An article on the process of Hong Kong's cryptocurrency regulatory policy: Hong Kong has become another treasure in the crypto world

Article Author: Meta Era Guest Author "Crypto Big Cousin"

Introduction

It has been one year since the Hong Kong Financial Services and the Treasury Bureau issued the Policy Statement on the Development of Virtual Assets in Hong Kong in October 2022. With the last round of crypto world boom, more and more markets are targeting the crypto space, and many institutional and individual investors are eager to try it, but due to the policy uncertainty around 2021, a large amount of capital and institutions have "fled" to crypto-friendly countries such as Singapore and the United States. With the Hong Kong government's official announcement of the openness and tolerance of the crypto market in 2022, many capitals have chosen to return to their own "battlefield", so what are the major policies to promote the development of virtual assets in Hong Kong on the first anniversary of the development of virtual assets in Hong Kong? This article will introduce and follow up on the relevant policy content one by one!

Inventory of Hong Kong's Web 3.0 support policies

After supporting the vigorous development of NFT, Gamefi and other tracks in Hong Kong, the Hong Kong government first announced on October 16, 2022 that it would promote e-HKD as the first bridge to link virtual assets, and then issued government tokenized green bonds to show support for distributed ledger technology (high efficiency, reduced costs, and increased trust).

During Hong Kong Tech Week (30 October 2022), the Hong Kong government announced that it would set up a US$4 billion technology fund to support the start-ups of blockchain, Web3 and other technology-based companies. This was followed by the passage of ETFs,

On the same day, the Hong Kong Securities and Futures Commission issued a letter authorising the public offering of virtual asset futures ETFs.

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Figure 1 SFC ETF Cover Letter

The SFC only allows the issuance of index funds for virtual asset futures traded on traditional regulated futures exchanges, and only for Bitcoin futures and Ether futures index funds traded on the Chicago Mercantile Exchange.

On the basis of the first appropriation, Hong Kong Financial Secretary Paul Chan Mo-po and April 2023 allocated HK$50 million for the ecological construction of Web3.

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Figure 2 Director Paul Chan speaks on Web3

Regulatory Policy Process

As early as November 2019, Hong Kong regulated cryptocurrency exchanges, and only licensed CEXs were able to provide corresponding services to investors, but only one CEX (OSL) was licensed, and it was not until the Hong Kong government officially announced that it would support the development of the crypto industry, which ushered in a turnaround. According to the official website of Hong Kong's SFC, there are now many exchanges queuing up to apply for licenses, the exchange approved in 2022 is HashKey, and Meex is currently the Hong Kong exchange that has not been rejected in 2023, and the application results will be announced before 12/10/2023.

In 2022, the exchange was limited to professional investors and closed retail business to retail investors, but in August 2023, the Hong Kong government announced that listed exchanges could sell to retail investors, which is enough to prove the Hong Kong government's determination to promote the globalization of crypto assets.

There are also differences in the licenses issued by the Hong Kong SFC, the most critical of which is the Type 1 license and the Type 7 license (respectively for securities trading and the provision of automated trading services), which is a necessary condition for the landing of compliant exchanges, and the Type 9 license is also the focus of the market, the difference is that it can custody user funds, which is a necessary condition for private placement or public offering, and the exchange does not need to change the license at present.

Regarding the regulation of NFTs, the Hong Kong Securities and Futures Commission issued an announcement on June 6, 2022 "Investors should be aware of the risks of NFTs", stating that most NFTs are intended to represent their underlying assets, such as electronic images, artwork, music, or a one-of-a-kind version of a video. Overall, if an NFT is a truly digital collectible, the activities associated with it are not subject to the SFC's supervision. Gamefi is the same as NFT, everything that can get income, such as Token, will be included in the list of regulatory policies to ensure the rights and interests of consumers.

In terms of transaction currency, Tang Yi, President of the Hong Kong Blockchain Association, said: "Tokens such as Bitcoin and Ethereum are defined as utility tokens, so they do not need to be registered and audited. Every token circulating in the market needs to go through independent judicial cases or even legal proceedings to determine whether it is a security token or a functional token, and you can submit legal opinions to the CSRC like Ripple, and fight a lawsuit with the CSRC to argue that their interpretation is incorrect."

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Figure 3 Tradable Currencies

Stablecoin regulation, according to the "Discussion Paper on Cryptoassets and Stablecoins" released by the Hong Kong Monetary Authority in 2023, it is required that stablecoins should be fully supported and allowed to be redeemed at face value, which has high liquidity. Arbitrage-based or algorithmic-based stablecoins, such as DAI, will be rejected, which will exempt investors from potential property losses caused by algorithmic stablecoins such as LUNA.

The Exchange protects that, in accordance with the documents published by the Securities and Futures Commission of Hong Kong, Platform Operators are required to maintain a paid-up share capital of not less than HK$5 million at all times (the "Minimum Paid-up Share Capital"). The Platform Operator should beneficially have fully liquid assets in Hong Kong at all times, such as cash, deposits, Treasury bills and certificates of deposit (but not virtual assets), in an amount equal to the Platform Operator's actual operating expenses on a continuing basis for at least 12 months. In addition, platform operators should establish and implement strict internal controls and governance procedures in relation to private key management to ensure that all crypto seeds and private keys are securely generated, stored and backed up. Both the seed and private keys are stored in Hong Kong.

Summary

From the implementation of support policies to regulatory policies, it can be seen that the Hong Kong government's determination and attitude towards the development of the virtual asset industry, in terms of support, the same return to open up policies and financial help to attract more and more entrepreneurs to embrace the Hong Kong cryptocurrency industry.

From the perspective of regulatory policies, the most direct help is to open retail trading licenses, not only for professional investors, which will greatly promote the scope of users of the Hong Kong cryptocurrency industry, and also strictly regulate the online currencies and businesses of the exchange, so that users can get more trading rights at the same time, and greatly protect the safety of users, Hong Kong will eventually become a friendly harbor for the cryptocurrency industry, back to the top!