The first day of Hong Kong Financial Week: Is the information summary and multi-party interpretation of the new encryption policy beneficial?

Wanxiang Xiaofeng

Before March 1 next year, it is legal to set up a so-called virtual asset exchange in Hong Kong, if it only trades BTC, ETH, etc., and no one can stop it. In fact, according to the regulatory authorities, before March 1 next year, those who apply for a license from the regulatory authorities are voluntarily accepting supervision. However, starting from March 1 next year, after the revision of Hong Kong's anti-money laundering regulations is passed by the Legislative Council, mandatory licensing management will be required. In other words, no matter what, anyone engaged in any crypto-related or virtual asset business in Hong Kong, not necessarily opening an exchange, but providing wallet services, needs to apply for a license, otherwise it cannot be done.

How to interpret the new policy in Hong Kong? I think it can be interpreted from several levels. The first level is that the head of financial technology of the Hong Kong Securities and Futures Commission, that is, the head who reviews our licenses, mentioned that Hong Kong's "one country, two systems" policy is not implemented in Hong Kong, and Hong Kong has its own set of policies on virtual assets. The second meaning is what Ms. Liang of the Hong Kong Securities and Futures Commission said in her speech today, that Hong Kong is willing to try and open up discussions for individual investors. The third level is the policy declaration announced today, and some legislation should be made for smart contracts to consolidate its legitimacy, which is actually helping Web3. Legislating for smart contracts to make it legal is actually legislating for DAO to make DAO legal, and DAO may be a basic business organization form for all our web3 entrepreneurs. If you want to come to Hong Kong to start a WEB3 business, there has actually been no legal obstacles. It's just that if it involves Tokens and Token economics before, then Hong Kong's policies or attitudes were not clear enough before. Today, this is very clearly expressed. This is not only legal and compliant in Hong Kong, but also welcomed and encouraged by the Hong Kong government. So I don't think there are any obstacles to starting a business in Hong Kong. There are more compliances and fewer risks. There is a set of rules to guide you in tokenization, and the legal environment and rules for starting a business in Hong Kong are very clear. I always want to say: everything is possible. But the devil is in the details. How to implement it is a huge test. We hope to see a gradual implementation process.

SBF, founder of FTX

“If you look at what the crypto hubs of the world are going to look like, I think the Bahamas looks like one of them, Dubai looks like one of them, but if you look east, it’s less obvious,” he said. “It could be Singapore, it could be somewhere like Busan, South Korea, but I think there’s a good chance it’s going to end up being Hong Kong,” he added. Bankman-Fried cited regulatory uncertainty when moving FTX from Hong Kong to the Bahamas in 2021.

New World Executive Vice Chairman and Chief Executive Officer Adrian Cheng

Zheng Zhigang said that Hong Kong embraces three major opportunities and is expected to become a unique virtual asset center in the world. He believes that the government, financial institutions and investors need to cooperate with each other to eliminate the gap between traditional finance and decentralized finance (DeFi) and further integrate the two. Regarding the government's "virtual asset" service provider licensing system, Zheng Zhigang believes that with the advantage of "one country, two systems", Hong Kong has become the only place in China that legally provides virtual asset services, which will bring new opportunities. He continued that with the introduction of virtual asset and stablecoin regulatory systems by the HKMA, and the support of STO (Security Token Offering) by Invest Hong Kong, it is believed to be good for the industry. In response to the fact that Hong Kong's new share fundraising occupies a considerable share of the global securities market, Zheng Zhigang expects that Hong Kong's STO market will rise accordingly and become a world-leading market in the future. Zheng Zhigang also believes that Hong Kong needs a complete digital financial ecosystem and virtual asset custody system, as well as near-real-time settlement trading arrangements for security tokens; as for the development of a one-stop platform that integrates different tokens, central bank digital currencies (CBDCs), etc., it will become a golden opportunity for Hong Kong. In addition, the market must also break through the current boundaries between DeFi and utility tokens.

Ms. Leung Fung-yee, Deputy Chief Executive Officer of the Securities and Futures Commission

She said that she welcomes the development of Hong Kong's fintech community, including NFT (non-fungible tokens), metaverse and Web 3.0, etc. However, in the turbulent virtual currency market, it also reflects the importance of traditional financial supervision. The SFC has been actively seeking to establish a mechanism to authorize ETFs to provide risk exposure to mainstream virtual assets with appropriate investment guardrails. She believes that the initial concerns about virtual asset futures ETFs have become controllable and that relevant issues can be resolved as long as appropriate safeguards are taken.

In addition to the existing requirements applicable to ETFs, Liang Fengyi said that virtual asset futures ETFs are subject to additional requirements related to the disclosure of investment strategies of their management companies, as well as education for investors. In the initial stage, the SFC will limit the underlying assets to Bitcoin futures and Ethereum futures traded on the Chicago Mercantile Exchange (CME). The SFC will provide more information later today.

Currently licensed virtual asset trading platforms have restrictions on "professional investor participation". Whether this will be further relaxed to retail investors in the future requires further consultation. It is emphasized that supervision will be based on the principle of "similar business, similar risks, and similar regulations".

She pointed out that when the relevant amendments to the Anti-Money Laundering Ordinance are passed by the Legislative Council, the power of issuing licenses and terminating services will be transferred to the new regulations. At that time, the central virtual asset trading platform will need to obtain relevant licenses to continue operating, emphasizing that all matters related to assisting customers in investment and trading need to be included in the scope of supervision. After the relevant draft is passed, the Securities and Futures Commission will consult the public on the details of the relevant regulations. Regarding the HKMA's plan to issue tokenized green bonds, Leung Fung-yee said that if the risks are no different from ordinary green bonds, it is believed that it does not need to be regarded as a complex product and the public can also participate.

Subsequently, the Hong Kong Securities and Futures Commission issued a notice that it was ready to accept the authorization application for virtual asset futures ETFs and would closely monitor the development of the virtual asset market and its regulatory environment to understand whether the authorization of ETFs that directly invest in spot virtual assets is appropriate.

Read the original article:

https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=22EC60

Hong Kong Financial Secretary's Policy Statement on the Development of Virtual Assets in Hong Kong:

On October 31, the Financial Secretary (Financial Services and the Treasury Bureau) of Hong Kong officially released the "Policy Statement on the Development of Virtual Assets in Hong Kong", clarifying the government's policy stance and guidelines on the development of the booming virtual asset industry and ecosystem in Hong Kong.

The declaration stated that while stepping up preparations for the new virtual asset service provider licensing system, it is also willing to contact the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong. The Securities and Futures Commission will launch a public consultation on the appropriate extent to which retail investors can buy and sell virtual assets under the new licensing system. The government welcomes the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong. The government is open to reviewing the property rights of tokenized assets and the legality of smart contracts in the future to facilitate their development in Hong Kong.

In addition, the government has launched three experimental projects, namely, issuing NFTs as attendance certificates at the Hong Kong Fintech Week 2022; tokenizing the issuance of government green bonds for subscription by institutional investors; and the digital Hong Kong dollar, which can serve as the "backbone" and pillar between legal currency and virtual assets, providing the necessary confidence to promote more innovations.

1. Vision and Approach: Hong Kong is an international financial centre that is open and inclusive to innovators in virtual asset business from around the world. The Government is working with financial regulators to create a convenient environment to promote the sustainable and responsible development of Hong Kong's virtual asset industry. We will set out the necessary restrictions in a timely manner to mitigate actual and potential risks in accordance with international standards, so that virtual asset innovation can flourish in a sustainable manner in Hong Kong.

2. Regulation: We believe that a consistent, clear and integrated regulatory framework will help lay a solid foundation to meet the financial innovation and technological development brought about by the rapid development of virtual assets around the world. While stepping up preparations for the new virtual asset service provider licensing system, we are also happy to contact the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong. The Securities and Futures Commission will launch a public consultation on the appropriate extent to which retail investors can buy and sell virtual assets under the new licensing system. The Government welcomes the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong. The Government is open to reviewing the property rights of tokenized assets and the legality of smart contracts in the future to facilitate their development in Hong Kong. The Hong Kong Monetary Authority will later announce the consultation results and next steps on the regulatory system for stablecoins.

3. Pilot programs: The government and regulators are studying the launch of the following pilot programs to test the technical benefits of virtual assets and try to further apply the relevant technologies to the financial market. These pilot programs include issuing non-fungible tokens (NFTs) for the Hong Kong Fintech Week 2022, tokenizing green bonds, and digital Hong Kong dollars.

4. Outlook: We will implement the vision set out in this policy statement through accommodative policies, holistic and balanced supervision, risk-based restrictions, and various pilot schemes. The Government sincerely invites the global virtual asset industry to work with us to leverage Hong Kong’s status as an international financial centre, follow the best international standards and practices, and unleash the potential of financial innovation in a clear, flexible and convenient regulatory environment.

The following is the full text of the declaration:

https://gia.info.gov.hk/general/202210/31/P2022103000455_404825_1_1667173459238.pdf