Singapore, Japan, Hong Kong cryptocurrency regulatory policies: who has the advantage?

The regulatory frameworks for crypto exchanges in Japan, Singapore, and Hong Kong each have their own advantages. Which one is friendlier to retail investors? Which one has stricter regulation? What are the unique features of the three different frameworks?

In summary: Although Japan has the most complete regulations, its specific implementation is almost strictly curbing 1CO and derivatives, so the domestic industry is relatively lacking in vitality; Singapore and Hong Kong are temporarily adopting sandbox supervision, so a large number of cryptocurrency institutions have landed in Singapore, and Hong Kong also has well-known institutions such as BitMEX and FTX, but judging from the subsequent progress, Hong Kong has a trend of tightening.

1. Japan

The Japanese crypto asset industry is regulated by the Financial Services Agency of Japan. The relevant laws include the Payment Services Act and the Financial Instruments and Exchange Act. The relevant amendments officially came into effect on May 1, 2020. Japanese cryptocurrency exchanges are required to hold a crypto asset service provider license to provide crypto asset-related services to Japanese customers and investors.

The legislative amendments that came into effect this year have the following highlights:

- Use "crypto-asset" as a term to refer to digital assets;

- Crypto asset service providers must store platform cash flow and customer assets separately, and need to custody customer assets through third-party operators;

- Even if crypto asset custodians do not provide trading services, they must register their company information with the Financial Services Agency;

- Spreading false rumors about a cryptocurrency may constitute a crime and attract penalties.

The new regulations of the Japanese Financial Services Agency have obviously tightened the supervision of the crypto asset industry, aiming to strengthen the protection of Japanese investors. Monex CEO Oki Matsumoto pointed out that the Japanese crypto market is almost entirely composed of retail investors, belonging to the retail market, and institutional participation is low. He hopes that more institutional participants will enter the Japanese crypto asset industry to bring more stable liquidity.

Japan introduced the Payment Services Act in 2009. Since April 2017, the Payment Services Act has been applicable to all Japanese cryptocurrency exchanges, stipulating that exchanges must register with the Financial Services Agency and apply for licenses, conduct compliance checks on customers, keep relevant records, and strictly abide by anti-money laundering and counter-terrorist financing regulations.

Interestingly, the Japanese Financial Services Agency also regulates the crypto asset industry through private self-regulatory organizations. The Japan Token Exchange Association has become an officially certified industry self-regulatory organization, with all licensed exchanges in Japan registered as members. As of now, there are 26 members, basically all local exchanges in Japan. For foreign exchanges, the Japanese Financial Services Agency requires them to comply with relevant local laws and regulations in Japan and the laws of the exchange's home country, which is a very high threshold. OKEx established a subsidiary in Japan to apply for a local license in Japan. Huobi was also able to legally conduct business in Japan by acquiring a majority stake in the licensed Japanese BitTrade exchange.

Although Japan claims to be a leading regulator that continuously promotes innovation in the cryptocurrency ecosystem, it has not made much of a splash in the country. Some people believe that Japan's crypto asset framework is just a facade and difficult to implement. The head of the Japanese Financial Services Agency rotates very quickly, and it is difficult to have a long-term, consistent and in-depth policy. In addition, Japan is very strict in approving derivatives and currencies. It is extremely rare for Huobi HT, as a platform currency, to pass the approval.

2. Singapore

The Monetary Authority of Singapore defines virtual assets as a "commodity" and lists crypto asset exchanges as digital payment token service providers, with the applicable law being Singapore's Payment Services Act. Singapore has always been friendly to cryptocurrencies, and in 2019 it introduced the Payment Services Act to jointly regulate the traditional financial and cryptocurrency payment sectors.

The Payment Services Act requires all cryptocurrency industry participants to register and apply for relevant licenses. The Monetary Authority of Singapore adopts a universal licensing system. Depending on the nature and content of the business, Singapore digital payment token service providers need to apply for one to three licenses.

The first type of license is for currency exchange, which is aimed at institutions that only provide currency exchange services, and is mainly used to control the risks of money laundering and terrorist financing; the second type of license is for standard payment institution, and companies with monthly or daily transaction volume within a certain amount need to apply for this license; the third type of license is for major payment institution, which has the most stringent application and approval procedures, and large service providers with daily transaction volume above a certain amount need to apply for this license.

To apply for the above licenses, exchanges need to register as digital payment token service providers in Singapore. After successful registration, they will be subject to assessment and review by the Monetary Authority of Singapore to assess whether the platform meets the requirements of the Payment Services Act and other relevant laws and regulations.

According to public information from the Monetary Authority of Singapore, there are currently 140 companies that have obtained the most difficult major payment institution licenses, including some that we are familiar with - Alipay. However, since the official list does not distinguish between traditional financial players and crypto asset exchanges, it is currently difficult to know which licensed companies focus on the crypto asset field, and therefore it is impossible to accurately determine the market share of virtual assets in Singapore.

The Monetary Authority of Singapore’s official website also announced the list of companies subject to the Payment Services (Exemptions for Specified Periods) Regulations 2019, including Binance, OKEx, Huobi’s subsidiaries FEU and OSL. However, obtaining an exemption for a specified period does not necessarily mean that a license will be granted in the end. Similar to regulatory measures in other jurisdictions, the Payment Services Act emphasizes protecting investor assets, preventing and controlling money laundering and terrorist financing risks, and providing clear regulatory guidance for the crypto asset sector.

3. Hong Kong

The virtual asset industry in Hong Kong is regulated by the Hong Kong Securities and Futures Commission. Since the "Statement on the Regulatory Framework for Virtual Asset Portfolio Managers, Fund Distributors and Trading Platform Operators" was put forward in 2018, the Hong Kong Securities and Futures Commission has been active and carried out a large number of virtual asset industry research. In 2019, it launched the Virtual Asset Regulatory Sandbox Program to conduct experimental supervision on virtual asset platforms that voluntarily join and meet the requirements. Unlike Japan and Singapore, Hong Kong still does not have a legal system specifically for the virtual asset industry. Instead, it issues corresponding licenses within the virtual asset framework to companies applying for virtual asset licenses based on existing financial services licenses.

The Hong Kong Securities and Futures Commission regulates a total of 10 types of activities, and related companies can apply for relevant licenses. Among them, the regulated activity licenses of Category 1 (securities trading), Category 7 (providing automated trading services), and Category 9 (providing asset management) are most closely related to the virtual asset industry. In the "Position Paper" issued by the Hong Kong Securities and Futures Commission on November 6, 2019, it was clearly stated that if a digital asset online 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 obtain Category 1 (securities trading) and Category 7 (providing automated trading services) regulated activity licenses. Not long ago, Ashley Alder of the Hong Kong Securities and Futures Commission stated that a mandatory regulatory system would be introduced, and all virtual asset trading platforms operating in Hong Kong or targeting Hong Kong investors must hold licenses to ensure the fairness and security of market competition.

Category 1 regulated activities are securities trading, which mainly involve providing stock and stock option buying/selling/brokerage services for customers; buying and selling bonds for customers; buying/selling mutual funds and unit trust funds for customers, allocating and underwriting securities. Usually securities companies and investment consulting companies hold this license. Category 7 regulated activities are providing automated trading services and building electronic trading platforms to operate and match customer buy and sell orders. Applications for both No. 1 and No. 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. Judging from the current issuance of virtual asset licenses in Hong Kong, the road to applying for a virtual asset license in Hong Kong is long. From 2018 to the recent issuance of OSL's first license, no trading platform has been approved to obtain a virtual asset license during this period. It can be seen that the Hong Kong Securities Regulatory Commission attaches great importance to this regulatory framework and has long-term considerations.

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 application for licenses and related certificates in Hong Kong on the Hong Kong Stock Exchange Disclosure Website. However, Huobi and OKEx applied for licenses and certificates within the traditional financial framework, not licenses within the virtual asset regulatory framework, which means that they cannot start virtual asset trading platform business. Huobi announced in August that its Huobi Wallet obtained a trust or corporate service provider license, and Huobi Asset Management obtained Category 4 (providing advice on securities) and Category 9 (providing asset management) regulated activity licenses; OKEx announced in June that its subsidiary obtained a Hong Kong Trust Company Registration Certificate. (Author: Cicici Editor: Wu Shuo Blockchain Image from IQ Decision)