Hong Kong issues first cryptocurrency license, limited to professional investors of more than 8 million. Will Beijing take this into consideration?

On December 15, OSL Exchange, a subsidiary of BC Technology Group (863.HK), announced that it had obtained the first virtual asset license issued by the Securities and Futures Commission of Hong Kong. The license types are Category 1 securities trading and Category 7 automated trading services. This means that Hong Kong has issued the first cryptocurrency license.

In August 2020, the Hong Kong Securities and Futures Commission agreed in principle to issue a license to OSL Digital Securities. OSL stated that in addition to the Hong Kong license, in accordance with Singapore's Payment Services Act, OSL has formally applied to the Monetary Authority of Singapore for a digital asset license.

In its Position Paper issued on November 6, 2019, the Hong Kong Securities and Futures Commission clearly stated that if an online digital asset trading platform provides at least one type of security token trading on the platform, it falls under the jurisdiction of the Securities and Futures Commission and must hold Type 1 (securities trading) and Type 7 (providing automated trading services) regulated activity licenses.

Category 1 regulated activities are securities trading, which mainly involve providing stock and stock option buying/selling/brokerage services for clients; buying and selling bonds for clients; buying/selling mutual funds and unit trusts for clients, allocating and underwriting securities. Usually securities companies and investment consulting companies hold this license. Category 7 regulated activities are providing automated trading services and setting up electronic trading platforms to match client buy and sell orders. Applications for both Category 1 and Category 7 licenses require more than two heads of institutions with relevant industry qualifications or equivalent experience; the company entity must be a Hong Kong company, or a foreign company registered in Hong Kong, and equipped with corresponding directors and responsible personnel.

OSL emphasized that after the platform is officially launched, customers can trade high-quality cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH) and strictly screened security tokens (STOs) through OSL's secure and compliant platform. OSL emphasized that customers must pass strict KYC and anti-money laundering compliance processes; to prevent market misconduct, OSL will use market monitoring, transaction monitoring and other prevention and control measures for digital assets.

However, OSL's license cannot provide services to retail investors, but only to professional investors or institutions, with personal assets of no less than HK$8 million and institutional assets of no less than HK$40 million. If you are an investor from mainland China, you not only need to meet the above requirements, but also need to have a Hong Kong bank account and can only trade in Hong Kong dollars.

According to Hong Kong law, professional investors refer to 1. a trust corporation entrusted with the management of assets of not less than HK$40 million or its equivalent in foreign currency; 2. an individual with an investment portfolio worth not less than HK$8 million or its equivalent in foreign currency; 3. a corporation or partnership with an investment portfolio of not less than HK$8 million or its equivalent in foreign currency or with assets of not less than HK$40 million or its equivalent in foreign currency; 4. a corporation whose sole business is holding investments and which is wholly owned by individual professional investors.

Unlike Japan and Singapore, Hong Kong currently does not have a legal system specifically for the virtual asset industry. Instead, based on existing financial services licenses, it issues corresponding licenses within the virtual asset framework to companies applying for virtual asset licenses.

Hong Kong’s virtual asset regulatory framework has the following features:

- Licensed platforms are currently only open to professional investors

- Support security token issuance business

- Legal currency and virtual assets must be stored separately, and customers' hot and cold wallets must be covered by insurance

- Customers can use the investor protection mechanism under the traditional financial system, and can also enjoy the special protection measures launched by the Hong Kong Securities Regulatory Commission for virtual assets

- Have strict KYC / anti-money laundering procedures

Huobi (1611.HK) and OKEx (1499.HK) also announced the progress of their applications for licenses and related certificates in Hong Kong on the Hong Kong Stock Exchange's Disclosure Website. However, Huobi and OKEx applied for licenses and certificates within the traditional financial framework, rather than licenses within the virtual asset regulatory framework, which means they cannot develop virtual asset trading platform businesses.

In August, Huobi announced that its Huobi Wallet had obtained a trust or corporate service provider license, and Huobi Asset Management had obtained Type 4 (providing advice on securities) and Type 9 (providing asset management) regulated activity licenses; OKEx announced in June that its subsidiary had obtained a Hong Kong Trust Company Registration Certificate.

Wu Blockchain previously pointed out that Huobi and OKEx mainly engage in retail business. If they decide to accept the supervision of Hong Kong's virtual asset framework, they will need to make major strategic adjustments. At least institutions applying for licenses in Hong Kong need to give up the fat piece of meat of retail investors.

It is worth noting that just five days ago on December 10, DBS Bank, which is controlled by Temasek Holdings, Singapore's second largest sovereign wealth fund, announced that it would launch a cryptocurrency exchange, which would provide transactions in four fiat currencies (Singapore dollars, US dollars, Hong Kong dollars, and Japanese yen) and four of the most mature cryptocurrencies (Bitcoin, Ethereum, Bitcoin Cash, and Ripple). At the same time, the exchange will also provide cryptocurrency custody services. On December 11, BC Group announced that it had entered into a service agreement with DBS Bank to provide DBS Bank with a number of technical services.

The executive director of BC Group is known as the "Hong Kong Shell King" Gao Zhenshun. According to New Fortune, rumors circulate that this "Fujian Gang" financial expert, born in 1951, was originally just a "small tailor" in Tsim Sha Tsui, Hong Kong, and later switched to foreign exchange. With his extraordinary financial skills, he turned gorgeously into a financial talent and accumulated a considerable fortune. He has cooperated with Jack Ma, Huang Guangyu, Xu Zheng, Ning Hao and others. Reference "Hong Kong Shell King"

Beijing has always maintained close communication with the Hong Kong financial industry. For example, the Hong Kong Stock Exchange reform was also referenced before the launch of the Science and Technology Innovation Board. Previously, central bank officials revealed that they were considering writing ICO into the Securities Law. The central bank law recently reiterated that the issuance of coins is strictly prohibited, but it also leaves room for virtual commodity transactions such as Bitcoin. Whether Beijing will refer to Hong Kong's actions in the future is more worth looking forward to.

Reference: Hong Kong’s new cryptocurrency regulatory policy is OK. Can Huobi Greater China break through compliance?