Five highlights of Hong Kong’s cryptocurrency policy in the coming year after opening up to retail trading

On August 3, HashKey and OSL trading platforms announced that their licenses No. 1 and No. 7 were officially upgraded, becoming licensed trading platforms for retail users in Hong Kong. In addition to providing support for fiat currency deposits and withdrawals, HashKey trading platform will also cooperate with Standard Chartered Bank, Morgan Stanley Asia ZA BANK and others to provide users with fiat currency deposit and withdrawal services. In addition, the platform has also opened up compliant OTC transactions. After opening up retail trading, what else is there to watch in the coming year.

1. What coins may be open to retail trading?

According to the new regulations issued by Hong Kong in March, if licensed platform operators intend to provide virtual assets to retail customers, they should also ensure that the selected virtual assets are qualified large-scale virtual assets and meet the following specific token inclusion criteria: "Qualified large-scale virtual assets" refer to virtual assets that are included in at least two "accepted indices" launched by at least two independent index providers; licensed platform operators should ensure that at least one of the two indices is launched by an index provider with experience in publishing indices for traditional non-virtual asset financial markets, such as an index provider that has launched an index tracked by an index fund approved by the Securities and Futures Commission.

According to @tier10k statistics, among the five indices launched by mainstream traditional institutions, Bitcoin BTC and Ethereum ETH are recorded in all indices; Litecoin LTC and Polkadot DOT rank second, with four indices included; Bitcoin Cash (BCH) and SOL rank third, with three indices included; Cardano Avalanche Polygon and Chainlink rank fourth, with two indices included. In addition, EOS BNB ATOM FIL ETC XLM UNI, etc. are also included once. However, it should be noted that the major indices will also increase or decrease with market changes.

William believes that, if the requirements of the CSRC are met, there are currently 13 crypto assets that can be used as alternative materials for retail trading, namely: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH and CRV. Of course, the above currencies may not be allowed to be traded to retail investors. Because the assets available for retail trading must meet the three conditions of "exchange due diligence + qualified large virtual assets + written approval from the CSRC". For example, the current operating conditions of SOL and BCH are not optimistic and may be excluded by the CSRC.

Currently, Hashkey only provides 5 assets and 7 trading pairs, including BTC, ETH, USDT, USDC and USD; OSL only provides BTC and ETH.

2. Brokers and banks allow ordinary citizens to buy coins

On June 26, HSBC, the largest bank in Hong Kong, allowed its customers to buy and sell virtual asset ETFs listed on the Hong Kong Stock Exchange. It is also the first bank in Hong Kong to allow customers to buy and sell virtual asset ETFs listed on the Hong Kong Stock Exchange. This move will expand the exposure of local Hong Kong users to cryptocurrencies. Currently, the cryptocurrency ETFs listed in Hong Kong include CSOP Bitcoin Futures ETF, CSOP Ethereum Futures ETF, and Samsung Bitcoin Futures Active ETF.

Hu Zhenbang, CFO of BC Technology, the parent company of Hong Kong compliant exchange OSL, said that last year the Securities and Futures Commission and the Monetary Authority issued a very clear guideline that if banks and securities firms want to provide digital asset services to customers, they must cooperate with digital asset licensed institutions. There are two ways to cooperate. One is to directly introduce customers, and the other is to apply to the Securities and Futures Commission on the basis of the original stock and bond services, and add digital asset services to the business scope through cooperation with licensed digital asset service providers. Securities firms can open accounts on licensed digital asset trading platforms and buy and sell digital assets for their end customers. Of course, banks can also develop their own trading systems and then apply for licenses, but after all, digital assets are not the main products of banking business, so the more efficient way should be to cooperate with external licensed digital asset platforms.

3. Third, fourth and subsequent Hong Kong licenses

The Hong Kong government began to implement the virtual asset service provider licensing system (VASP licensing system) after June 1. Prior to this, the "Type 1 License and Type 7 License" system was implemented, namely licenses for regulated activities of Category 1 (securities trading) and Category 7 (providing automated trading services). Currently, only the above-mentioned Hashkey and OSL have obtained the above two licenses.

The main differences between the VASP licensing system and the previous system are the increase in retail trading, mandatory licensing (previously only for professional investors and voluntary licensing), and increased investor protection. However, at the same time, more thresholds have been set to achieve the goal of screening high-quality crypto exchanges, such as the need to establish a physical office in Hong Kong, the need for at least two ROs (heads of licensed crypto institutions) with many years of experience in traditional financial institution management and many years of experience in virtual currency trading, the need to have a certain number of cryptocurrency users and trading volume before June 1, the need to obtain a TCSP license as well as No. 1 and No. 7 licenses, and the need to be officially in business for one year and obtain regulatory approval before obtaining a formal license.

At present, at least 10 institutions have announced their applications for Hong Kong VASP licenses, including crypto institutions such as HashKey, OKX , Huobi, BitgetX, BitMart , Bybit , BitMEX , and Gate, as well as traditional institutions such as YiBo Finance.

Hu Zhenbang believes that the number of exchanges that will eventually obtain licenses will not be too large, and it is estimated that there will be only four or five. This is because they need sufficient capital, custody services, maintenance and stability of the trading system, network security investment, compliance requirements close to traditional finance, back-end support, etc. It is not easy for companies that do not operate compliant businesses to meet these requirements.

4. Open up the regulatory framework for RWA

Wu said that he had learned exclusively on July 6 that Elizabeth Wong, head of the Hong Kong Securities and Futures Commission's (SFC) fintech group, said in an interview with Eliptic that the SFC will soon launch an update to change the view on STO four years ago (2019). Securities Tokens or RWAs will not be defined as complex products and will have the opportunity to be open to retail investors. RWAs will be regulated based on underlying assets. Analysts pointed out that this may drive a new round of RWA craze.

5. Stablecoin Regulatory Framework

Hong Kong's regulatory framework for stablecoins can be traced back to the first policy address of Hong Kong Chief Executive John Lee after he took office in October 2022. At that time, he stated that the Hong Kong Monetary Authority was studying the market's opinions on the regulation of stablecoins and would ensure that the regulatory system was consistent with international regulatory recommendations and suitable for local conditions.

On January 31, 2023, the Hong Kong Monetary Authority released a consultation summary of the discussion paper on crypto assets and stablecoins, proposing to include certain activities related to stablecoins in the regulation, and elaborating on the expected regulatory scope and main regulatory requirements in the summary document. At the same time, Binance, Deloitte, Alipay, Animnoca, Circle (USDC issuer), HSBC, Mastercard, Xinhuo Technology, WeChat, etc. all provided suggestions on the Hong Kong Monetary Authority's "Discussion Paper on Cryptocurrency and Stablecoins".

On March 20, Hong Kong Financial Services and the Treasury Bureau Director Paul Hui said in a speech that the Hong Kong Monetary Authority is studying the regulatory system for "stablecoins" with the goal of implementing relevant supervision in 2024. On April 29, the Hong Kong Monetary Authority released its 2022 annual report, emphasizing that the first objects of regulation will be those stablecoins that claim to be linked to the value of one or more legal currencies; in 2023, more detailed regulatory requirements will be formulated, and a number of factors will be considered in the process, including the latest market developments, suggestions and good practices put forward by international institutions on stablecoin regulation, and responses received on discussion papers on crypto assets and stablecoins. On May 9, Hong Kong Monetary Authority Chief Executive Eddie Yue said that in addition to the license of virtual asset platforms, the stablecoin compulsory licensing system will be launched in 2023-2024.

On May 23, the Hong Kong Securities and Futures Commission document expressed its opinion on the requirement that non-security tokens must have a track record of at least 12 months. The regulatory arrangements for stablecoins are expected to be implemented in 2023/24. Before stablecoins are regulated in Hong Kong, we believe that stablecoins should not be included for retail trading. On June 12, Chan Ho-lim, Deputy Secretary for Financial Services and the Treasury of Hong Kong, said that the Hong Kong Monetary Authority has conducted public consultation on the launch of stablecoins and will gradually establish a regulatory framework in the future, with the goal of launching it before the end of next year.

In addition, Hu Zhenbang, Wang Yang, Vice President of HKUST, and Fang Hongjin, Co-Chairman of the Hong Kong Blockchain Association, also expressed different views on whether to use a Hong Kong dollar stablecoin or a US dollar stablecoin. Hu Zhenbang believes that the possibility of a Hong Kong dollar stablecoin is not very high; however, the international demand for US dollar stablecoins is very large. If an issuer chooses Hong Kong as the place of issuance and accepts the supervision of the Hong Kong Securities Regulatory Commission, it is possible. Wang Yang and Cai Wensheng called on the Hong Kong government to issue a Hong Kong dollar stablecoin backed by Hong Kong's foreign exchange reserves; they believe that a strong HKDG can challenge the hegemony of the US dollar in this ecosystem, thereby achieving de-dollarization in essence; under proper supervision, it can also serve as a role in reshaping the international strategy of the Hong Kong dollar and delivering stablecoins to other countries. Fang Hongjin criticized Wang Yang and Cai Wensheng's article, saying that the Hong Kong dollar stablecoin should be endorsed and regulated by the government, which is a fundamental misunderstanding of the role of the government in the market economy; it is meaningful to issue a Hong Kong dollar stablecoin, but it should not be issued by the Hong Kong government, but by private institutions in compliance with the supervision of the Hong Kong government; using the Hong Kong dollar stablecoin to promote "de-dollarization" is impossible given that the Hong Kong dollar and the US dollar are linked exchange rates and can be freely interchangeable in Hong Kong.