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Key focus areas of Hong Kong's new cryptocurrency policy include trading, stablecoins, staking services, and regulatory restrictions.

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This week, Hong Kong's actions regarding cryptocurrency-related policy direction have been frequent. Not only did the Securities and Futures Commission hold a press conference on the 23rd to summarize its views on virtual assets, but it also published mul

Original title: "Highlights of Hong Kong's new cryptocurrency policies this week"

Source: Odaily Planet Daily

省流版

translates to

Lite Version

in English.

1. Allow retail investors to trade qualified virtual currency assets, and there is not only one criterion for inclusion.

2. Stablecoin regulation will be implemented in 23/24, and retail trading will not be opened before that.

3. Licensed platforms are not allowed to participate in pledge and other businesses.

4. Reiterate and strengthen regulatory restrictions on suspected money laundering.

This week, Hong Kong's actions regarding cryptocurrency-related policies have been frequent. Not only did the Securities and Futures Commission hold a press conference on the 23rd to summarize virtual assets, but it also published multiple guidelines related to cryptocurrency in the constitutional newspaper yesterday. Further explanations and clarifications were made on various aspects such as retail trading, stablecoins, and money laundering. The following is a detailed summary compiled by Odaily Star Daily.

Individual Trading

The China Securities Regulatory Commission mentioned in its response on the 23rd regarding news related to providing services to retail investors. Its response is as follows:

The Association has noted that the respondent strongly supports the provision of services by licensed virtual asset trading platforms to retail investors. The Association will implement the recommendations regarding the provision of services by licensed virtual asset trading platforms to retail investors.

As explained in the consultation document, we agree that licensed virtual asset trading platforms should follow a series of proper investor protection measures covering establishing business relationships with customers, governance, disclosure, token due diligence and inclusion before providing trading services to retail investors. We also agree that retail investors must understand the risks involved in virtual asset investment. Before making any investment decisions, investors should understand the relevant characteristics and risks and be prepared to accept losses. The approval by the Securities and Futures Commission of a licensed virtual asset trading platform to include a certain virtual asset for retail trading does not constitute a recommendation or endorsement of the virtual asset, nor does it guarantee its commercial viability or performance. The Securities and Futures Commission will continue to work with investors and the Investor Education Committee to educate them on all aspects of virtual assets and their trading.

Meanwhile, the China Securities Regulatory Commission also supports licensed trading platforms in establishing business relationships with customers in the retail sector to protect ordinary investors. Their specific response is as follows:

Our industry welcomes the provision that requires responding parties to establish business relationships with retail customers, as it has received widespread support.

Regarding the exemption of regulations on whether individual professional investors should establish business relationships with clients, it is recommended that the regulations applicable to individual professional investors should be consistent with the existing regulations on derivative knowledge assessment and suitability that intermediaries must apply when providing services to individual professional investors. Since the regulations on establishing business relationships with clients are designed to follow the spirit of suitability, we still believe that individual professional investors should enjoy the same protection as retail investors.

The Association has already considered proposals to relax specific provisions for establishing business relationships with retail customers in certain circumstances. However, we believe that retail investors are generally unlikely to understand the terms, characteristics, and risks of virtual assets. In addition, trading on virtual asset trading platforms is automatic, and even if a transaction is unsuitable, the platform has no ability to intervene. Therefore, ensuring suitability is extremely important when establishing business relationships with retail customers. Only by fully implementing the proposed regulations for establishing business relationships with customers can this goal be achieved. For example, the proposed regulations for assessing a customer's risk tolerance are an important part of existing suitability regulations. As most virtual assets come with high risks, virtual assets are generally only suitable for customers with higher risk tolerance. Therefore, even if retail customers have an understanding of virtual assets, virtual asset trading platforms should not be exempt from conducting risk tolerance assessments.

Given that it is necessary to ensure that retail investors have a full understanding of virtual assets before allowing them to trade in virtual assets, the China Securities Regulatory Commission believes that platform operators should comprehensively evaluate investors' understanding of the nature and risks of virtual assets, including evaluating the virtual asset training or courses that the investor has received in the past, the investor's current or past work experience related to virtual assets, and the investor's past trading experience related to virtual assets. Therefore, we have made corresponding revisions to the "Guidelines for Virtual Asset Trading Platforms". As the knowledge assessment requirements apply to both virtual asset trading platforms and other intermediaries engaged in virtual asset-related activities, we will also make corresponding revisions to ensure that all intermediaries are subject to uniform regulation.

The China Securities Regulatory Commission (CSRC) is fully aware of the request from respondents for more guidance on the regulations regarding establishing business relationships with clients. We will provide further guidance in the form of frequently asked questions (FAQs), such as how to assess a client's risk tolerance and risk-bearing capacity for virtual assets. Although we understand that the industry may want more specific guidance, such as specifying risk-bearing limits for investors with different financial conditions and risk tolerance levels, it may not be appropriate for the CSRC to provide such guidance. This is because platform operators (rather than the CSRC) are best able to impose limits based on the information obtained during the "know your customer" process.

Virtual Assets and Stablecoins

Additionally, the China Securities Regulatory Commission has provided relevant opinions on which virtual assets are allowed to be traded by retail investors and has also revised the "Guidelines for Virtual Asset Trading Platforms". The China Securities Regulatory Commission's response to the relevant issues is as follows:

As explained in the consultation document, in the traditional securities market, investment products sold to retail investors in Hong Kong must comply with the investment offer system and prospectus system. Retail products are generally regulated by the Securities and Futures Commission at the product level. The relevant products must have been reviewed or approved by the Securities and Futures Commission for their offer and promotional documents before they are publicly offered for sale. These regulations do not apply to non-security tokens; indeed, most (if not all) non-security tokens are not regulated by any regulatory authority at the product level. This explains why the Securities and Futures Commission needs to approve the tokens before they can be traded on licensed virtual asset trading platforms for retail investors.

Therefore, we recommend implementing additional minimum criteria for tokens before they can be bought and sold by retail investors. The recommended criteria are based on the following principles: tokens that retail investors can buy and sell should be less susceptible to market manipulation (not only on the platform operated by the platform operator, but also in the overall virtual asset market) because most (if not all) virtual asset trading platforms worldwide are currently unregulated or only regulated in terms of combating money laundering/terrorist financing. Our recommended regulations therefore require that tokens must belong to qualified large virtual assets in order to be eligible for retail investor trading, i.e. they have been included in at least two accepted indices provided by two independent index providers.

We appreciate the independence of the index providers and the feedback received on the acceptance index and the index providers. We agree that index providers should carefully compose and manage indices, including ensuring the quality and robustness of the indices. The criteria for determining whether an index belongs to the accepted index are formulated in accordance with relevant principles, and the introduction of an index provider should have additional regulations for the traditional certificate market to improve reliability. We agree that, as some respondents have suggested, the reliability of relevant data and the issue of balancing potential benefits will have an impact on the robustness of the index.

Therefore, we believe that it is appropriate to further stipulate that experienced index providers in the traditional securities market comply with the Principles for Financial Benchmarks established by international securities regulatory organizations when publishing indices, so that relevant index providers have appropriate internal arrangements to ensure the stability and quality of their indices. In addition to requiring that the two index providers be independent of each other, we will also require that they be independent of virtual asset issuers and platform operators. We recognize that, with respect to virtual assets, a large market capitalization does not necessarily mean high liquidity. The securities regulatory commission wishes to reiterate that inclusion in the two accepted indices is not the only criterion for inclusion in a virtual asset. In fact, it is only a minimum criterion. This emphasizes the importance of licensed virtual asset trading platforms conducting due diligence.

Platform operators must conduct further due diligence based on the platform's token inclusion criteria and ensure that the tokens included for trading comply with the relevant criteria. In the case of tokens being included for retail trading, platform operators must also ensure that the tokens have high liquidity. Platform operators should also ensure that the included tokens continue to comply with the relevant token inclusion criteria. The acceptability and continued eligibility for trading of tokens depend on the due diligence conducted by platform operators, and it is not appropriate for the China Securities Regulatory Commission to publish a list of qualified virtual assets, accepted indices or index providers.

Response to Stablecoins:

We have noticed that the risks brought by stablecoins have attracted international attention. There are voices in the market calling for the regulation of stablecoins to ensure that their reserves are properly managed to maintain price stability and enable investors to exercise their redemption rights. These risks have a fundamental impact on the stability of stablecoins. Stablecoins that cannot maintain their pegging function or cannot return investors' funds upon redemption cannot be called stable. This expanded risk of runs and redemptions seriously affects the liquidity of stablecoins, making them generally unsuitable for retail investors.

The Hong Kong Monetary Authority (HKMA) has released a summary of its discussion paper on cryptocurrencies and stablecoins in January 2023. The regulatory framework for stablecoins is expected to be implemented in 2023/24. Prior to the regulation of stablecoins in Hong Kong, we believe that stablecoins should not be included for retail trading.

Trading Platform

Following the trend, many platforms have recently launched Hong Kong sites/Hong Kong version platforms. Regarding the relevant issues and details of license application, the response from the Securities and Futures Commission is as follows:

Our organization has received many requests to clarify various technical issues. For example, some respondents have raised questions about the scope of "providing virtual asset services" defined in the Anti-Money Laundering Regulations, including whether it covers off-exchange virtual asset trading activities and virtual asset brokerage activities.

Regarding the arrangement of dual licenses, respondents were asked whether they need to obtain licenses under both the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance, especially since some platform operators may not intend to provide trading services for securities-type tokens. Given that non-securities tokens may evolve into securities tokens, respondents also indicated that platform operators can terminate trading services for that particular securities token or only allow customers to reduce their positions in the token, thus not requiring a license under the Securities and Futures Ordinance. With regard to the arrangement of dual licenses, respondents also asked whether virtual asset trading platforms that obtain dual licenses need to have two or four responsible persons, and whether a pragmatic approach can be taken in assessing competency (including relevant industry experience of responsible persons) in response to the shortage of talent with experience in both virtual assets and traditional securities.

Regarding the regulations on external evaluation reports, the issues raised include the policies and procedures proposed by the applicant of the virtual asset trading platform under preparation and providing opinions on system implementation, whether they can serve as evaluation experts in the first and second stage reports; whether the first stage report can be submitted without the license application; whether platform operators who intend to apply for a license can submit a declaration of the capabilities of their selected external evaluation experts to the China Securities Regulatory Commission before submitting the external evaluation report; and whether established and operating virtual asset trading platforms can only submit the second stage report.

Regarding the scope of "providing virtual asset services", the system under the "Anti-Money Laundering Regulations" will cover central virtual asset trading platforms that operate similarly to traditional automated trading venues licensed under the "Securities and Futures Ordinance". These platforms typically use automated trading systems that match customer trading instructions to provide virtual asset trading services, and will provide additional custody services along with such trading services. Therefore, those who provide virtual asset services (such as off-exchange virtual asset trading activities and virtual asset brokerage activities) but do not have automated trading systems and additional custody services will not fall within the scope of the "Anti-Money Laundering Regulations".

As explained in our consultation document, given the terms and characteristics of virtual assets may evolve over time, the classification of a particular virtual asset as a non-security token or a security token may change (and vice versa). To avoid violating the issuance system regulations and ensure the continuity of their operations, virtual asset trading platforms also apply for approval under the current system of the Securities and Futures Ordinance and the virtual asset service provider system under the Anti-Money Laundering Ordinance, which is a prudent approach. We note that there are opinions suggesting that virtual asset trading platforms may only suspend and ultimately revoke trading services for certain tokens that have evolved into security tokens, rather than obtaining a license under the Securities and Futures Ordinance. We are very concerned about this. Fundamentally, removing tokens that have been included for trading may not necessarily be in the best interests of customers and should only be used as a last resort. The idea that customers are only allowed to reduce their positions in a particular token is also based on a misunderstanding, as any sell order placed by a customer will be matched with a buy order placed by another customer.

We will adopt a simplified application process, so that dual-license applications only need to submit a comprehensive application form once. In terms of personnel, the person in charge may be approved under both the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance, so virtual asset trading platforms that have obtained dual licenses do not need to have four different responsible persons. For talents in the industry who may lack experience in both virtual assets and traditional securities, we are willing to adopt a pragmatic approach, and details will be supplemented through more guidance.

As stated in the consultation document, the provisions regarding external assessment reports are intended to simplify the application process, particularly as the industry may not fully understand our regulatory expectations. We expect external assessment experts to assist applicants in substance, such as providing opinions or drafting documents on the applicant's policies and procedures, providing opinions on system implementation, and suggesting improvements or corrective measures when deficiencies are found in the design, implementation, or effectiveness of policies, procedures, systems, and monitoring measures. Therefore, it is acceptable for external assessment experts to participate in relevant work before and during the first and second stage reports. (The scope of the external assessment report (also attached to the consultation document) and further guidance, where appropriate, will be published on the SFC website.)

Due to the expected participation of external evaluation experts in the early preparation stage of the license application, and the introduction of the first-stage report requirement to simplify the application process, the first-stage report should be submitted together with the license application. In addition, considering that the industry may not fully understand our regulatory expectations at the moment, the applicant of the virtual asset trading platform that has been established and is in operation still needs to submit the first-stage report. We encourage virtual asset trading platforms to discuss with the Financial Technology Group of the China Securities Regulatory Commission in advance if they are unsure whether the external evaluation experts they plan to hire are fully qualified.

Given the wide range of issues received, we will issue further guidance in the form of FAQs, circulars, and handbooks on common issues related to the new virtual asset service provider system under the Anti-Money Laundering Regulations.

The scope of the external evaluation report (also included in the appendix of the consulting document) and additional guidance (if applicable) can be viewed on the Securities and Futures Commission website.

As for the business scope of licensed platforms, the China Securities Regulatory Commission has also provided detailed explanations:

We agree that, like all other intermediaries, platform operators should not provide gifts related to the sale of specific virtual assets. This principle forms the basis for the regulation that platform operators should not publish any advertisements related to specific virtual assets. In light of the feedback received, we have now explicitly prohibited gifts (excluding fees or fee discounts) in the "Guidelines for Virtual Asset Trading Platforms". The Securities and Futures Commission also wishes to remind platform operators that they have a responsibility to ensure that any materials related to specific products, whether on or off the platform, are based on facts, impartial, and unbiased.

The China Securities Regulatory Commission (CSRC) currently does not impose a cooling-off period on retail customers of intermediaries engaged in other regulated activities (including providing automated trading services). As platform operators must ensure suitability in the process of establishing business relationships with customers, any retail customer who has established a business relationship should have already been assessed by the platform operator as suitable for trading virtual assets. A cooling-off period after trading is also not feasible, as automated trading services involve matching trades with customers, and the cancellation or revocation of a trade would affect another customer of the platform.

Generally speaking, the risks of holding customer virtual assets offline are similar to the custody risks associated with customer assets in traditional financial markets (i.e. embezzlement and fraud by employees). We note that traditional financial institutions' customers do not have comprehensive insurance protection against customer asset losses, so we believe that there is room to lower the threshold for safeguarding customer virtual assets held offline, especially since licensed virtual asset trading platforms are subject to multiple provisions in the "Virtual Asset Trading Platform Guidelines" regarding private key management and custody, which are aimed at reducing the risk of collusion among employees. However, since the risks of holding customer virtual assets online and through other storage methods (mainly the risk of being hacked and other network security risks) are not typically associated with the custody of customer assets in traditional financial markets, we still believe that customer virtual assets held online and through other storage methods should be fully covered by compensation arrangements provided by licensed virtual asset trading platforms.

Due to the fact that virtual assets of customers cannot obtain comprehensive insurance protection against losses, we believe that if most of the virtual assets of customers are held offline in a way that is usually not subject to hacker attacks and other network security risks, they will have a higher level of protection. Therefore, based on the premise that 98% of customer virtual assets must continue to be held offline, we are prepared to lower the threshold for the protection of customer virtual assets held offline to 50%. We note that, given that platform operators may need to allocate their own funds when they cannot obtain insurance protection for online and other storage methods, licensed virtual asset trading platforms may also tend to hold less than 2% of customer virtual assets online and in other storage methods.

Regarding what asset categories can constitute part of the compensation arrangement, we agree that funds held in the form of bank guarantees and in the form of current deposits or fixed deposits that will mature within six months are acceptable. As for virtual assets, we believe that holding reserve virtual assets that are the same as the customer's virtual assets that require compensation arrangement protection can reduce market risk caused by the volatility of virtual assets.

We have noticed that there are different opinions on whether to establish a custodial arrangement for compensation arrangements or whether licensed virtual asset trading platforms are allowed to hold disbursed funds. We believe that both arrangements are acceptable, provided that the disbursed funds are segregated from the assets of the platform operator and its group companies and are disbursed in trust and designated for relevant purposes. Funds held by the platform operator or its affiliated entities should be held in an independent account of an approved financial institution. The "Guidelines for Virtual Asset Trading Platforms" have been amended accordingly.

We agree that licensed virtual asset trading platforms should also be able to flexibly establish a fund pool jointly or separately in the form of an insurer to provide protection against the loss of their clients' assets. The "Guidelines for Virtual Asset Trading Platforms" have made provisions for such flexibility.

Finally, we also agree that the virtual assets that constitute part of the compensation arrangement should be separated from the virtual assets of the platform operator and its affiliated companies, and held offline by its affiliated entities. This is because the affiliated entities are subject to various regulations on private key management and custody under the "Guidelines for Virtual Asset Trading Platforms", while the custody standards of third-party custodians may vary greatly or even be insufficient.

We believe that in order to ensure the safe custody of customer assets, the ratio of offline to online storage should not be reduced, and most virtual assets should be held in offline storage methods that are usually not susceptible to hacker attacks and other network security risks. We also want to remind platform operators that they should implement appropriate virtual asset withdrawal procedures and disclose these procedures to their customers. In particular, if the platform operator does not execute customer withdrawal requests in real time, it should provide specific assistance on its website on how long it usually takes to transfer virtual assets to the customer's private wallet after receiving the withdrawal request.

Regarding proprietary trading, we agree that liquidity on the trading platform is crucial for our clients. Therefore, the China Securities Regulatory Commission allows third-party market makers to engage in market making activities. However, the current prohibition on proprietary trading is comprehensive and effectively prohibits licensed virtual asset trading platform group companies from holding any virtual asset positions. Therefore, we have revised the provisions in the "Virtual Asset Trading Platform Guidelines" to allow affiliated parties to trade through channels outside of licensed virtual asset trading platforms.

As far as program trading is concerned, the China Securities Regulatory Commission hopes to clarify that although platform operators are prohibited from providing program trading services to their customers, the platform's customers can use their own program trading systems for transactions through licensed virtual asset trading platforms.

Regarding other common services in the virtual asset market, such as earnings, deposits, and loans, the China Securities Regulatory Commission does not allow licensed virtual asset trading platforms to provide these services. This is covered in section 7.26 of the "Guidelines for Virtual Asset Trading Platforms". Ultimately, the main business of licensed virtual asset trading platforms is to act as agents and provide a way for customers to buy and sell. Any other activities may lead to potential conflicts of interest and require additional safeguards, therefore licensed virtual asset trading platforms are currently not allowed to engage in such activities.

Money Laundering

The emphasis of the new regulations undoubtedly lies in cracking down on money laundering/terrorist financing activities, and in this regard, the China Securities Regulatory Commission has made certain provisions for virtual asset transfers in the "Anti-Money Laundering Guidelines for Licensed Corporations and Virtual Asset Service Providers Licensed by the China Securities Regulatory Commission" and responded to related issues:

The transfer rules are a major measure for virtual asset service providers and financial institutions to combat money laundering/terrorist financing, as the rules provide the basic information needed for sanction screening, transaction monitoring, and other risk mitigation measures. This also helps prevent the processing of virtual asset transfers for criminals and designated persons, and detect them when such transfers occur.

The Financial Action Task Force (FATF) reiterates that all jurisdictions need to implement the transfer rules as soon as possible, as the "sunrise problem" cannot be resolved until all virtual asset service providers and financial institutions operating in major jurisdictions comply with the transfer rules.

Other major jurisdictions (such as the United States, Singapore, the United Kingdom, and Europe) have already implemented or are about to implement transfer rules 9. If the implementation of transfer rules is delayed in Hong Kong, the competitiveness of our virtual asset trading platform that has obtained our license will be affected, because virtual asset service providers and financial institutions operating in other major jurisdictions will not be able or unwilling to transact with them due to risk management concerns.

However, it may take time for the development system to conveniently submit the required information to the receiving institution, even though licensed virtual asset trading platforms are well aware that special organizations have been advocating compliance with transfer rules in recent years.

Considering the active and rapid development of technology solutions and transfer rules networks in recent years, the difficulties in exchanging information between institutions have gradually been alleviated. Respondents' concerns about submitting information immediately will be resolved over time. In addition, more and more virtual asset service providers and financial institutions operating overseas will be subject to transfer rules restrictions.

If the required information cannot be submitted to the receiving institution immediately, the China Securities Regulatory Commission considers it acceptable to submit the required information as soon as possible within a feasible range after the transfer of virtual assets, taking into account the implementation status of transfer rules in other major jurisdictions, until January 1, 2024. From June 1, 2023, licensed virtual asset trading platforms should comply with all other transfer rules and related regulations in sections 12.11 to 12.13, including safely submitting the required information to the receiving institution while taking the above temporary measures. Section 12.11 has been revised to reflect the above situation.

Some customers of licensed virtual asset trading platforms can conduct virtual asset transfers to and from non-custodial wallets. This may pose a higher risk of money laundering/terrorist financing due to the lack of intermediaries to enforce anti-money laundering/terrorist financing measures on the owners of non-custodial wallets.

Therefore, we listed regulations in section 12.14 to control the transfer of non-custodial wallets. These regulations are similar to transfer rules and even stricter. Licensed virtual asset trading platforms should obtain necessary information from customers and conduct sanction screening. In addition, licensed virtual asset trading platforms should consider screening related to virtual asset transactions and wallet addresses.

After reviewing the evaluation results for the ownership or control of non-custodial wallets, only virtual asset transfers with non-custodial wallets that have been evaluated as reliable will be accepted. Please also refer to the discussion in sections 106 to 109 of this summary document.

The transfer rules have been implemented in the United States and Singapore, and will take effect in the United Kingdom on September 1, 2023, and are expected to take effect in Europe in January 2025.

This means that sections 12.11.10 and 12.11.13 will take effect on January 1, 2024. If the required information cannot be submitted immediately to the collecting institution, licensed virtual asset trading platforms should adopt the above temporary measures before January 1, 2024. The CSRC will issue frequently asked questions to clarify its regulatory requirements in this regard.

Licensed virtual asset trading platforms should only return virtual assets in appropriate circumstances and when there is no suspicion of money laundering/terrorist financing activities, and after due diligence on the counterparty of the virtual asset transfer and screening of the virtual asset trading and related wallet addresses. In addition, virtual assets should be returned to the account of the remitting institution, not the remitter's account. Additional guidance is provided in paragraph 12.11.22.

Meanwhile, the constitutional document of May 25th has also published guidelines on regulating money laundering/terrorist financing, which can be found in the May 25th constitutional document on the official website of the Special Administrative Region government.

For the full text of the May 23rd press conference, please refer to the following official website link.