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Why Hong Kong is at the forefront of virtual asset regulation in Asia

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All virtual asset trading platforms operating in Hong Kong must obtain a license issued by the SFC

Original title: "Interpretation | Virtual Asset Licensing and Supervision, Why Can Hong Kong Take the Lead in Asia? "

Original Source: 01 Blockchain

and the Hong Kong Securities Regulatory Commission (referred to as SFC) is different from the voluntary regulatory experiment plan implemented through the regulatory sandbox. This licensing system is mandatory and will fully supervise the trading services of security and non-security tokens. All virtual asset transactions operating in Hong Kong All platforms must obtain a license issued by SFC.

November 3, Hong Kong Special Administrative Region Government Financial Affairs and Treasury The Hong Kong Treasury Bureau (hereinafter referred to as the Hong Kong Treasury Bureau) issued the "Public Consultation on Legislative Proposals for Strengthening Anti-Money Laundering and Terrorist Financing Regulations in Hong Kong" (hereinafter referred to as the "Consultation Document"). Legislative proposals undergo public consultation. The consultation document suggested the establishment of a licensing system for virtual asset service providers, which has aroused great concern in the market.

Consultation document on "establishing virtual asset service provider licensing The proposal of the "system" is: Anyone who intends to engage in the regulated business of a virtual asset trading platform in Hong Kong, ① needs to apply for a license from the Securities and Futures Commission (SFC), and ② meet the fit and proper criteria, and ③ hold a license Investors need to comply with the anti-money laundering and terrorist financing regulations stipulated in Schedule 2 of the Anti-Money Laundering Ordinance and ④ other regulatory requirements aimed at protecting investors.

Voluntary engagement with SFC late 2019 through regulatory sandbox implementation The proposed licensing system is mandatory, and will fully supervise the trading services of security and non-security tokens. Moreover, this licensing system is mainly aimed at virtual asset trading platforms. All virtual asset trading platforms operating in Hong Kong must obtain a license issued by SFC and implement relevant measures under the "Anti-Money Laundering and Terrorist Financing Ordinance", as well as other Requirements to protect investors and prevent market manipulation.

The release of the consultation document is the result of several After years of practice, a supervisory plan for virtual asset supervision is proposed. At present, virtual assets are receiving more and more attention in the global financial market, and all major economies in the world are promoting the regulatory process related to virtual assets. As an international financial center, Hong Kong's thinking and practical experience in virtual asset regulation may provide a good example for regulators in mainland China and other parts of the world in the future.

From "voluntary licensing" to "comprehensive supervision"

As an international financial center, Hong Kong has always been active in the regulation of virtual assets, and its regulatory effectiveness is also at the forefront of Asia. As early as 2017, the SFC took action in regulating virtual asset transactions. In 2018 and 2019, the SFC issued relevant documents for two consecutive years to promote the supervision of virtual asset trading platforms.

On November 1, 2018, SFC released Statement on the Regulatory Framework for Asset Portfolio Management Companies, Fund Distributors and Trading Platform Operators (hereinafter referred to as the "Statement") and "Circular to Intermediaries Who Distribute Virtual Asset Funds" (hereinafter referred to as the "Circular"). The "Statement" expounds the conceptual framework for the supervision of virtual asset trading platforms, including virtual asset portfolio management companies and virtual asset fund distributors in the regulatory sandbox of the China Securities Regulatory Commission. Monitor closely. However, a license will not be issued if the SFC considers that the risks involved cannot be adequately dealt with and that investors cannot be assured that they will be protected.

In November 2019, the SFC published its Position Paper: Regulating Virtual "Asset Trading Platform" (hereinafter referred to as the "Position Statement") elaborates on ① the regulatory framework for virtual asset trading platforms and ② licensing conditions. At the same time, ③ "voluntary licensing system" was proposed, announcing that licensed virtual asset trading platforms will be included in its regulatory sandbox, and ④ setting out regulatory standards similar to those of licensed securities brokers and automated trading venues.

It is worth noting that the previous position The licensing system is voluntary, excluding non-security virtual assets or tokens from this regulatory system, and also giving virtual asset operators time and space to choose.

SFC believed at the time that they had no authority to Platforms for virtual assets or tokens are not licensed or regulated because such assets do not qualify as “securities” or “futures contracts” under the Securities and Futures Ordinance. In other words, only platforms that provide securities-type virtual assets or token trading services to customers are within the scope of the supervision of the CSRC, and a virtual asset trading platform is also under the supervision of the CSRC even if only one token belongs to securities.

For this reason, the supervision set in the "Position Statement" Under the framework, Bitcoin and other encrypted assets that are not securities will not be regulated by the SFC.

However, with the substantial increase in virtual currency and virtual asset transactions, Gradually pose a major risk of money laundering and terrorist financing to the financial system, and often involve speculation, fraud, market manipulation and other illegal activities, seriously threatening the financial market and the safety of investors' property. In order to deal with the increasing risks of money laundering and terrorist financing in virtual asset transactions, the Hong Kong Treasury Bureau proposed to establish a mandatory licensing system to comprehensively supervise virtual asset service providers, and on the basis of the original "Position Statement" Further supplements are made on money laundering, licensing rules, supervision and determination of responsibilities, and conviction and sentencing of violations.

As one of the twelve policy bureaus in Hong Kong, the Treasury Bureau It is mainly responsible for formulating and implementing government fiscal and financial policies; SFC is the statutory organization that supervises the operation of the Hong Kong securities and futures market, and is responsible for formulating, approving and issuing various licenses and monitoring. Therefore, in the consultation document, the Treasury Bureau proposed to empower SFC to impose licensing conditions on licensed virtual asset service providers.

How do the new regulations regulate virtual assets?

The regulatory framework proposed in the consultation document has a "Virtual asset service provider" and "virtual asset trading platform" have been clearly defined, requiring license applicants to meet relevant qualification requirements and suitable person criteria. At the same time, imposing license issuance conditions on licensed virtual asset service providers has put forward many regulatory requirements.

1. Regulatory objects: Stablecoins are also within the scope of supervision

According to the consultation document, the Hong Kong Treasury Bureau proposes to establish a virtual asset service provider A licensing regime requiring licensees to meet fit and proper criteria similar to those in other financial industries and to comply with the anti-money laundering and counter-terrorist financing requirements set out in the Anti-Money Laundering Ordinance, as well as other measures aimed at ensuring market integrity and investment protection Regulatory requirements for stakeholder interests.

The licensing system for virtual asset service providers will focus on the supervision of virtual assets exchange. The reason is that virtual asset exchanges are currently a larger and more mature business in Hong Kong, while other virtual asset activities, such as virtual asset payments or custody services operating in Hong Kong as stand-alone business models, are limited in number.

According to the consultation document, a virtual asset service provider is defined as "a business forms to operate specific activities related to virtual assets". Including: ① conducting transactions between virtual assets and legal tender; ② conducting mutual transactions of one or more virtual assets; ③ transferring virtual assets; ④ providing custody or management services for virtual assets, or providing tools for controlling virtual assets; Issue virtual assets to provide related financial services.

The consultation paper refers to the criteria of the special organization and the assessed Hong Kong virtual After reviewing the risks of asset activities, it is proposed to designate the business of operating virtual asset exchanges as "regulated virtual asset activities" under the Anti-Money Laundering Ordinance, and to require anyone who intends to engage in regulated activities to obtain from the SFC Virtual Asset Service Provider License and compliance with fit and proper criteria and other regulatory requirements.

The consultation paper defines virtual asset exchanges as: "allowing Or a trading platform that invites customers to place orders, buy or sell any virtual assets with currency or virtual assets (whether the same virtual asset or not), and has kept, implemented, controlled or possessed any currency or virtual assets in the course of business ".

The private trading platform (that is, only provides the platform to display buy orders and Selling orders, the actual transaction is carried out outside the platform, such as OTC over-the-counter transactions) are not within the scope of virtual asset service providers defined this time, so they are not subject to regulation.

Additionally, with regard to virtual assets, the Consultation Paper defines A unit that expresses, calculates, or stores the value of an asset and is transferred, stored, or bought and sold in digital form for payment of goods or services, settlement of debts, or investment.

It does not include:

①Legal digital currency (including central bank digital currency);

②Financial assets (such as securities and authorized structured products) regulated by the Securities and Futures Ordinance;

③Closed, limited-use products that cannot be transferred, traded or interchanged (such as air miles, credit card rewards, gift cards, customer rewards programs, game tokens, etc.) are not virtual assets.

The consultation paper states that the definition applies to all virtual assets, regardless of Whether the value is stable. Therefore, virtual assets that claim to be backed by assets to stabilize their value, so-called "stablecoins", are also regulated virtual assets.

To ensure consistency, under the proposed Anti-Money Laundering Ordinance When issuing licenses for virtual asset service providers, the government will refer to the voluntary licensing system established by SFC on virtual asset trading platforms to solve the compatibility problem between the two licensing systems. SFC Chairman Ouyang Li also stated previously that the new The licensing regime will adopt the same regulatory standards as the existing regulatory sandbox scheme.

2. License issuance conditions

Consultation paper proposes that anyone wishing to operate a regulated virtual asset exchange must apply to the Securities and Futures Commission Apply for a license to become a licensed virtual asset service provider under the Anti-Money Laundering Ordinance. Applicants for a license must meet the relevant eligibility requirements and fit and proper criteria.

There are two main requirements for eligibility:

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①Companies must be established in Hong Kong and have a fixed place of business before they can apply for virtual asset services Provider license;

②Natural person or business without legal person status models (such as sole proprietorship or partnership), are not eligible to apply for a virtual asset service provider license.

In addition, license applicants must also comply with the Anti-Money Laundering Ordinance Only the fit and proper criteria stipulated in the virtual asset service provider license can be obtained. The guidelines apply not only to the company making the application, but also to all responsible officers and ultimate owners of the company. Specifically, when considering whether an individual is a suitable person, the Securities Regulatory Commission should consider whether there have been crimes of money laundering or terrorist financing, whether there have been crimes related to fraud, corruption or dishonesty, whether they have good reputation and financial documents, etc. aspect.

This consultation document imposes restrictions on license issuance, not only for The place of registration and the type of registration of the virtual asset exchange also put forward clear requirements for the person in charge or the actual controller of the exchange, which has never appeared in the previous SFC regulatory documents, and will also make the existing virtual asset trading business in many Hong Kong markets exchanges are excluded.

At the same time, it is worth noting that the proposed license issued this time belongs to Open license, that is, as long as the licensed virtual asset service provider continues to operate and has not been suspended or revoked by the China Securities Regulatory Commission, its license will continue to be valid. This setting is to provide licensed institutions with a certain business environment to facilitate their long-term investment.

3. Ten regulatory requirements and four legal penalties< /p>

In addition to the qualification requirements for license applicants, in terms of business, The consultation document also puts forward regulatory requirements in ten aspects, including: ① initially only provide services to professional investors; ② financial capacity, including paid-up share capital and liquidity requirements; ③ knowledge and experience; ④ business stability; ⑤ Risk management; ⑥separation and management of client assets; ⑦listing and trading policies for virtual assets; ⑧financial reporting and disclosure; ⑨prevention of market manipulation and illegal activities; ⑩prevention of conflicts of interest.

At the same time, this consultation document lists four Asset-related crimes and corresponding legal penalties.

This is also something that has never appeared in relevant Hong Kong regulatory documents before. Among them, engaging in virtual asset activities without a license will be regarded as a criminal offense and punished with imprisonment and fines. This shows that to provide virtual asset services in Hong Kong in the future, obtaining a license is a must. From these punitive measures, it is not difficult to see the determination of the Hong Kong regulatory authorities to crack down on virtual asset activities and maintain order in the financial market.

Table: Four crimes related to virtual assets and corresponding legal penalties

Source of information: public information, 01 blockchain

The call for proposals for this consultation paper closes on January 31, 2021. According to the specific work progress, it is expected to submit the bill to the Legislative Council within 2021.

The file also mentions It is expected that the special organization will conduct a technical compliance assessment of Hong Kong in February 2023 and an effectiveness assessment in June 2024. The special organization expects that Hong Kong will respond to industries such as virtual asset service providers and precious metals and gemstone traders. Anti-money laundering and terrorist financing regulations.

Hong Kong and global virtual asset regulatory progress and trends

At present, many countries and regions around the world are actively promoting the supervision of virtual assets, among which Using the license plate system to impose constraints is currently the most important way. According to the previous incomplete statistics of the 01 blockchain, at least 14 countries or regions around the world have launched regulatory licenses related to encrypted digital currencies. It is a company that provides digital currency transactions and digital wallet services. The main regulatory purpose is anti-money laundering and anti-terrorist financing.

U.S. as example. States in the United States have different attitudes towards virtual assets, but it has become a consensus to impose supervision on virtual asset transactions: New York State implements strict control over digital currency exchanges, and currently only a few exchanges have obtained authorization; Washington State in April 2017 Promulgated Act 5031, which stipulates that all currency exchanges in Washington State, including virtual currency operators, must apply for a license to operate. Other states are also actively taking measures to implement licensing management for digital currency transactions under the regulations of the US Securities Regulatory Commission.

Japan Financial Services Agency (FSA) also adopted the "Payment Services Act" to implement comprehensive supervision on digital currency exchanges: all exchanges operating in Japan must be licensed by the Ministry of Finance and FSA.

In addition In addition, Singapore, Thailand, Australia and other countries have also incorporated virtual asset transactions into the regulatory framework and used the license system to regulate them. From this point of view, the open license model proposed by Hong Kong this time is in line with the current mainstream trend of global virtual asset regulation.

Chinese Lun Lawyer Chen Yunfeng, a senior partner of De Law Firm, believes that the consultation document is in line with the Hong Kong Securities Regulatory Commission's consistent regulatory attitude towards virtual currencies, and it is only a more detailed regulatory standard. All virtual assets, including transactions of cryptocurrencies such as Bitcoin and Ethereum, or derivatives transactions, will fall within the scope of regulation.

Similar to previous SFC Compared with the current regulatory attitude, the regulatory system proposed this time has a wider coverage, a more comprehensive regulatory framework, stricter licensing conditions, clearer regulatory focus, and greater punishment.

Hong Kong Regulatory Authority It is hoped that all virtual asset trading platforms in the future must meet the requirements of the regulatory framework or licensing system before they can trade, and will be subject to supervision to ensure a fair competition environment and reduce investor risk. It can be expected that if the licensing system is established, virtual asset exchanges that already have business entities in Hong Kong will apply for licenses as soon as possible in order to obtain the qualifications for compliance operations in Hong Kong and adapt to the new regulatory requirements; while for many other Exchanges that have actual business in Hong Kong but were not previously located in Hong Kong may choose to register a new entity in Hong Kong or selectively withdraw from the Hong Kong market. And this may depend on the market size of virtual asset transactions in Hong Kong and the possible cost of applying for a license.

From the past , It is not easy to obtain a virtual asset license from SFC. According to public information, since the date when the SFC promulgated the virtual asset regulatory framework in 2019, several institutions have applied to the SFC for licensing, but very few have actually obtained licenses. By August 2020, only BC Technology Group (863.HK) has announced that its OSL platform has applied for a license to operate Type 1 (securities trading) and Type 7 (automated trading services) regulated activities under the Hong Kong virtual asset regulatory framework , obtained the SFC issued a notice of approval in principle.

If the license plate is difficult Take it, it will be difficult to eliminate it in the short term if you build plank roads in the open and hide in the dark. After the 1994 Movement, Binance went overseas for a while to expand overseas markets, but domestic users can still download and use its services through other channels today, and many business entities that carry out encryption business in China are also permanently established overseas. Regarding Hong Kong’s supervision, if the exchange clearly does not carry out relevant business in Hong Kong, personnel in Hong Kong may also spontaneously use the services provided by the exchange through other channels.

Of course, license Not only is it beneficial to the management and supervision of the regulatory authorities, but it will also greatly enhance the credibility and market influence of the exchange itself. Today, major exchanges such as Huobi, OKEx, and Binance have more or less operating licenses in several countries. As long as its own conditions and regulatory requirements allow, the attractiveness of the license issued by SFC is beyond doubt.

As an international financial Center, Hong Kong's market inclusiveness and institutional frontiers are the key to promoting the regulation of virtual assets. Virtual assets are becoming more and more active in the global financial market, and their importance is becoming more and more prominent. Accelerating the improvement of the virtual asset regulatory system will undoubtedly help to consolidate Hong Kong's status as an international financial center, as well as the innovation and development of financial technology.