Hong Kong introduces new cryptocurrency regulations

New legal regulations for cryptocurrency exchanges in Hong Kong

Hong Kong continues to support the development of blockchain technology and introduces new regulations for the cryptocurrency market. Financial Supervision Authority in Hong Kong (SFC Securities and Futures Commission) issued a statement about the need to fill a legal gap in cryptocurrency trading, which aims to increase the security of using cryptocurrency exchanges operating in Hong Kong. At the same time, the Commission has changed its approach and I want to cover legal and licensing funds and cryptocurrency exchange platforms. The new regulations are to apply to trading platforms and companies that manage their clients' cryptocurrency portfolios, regardless of whether coins will be qualified by them as securities or futures.

The new approach and planned regulations impose on cryptocurrency exchanges and other platforms that have their headquarters in Hong Kong an obligation to register and meet requirements such as those imposed by the Securities and Contracts Commission on the stock exchanges.

Hong Kong a paradise for Blockchain?

The need for clear regulations for the cryptocurrency market in Hong Kong has been pointed out by the Polish Financial Supervision Authority several times earlier this year. The need for new regulations began to be pressing when the Chinese government introduced new, unfavorable guidelines and regulations for cryptocurrency-related projects.  Let us recall briefly, first in September 2017, the Chinese government announced a ban on publicly announcing ICO (Initial Coin Offering) projects, i.e. crowdfunding campaigns consisting in supporting new cryptographic projects that release their tokens to investors before the official launch of the cryptocurrency on the stock exchange. The next step was the ban on organizing public events related to ICO projects, and finally in April 2019 projects related to cryptocurrency mining were included in the activities "to be eliminated" in the annually announced "Catalog of guidelines for the adaptation of industrial structure 'published by the Chinese National Commission for Development and Reform (NRDC).

It is worth adding that in China operate 4 with 5 largest mining pool and the introduction of unfavorable regulations for them could be felt on the cryptocurrency exchanges.  Ultimately, the Chinese government, after numerous suggestions and reports from economic analysts, decided to remove "Bitcoin production" and projects related to cryptocurrency mining from the list of industries to be "eliminated" in 2020. In the meantime, however, many stock exchanges and companies, fearing total bans and perhaps even confiscation of some assets, decided to move their financial centers to Hong Kong.

Reports from China have caused concern around the world, and in Hong Kong, the Financial Supervision Authority in its annual report said it will clearly monitor the cryptocurrency sector. The risk of trading in cryptocurrencies was also noted. This does not mean, however, that the Hong Kong government does not support innovation in blockchain technology, on the contrary - the authorities are taking a number of initiatives to support blockchain technologies. In the fall of 2017, the body acting as the central bank in Hong Kong, i.e. the Hong Kong Financial Commission (HKMA), established a partnership with a twin institution in Singapore in the implementation of new projects based on Blockchain technology. The project was open to all banks from both countries. In addition, the Hong Kong government announced a plan to finance trade with Blockchain technology, and the Chinese giant Ant Financial in late June last year tested its money transfer AliPayHK, which is supposed to be a global system. Another undertaking by Hong Kong that should be noted is the signing of a blockchain and fintech cooperation agreement by HKMA with the Financial Services Regulation Commission (FSRA) of the United Arab Emirates.

Hong Kong is intended to become a blockchain center around the world. This is evidenced by the words of the director of fintech at the InvestHK agency, Charles d'Haussy, who stated that Blockchain is "a priority". And the goal in Hong Kong is "Building infrastructure for enterprises, both new and existing, to ensure that technologies and innovations remain a key driver of growth in the financial sector."

What will the new regulations consist in?

The Polish Financial Supervision Authority argues that in the face of new projects and challenges, the announced regulations are to increase investor safety. The new measures are to enable the regulation and management of cryptocurrencies to protect interests for large investors. All cryptocurrency exchanges are to be subject to strict control by the Commission, which will then decide whether they meet the requirements necessary to obtain a government license. However, no precise guidelines have been issued yet. Information on planning a release of a set of regulations regarding trading in virtual currencies was provided by SFC Director Ashley Adler to Reuters 6 November this year. In his words, he referred to the gentleman discussed earlier, the creation of a blockchain center in Hong Kong:

"The framework will enable SFCs to regulate virtual asset trading platforms, which is an important step in development that is based on a plan I outlined at the same time last year."

The new regulations mainly concern the rules Know Your Customer (KYC) to prevent money laundering. According to regulations, the licensed exchange should take all possible actions to identify the full identity of its clients, their investment goals and resources and to authenticate them. Thus, cryptocurrency exchanges will be able to offer their services only to investment companies and "professional" traders, and will be required to submit to SFC a full report on their activities on a monthly basis. What's more, once the exchanges will not be able to handle exchanges larger than 2% of assets held in the investor's hot portfolio, and each of them will be additionally insured against burglary, which will probably force an increase in commission. Having an insurance policy, servicing only professional clients is not all the restrictions needed to obtain a license by cryptocurrency exchanges. Another requirement is the mandate to use external market control mechanisms. This is to safeguard investors' interests and prevent the possibility of money laundering on cryptocurrency exchanges.

This does not mean that all exchanges will have a licensing obligation. The SFC license will be granted only to exchanges that trade instruments considered "safe", which do not belong to, for example, Bitcoin. In addition, Adler's statement reads that SFC will not be licensed for projects that allow direct peer-to-peer exchanges that typically retain control over their assets, whether they are in virtual or traditional currencies. It is not known to the end how many entities will be able to apply for a license.

New information has aroused mixed feelings among exchanges, traders and analysts. Some exchanges are happy that the introduction of licenses will help distinguish professional, licensed entities from unlicensed exchanges and will have a positive effect on raising industry standards. The first exchange that has a chance to get a license is probably Huobi. It is an interesting solution that may help fight fraud and dishonest cryptographic projects and pay more attention to the security of websites.