note that the Application Deadline for existing VASPs to apply to the Securities and Futures Commission (SFC) for a licence is by March 1, 2024. Failure to meet this deadline could result in legal consequences.

These key dates may seem daunting for those who have no law background, but they are critical to understanding the regulatory landscape for Hong Kong's VASPs.

Hong Kong is positioning itself as a financial centre for digital assets

Hong Kong is positioning itself as a financial centre for digital assets, and the recent issuance of the world's first tokenised green bond underscores its commitment to clean energy.

Hong Kong's crypto comeback couldn't have come at a more chaotic period, coinciding with the collapse of FTX, a significant player in the industry, and starkly contrasting with Singapore's move to impose stricter regulations.

To thrive in this space, Hong Kong must entice back the Chinese crypto moguls who migrated to Singapore and other locales while they waited for the regulatory fog to lift in Hong Kong.

While the financial world watches with bated breath, experts warn that gaining entry won't be a walk in the park.

Only a select few firms are likely to meet the rigorous criteria for licensing, which include stringent requirements for risk management, product knowledge, capital quality, and systems.