Authoritative sources explain Hong Kong virtual asset exchange compliance licenses and regulatory framework

At 5 pm on November 6, 2019, the Hong Kong Securities and Futures Commission issued two documents: "Position Paper on Regulating Virtual Asset Trading Platforms" and "Hong Kong Securities and Futures Commission Releases Terms and Conditions for Licensing Virtual Asset Trading Platforms".

After a year, the SFC has issued relevant regulatory policies again. What are the adjustments compared with the virtual asset exchange regulatory policies previously issued by the Hong Kong Securities and Futures Commission? What do these adjustments mean?

Today's notes come from the live broadcast of Golden Finance, where the co-president of the Hong Kong Blockchain Association brings relevant policy interpretations. The article is relatively long, with more than 11,000 words. There is a part in the middle that interprets the detailed terms, which can be skipped. I have marked the key parts.

Below, Enjoy:

Moderator: On November 3, the Financial Services and the Treasury Bureau of the Hong Kong Special Administrative Region Government issued a consultation document to collect public opinions on the amendment of Chapter 615 of the Laws of Hong Kong, the Anti-Money Laundering and Anti-Terrorist Financing Ordinance. It is recommended to establish a licensing system for virtual asset service providers. It stipulates that any person who intends to engage in regulated business of virtual asset trading platforms in Hong Kong must apply for a license from the Securities and Futures Commission and meet the appropriate person criteria. Licensees must comply with the anti-money laundering and terrorist financing provisions set out in Schedule 2 of the Anti-Money Laundering Ordinance and other regulatory requirements aimed at protecting investors.

Regarding this policy, Golden Finance invited Tang Yi, co-president of the Hong Kong Blockchain Association, to be a guest in the Golden Live Room to interpret Hong Kong's virtual asset service provider licensing policy.

Tang Yi: Hello everyone, I am honored to come to Golden Finance and share with you the recent regulatory framework for cryptocurrency trading platforms in Hong Kong.

The source of this news is here:

SFC. HK CEO Ashley Alder speech

Ashley Alder, President of the Hong Kong Securities and Futures Commission (SFC): The Hong Kong SAR government will launch licenses for crypto assets, and all virtual trading platforms will be regulated:

https://www.sfc.hk/-/media/en/flesER/PDF

In his latest speech on November 3, the SFC's president Ashley Alder said that a year ago, Hong Kong had already introduced a crypto asset licensing system and a license application system. But at that time, virtual asset and cryptocurrency companies could choose to apply for a license or not . If they were involved in non-security tokens, such as Bitcoin and Ethereum, they did not need to apply for the SFC7 license issued by the Hong Kong SFC. Because before, the Hong Kong SFC published an analysis that Bitcoin and Ethereum were non-security tokens. If these exchanges were engaged in the trading of non-security tokens, they did not need to apply for the SFC7 license.

But a year later, on November 3, Ashley Alder, CEO of the Hong Kong Securities and Futures Commission, announced that the Hong Kong government is planning to require all cryptocurrency trading platforms operating in Hong Kong or serving Hong Kong people and Hong Kong customers to apply for the Hong Kong Securities and Futures Commission's cryptocurrency trading platform VATP license .

According to the license application compliance documents and application forms issued by the Hong Kong Securities and Futures Commission on November 6, 2019, Hong Kong exchanges could choose to apply or not. If these exchanges do not involve security tokens, they can choose not to apply. But this time it is made clearer, because Hong Kong must comply with the global anti-money laundering AML. And this AML is formulated by the global anti-money laundering cooperation organization called the Financial Cooperation Action Organization Farta (sound), so Hong Kong will fully manage virtual exchanges in the future.

I also expressed my opinion when some virtual exchanges applied for licenses and some did not. I think it is a bit unfair to those companies that applied for licenses. These compliant companies have to spend millions or even tens of millions to operate in compliance. They need to use more reliable cold wallets, warm wallets, hard wallets, etc., and they also need to buy insurance for virtual assets. Buying insurance is also expensive, just like banks and other companies engaged in financial business have to buy insurance. These insurances are to ensure that if customers' deposits or deposits are hacked or lost due to some criminal acts, the insurance will pay.

So this time, the Hong Kong Securities and Futures Commission announced that everyone will have to apply for a license in the future. I think this is a fairer arrangement. It will be more positive for the entire industry. Just like there are banks in Hong Kong and casinos in Macau. If licensed companies and compliant companies can operate, and unlicensed companies can also operate, then of course it is definitely unfair to banks with compliant licenses in Hong Kong or compliant casinos in Macau.

In a fair environment, the government will generally raise the entry threshold to allow more powerful companies, such as banks, to participate .

Previously, some virtual asset exchanges lost coins due to insufficient financial strength or lack of internal supervision, lack of safe and reliable software, and lack of sufficient security. Since many unlicensed exchanges will go bankrupt, close or liquidate if they lose coins, and there is no compensation to depositors or customers, which will lead to customer losses. The first principle of the Hong Kong Securities and Futures Commission is to protect investors .

Therefore, the requirements of the Hong Kong Securities and Futures Commission for the companies applying for licenses are very high. They must have financial audits, internal compliance audits, software security audits, and insurance.

The current license No. 7 of the Hong Kong Securities and Futures Commission is the license for the Virtual Machine Asset Trading Platform VATP. The application fee and maintenance fee are very expensive . The fee is more expensive than the fees for the previous license No. 1, 2, 4, 6, and 9 of the Securities and Futures Commission. The cost of these ROs is very high. ROs are responsible compliance officers. They are hired by the company, but they are mainly responsible to the Hong Kong Securities and Futures Commission. If there is a violation, it is possible that these ROs and even the company's CEO CFO may face criminal penalties, and may be fined or imprisoned. The Hong Kong Securities and Futures Commission has also punished some securities companies that violated the regulations before, sentencing them to fines or imprisonment.

Although the cost of compliance is very high, I think it is still good for the entire industry. Because everyone knows how to get a license. But even after getting the license, these exchanges will still be tied up. Because after getting the license, according to the Hong Kong Securities and Futures Commission's licensing regulations for virtual asset trading platforms, compliant companies must only serve professional investors .

The definition of a professional investor in Hong Kong is that they must have 8 million Hong Kong dollars in circulating and investable assets . Clients of these compliant exchanges must provide proof of assets, such as bank deposits or securities company stock assets, to prove that they have assets exceeding 8 million Hong Kong dollars and have a lot of investment experience in the past year .

If ordinary retail investors do not have proof that they are professional investors, then they may not be able to get services. This is because according to the license rules of the Hong Kong Securities and Futures Commission, compliant licensed companies can only provide services to professional investors, not non-professional investors. Now 90% of investors in the cryptocurrency circle are non-professional investors, and they may not be able to provide proof of funds of more than 8 million Hong Kong dollars .

If you apply for a compliance license in Hong Kong, you may lose many non-professional investor clients and send them to other exchanges. So some exchanges may choose to leave Hong Kong .

I think some of the more famous exchanges, such as Tether (USDT's parent company), Bitfinex and FTX, which also have companies in Hong Kong, are likely to choose to leave Hong Kong. Because they are currently targeting retail investors. Some even have leveraged options products. The Hong Kong Securities and Futures Commission has not yet approved options and futures products for Bitcoin or virtual currencies. Therefore, if there is no futures and options license approved by the Hong Kong Securities and Futures Commission, and these services are provided to Hong Kong people in Hong Kong, it not only violates the laws of the Hong Kong Securities and Futures Commission, but also violates the Hong Kong gambling law.

We have also seen that the US government, the Commodity Futures Trading Commission (CFTC) recently punished a well-known company, Bit Max. They also have an office in Hong Kong, and their main business is futures. Even one of their executives was arrested by the US government and is on bail. So whether in the United States or Hong Kong, if you do not have a license, operating futures and options business will be very risky .

The application fee for a license to operate in compliance in Hong Kong is very expensive. Because of the need to ensure safety and purchase insurance, the compliance cost is very high. However, the Hong Kong Blockchain Association (HKBA) strongly encourages all virtual asset trading platforms operating in Hong Kong to apply for a license. If they provide virtual asset trading services to Hong Kong people or Hong Kong institutions, in order to ensure legal security, we strongly encourage them to apply for a license from the Hong Kong Securities and Futures Commission.

To apply for a license from the Securities and Futures Commission, you can go to the Hong Kong Securities and Futures Commission website sfc.hk. It takes at least 6 to 12 months to apply for this license. Many companies submitted their applications in November or December last year. So far, the Hong Kong Securities and Futures Commission has not officially issued any No. 7 license, which is a license for a virtual asset trading platform . Although BC Technology Group (HK 0863), a listed company, announced that their platform has obtained a letter of approval in principle issued by the Hong Kong Securities and Futures Commission. This is only a disclosure from a Hong Kong listed company, not an announcement of a license officially issued by the Hong Kong Securities and Futures Commission.

The Hong Kong Securities and Futures Commission has not announced any licensing agency on its official website so far. However, many companies are applying for the No. 7 license. One or two companies have also obtained the No. 9 license in Hong Kong. The No. 9 license of the Hong Kong Securities and Futures Commission is an asset management license. Now two companies have obtained the No. 9 license for virtual asset management. With this license, they can organize virtual asset funds, which is a bit like Grayscale listed in the United States. Their product is called GBTC, which is Grayscale's BTC. Under the framework of the Hong Kong Securities and Futures Commission, if they have a No. 9 license and a trust license, they can legally invest in Bitcoin .

As the Hong Kong Blockchain Association, we strongly support the government to regulate and issue licenses. We also encourage and support fellow practitioners to come to Hong Kong to apply for compliant exchange licenses and operate in compliance. In cooperation with the Hong Kong Securities and Futures Commission, we can issue security tokens, that is, STOs. In 2019, the Hong Kong Securities and Futures Commission also announced the issuance structure and rules for security tokens. We believe that Hong Kong should have a good compliance environment in terms of STO in the future. We should also be able to see some projects with stable income, including real estate projects, data centers, servers, mining machines, distributed storage, warehousing and logistics projects, which can apply for STO in Hong Kong.

In fact, the Financial Services and the Treasury Bureau of Hong Kong recently issued a consultation document entitled "Public Consultation on Legislative Proposals to Strengthen the Fight against Money Laundering and Terrorist Financing in Hong Kong". This document can be viewed on the sstb.gov.hk website.

If you look at this document, Chapter 2 contains very detailed information about the regulation of virtual asset service providers (VASP).

This document, clause 2.13 clearly states: Any person who intends to operate a regulated virtual asset exchange must apply for a license from the Securities and Futures Commission before becoming a licensed virtual asset service provider under the Anti-Money Laundering Ordinance. To establish a large-scale virtual asset exchange, a suitable structure is required to ensure continuity. Therefore, we recommend that only companies established in Hong Kong and with a fixed operating location can apply for a virtual asset service provider license, namely a VASP license.

2.14: Proper Person Criteria . Like other financial institutions regulated by the Anti-Money Laundering Ordinance, applicants must meet the proper person criteria set out in the Anti-Money Laundering Ordinance before they can obtain a virtual asset service provider license. In addition to the company that submits the application, the proper person criteria also apply to all responsible officers and ultimate owners of the company. Whether the person has violated or is likely to fail to comply with the anti-money laundering and terrorist financing regulations or other requirements applicable to licensed virtual asset service providers. The person's experience and relevant experience and whether the person is reputable and financially sound. For example, not undergoing bankruptcy or liquidation proceedings.

Therefore, there are still requirements for companies applying for licenses. All responsible personnel, major shareholders, and ultimate owners must meet the qualifications and must be suitable candidates. They must meet the requirements of the Securities and Futures Commission, have a good financial background, be financially sound, have no bankruptcy records, etc. For example, if they violated local laws in China or other countries, there are some violations. Ah, then it is very difficult. If you have these backgrounds, it will be difficult to get a Hong Kong license.

2.15 of the document: To ensure the management quality of licensed virtual asset service providers, applicants must appoint at least two responsible officers (ROs) to ensure that the licensee complies with anti-money laundering and terrorist financing regulations and other regulatory requirements in the future. And attach personal liability when the licensee violates the regulations or fails to meet the requirements. Like licensed corporations under the Securities and Futures Ordinance, all executive directors of licensed virtual asset service providers must be responsible officers approved by the Securities and Futures Commission.

2.18 of the document: With reference to the voluntary licensing system, we propose to empower the SFC to impose licensing conditions on licensed virtual asset service providers, implement the following regulatory requirements, and make amendments where necessary.

A. Only professional investors. As I just mentioned, virtual service providers can only provide services to professional investors in the initial stage. The SFC will continue to monitor market conditions and review its requirements depending on the maturity of the market.

It is said that the Hong Kong government and the Securities and Futures Commission have classified virtual asset trading as a high-risk transaction. They do not recommend retail investors to participate in trading . Therefore, they require experienced professional investors to participate. They must know the risks before they can participate.

The Hong Kong Securities and Futures Commission has initially limited participation to professional investors (PIs). In the future, if the market matures, it may be open to non-professional investors, but we don’t know when this will happen.

B. Financial capacity . Licensed virtual asset service providers should have sufficient financial capacity to operate virtual asset services. This includes whether they have sufficient financial capacity to pay for share capital and current assets. That is, the company must have sufficient operating capital and share capital;

C. Knowledge and experience . Licensed virtual asset service providers and their related entities and companies with controlling stakes in the providers need to have a good corporate governance framework. Employees must also have the necessary knowledge to perform their duties effectively, that is, experience and knowledge in managing virtual assets;

D. Business robustness . Licensed virtual asset service providers and their related entities should operate virtual asset businesses in a robust operating model and ensure that they do not harm the interests of customers and the public;

E. Risk management . Licensed virtual asset service providers are required to develop appropriate risk management policies and procedures to reduce the risks of money laundering and terrorist financing arising from regulated virtual asset activities, cybersecurity risks and other risks. Policies and procedures should be commensurate with the scale and complexity of virtual business;

F. Style and management of customer assets . Licensed virtual asset service providers must store customer assets in related entities to separate the relevant assets. Licensees must also implement appropriate policies and control procedures to properly manage and protect customer assets, including virtual assets;

G. Listing and trading policies for virtual assets . Licensed virtual asset service providers must implement and enforce appropriate policies for the listing and trading of virtual assets on their platforms, and licensed licensors and licensees must conduct all reasonable due diligence on the relevant virtual assets before allowing virtual assets to be listed and traded on their exchanges.

That is to say, you must do some due diligence on the wallets, such as the wallets that you remit money to. If they are involved in money laundering and there are some wallets on the blacklist, you cannot do business with them. Therefore, you must do due diligence on the customers and the wallet addresses;

H. Financial reporting and disclosure . Licensed virtual asset service providers and their related entities must comply with specified audit and disclosure requirements and publish audited accounts.

That is a bit like the regulations on stablecoins. For example, USDT has not yet announced its audited financial statements. However, USDC, which is more compliant, has a license in the United States and will be audited every month to see how much cash they hold to exchange the amount of coins issued one-to-one.

I. Prevent market manipulation and illegal activities . Licensed virtual asset service providers must formulate and implement regulatory policies and measures to supervise trading activities on their platforms to identify, prevent and report illegal trading activities suspected of market manipulation.

This requirement is relatively difficult and demanding. Most of the unlicensed exchanges on the market will not allow the government to supervise their trading platforms. According to the Hong Kong government's regulations, compliant trading platforms in Hong Kong must be supervised by the government. A system is used to monitor and prevent manipulation. Just like the stock market, you cannot manipulate the price of virtual assets, conduct illegal operations, or involve conflicts of interest.

J. Preventing conflicts of interest . To avoid conflicts of interest, licensed virtual asset service providers and their related entities may not engage in trading. In addition, licensees and related entities must establish appropriate firewalls between different functions within the corporate structure to avoid conflicts of interest. Policies must be formulated to eliminate and avoid management or disclosure of employees’ or potential conflicts of interest arising from virtual asset transactions.

It can be seen that the CSRC requires that compliant trading platforms must have sufficient measures to prevent market manipulation and conflicts of interest based on their previous experience in the securities market.

2.19 of the document: Virtual asset service providers must comply with relevant regulations before they can obtain a license from the Hong Kong Securities and Futures Commission. If a licensed virtual asset service provider violates the anti-money laundering and terrorist financing regulations and other regulatory requirements, the Hong Kong Securities and Futures Commission will conduct investigations and law enforcement actions. Administrative sanctions will also be imposed on the licensee who violates the regulations.

2.20: We expect that licensed virtual asset service providers will need to invest significantly to build systems of relevant scale and technology to operate competitive virtual asset exchanges. In order to provide specific licensees with long-term investment, we propose to make the relevant licenses open licenses. As long as the licensed virtual asset service providers continue to operate and have not been displayed, revoked or revoked by the SFC or violated the regulations, their licenses will continue to be valid.

2.27: Specifically, we propose to give the SFC the following powers:

A. Prohibit licensed virtual asset service providers and related entities from further participating in any transactions and operate their businesses only in a specified manner. Restrict licensed virtual asset service providers and related entities from disposing of their property. Including customer assets and other property, and requiring licensed virtual asset service providers and related entities to hold property in a specified manner to ensure that the property can pay debts.

2.28: Virtual asset services operate in the virtual world. There is a higher potential risk in terms of money laundering, terrorist financing or other criminal activities such as fraud. Therefore, the penalties for unlicensed virtual asset activities need to have sufficient deterrent effect. We recommend that any person who engages in regulated virtual asset activities without a license is guilty of a criminal offense. Conviction upon indictment may result in imprisonment for 7 years and a fine of HK$5 million . If the crime is a continuing crime, an additional fine of HK$100,000 may be imposed for each day during which the crime continues.

2.29: We also propose that any person who makes a false, deceptive or misleading statement in relation to any matter without having applied for a licence would be guilty of a technical offence and liable on conviction upon indictment to two years' imprisonment and a fine of $1 million.

2.30: If a licensed virtual asset service provider and its responsible persons violate the statutory requirements for combating money laundering and terrorist financing, they may be criminally prosecuted and convicted upon public prosecution. They may be imprisoned for two years and fined $1 million. They will also face administrative sanctions, including reprimands, orders to make corrections, fines of up to $10 million, or three times the amount of profits gained or expenses avoided due to misconduct in violation of anti-money laundering and terrorist financing regulations or other regulatory requirements. The highest amount will be determined. As well as temporary suspension or revocation of the license.

What I just talked about is the document recently issued by the Hong Kong government, "Public Consultation on Legislative Proposals to Strengthen Regulation on Combating Money Laundering and Terrorist Financing in Hong Kong", which is a consultation document issued by the Hong Kong Financial Services and the Treasury Bureau.

Interactive Q&A

1. What signals does the Hong Kong Securities Regulatory Commission's strict supervision of cryptocurrency exchanges send? What are the implications for the mainland?

I think I have answered this question above. The signal is that all virtual asset trading platforms registered and operated in Hong Kong, or virtual asset trading platforms serving Hong Kong people and Hong Kong institutions, even if they are not in Hong Kong, as long as they serve Hong Kong people, Hong Kong institutions will need to apply for the Hong Kong Securities Regulatory Commission's Virtual Asset Trading Platform No. 7 License in the future.

What lessons can be learned from this for mainland enterprises? There is no license in this regard in mainland China. I think these exchanges should apply for licenses in Hong Kong as soon as possible.

I know that many Chinese companies have applied for MSB licenses in the United States, or applied for MAS licenses in Singapore, or went to Malta, Switzerland, etc. Hong Kong is a special administrative region of China and is relatively close. Hong Kong is also an international financial center. I think mainland companies can consider applying for trading platform licenses in Hong Kong, and can also consider issuing security tokens under the compliance environment framework of the Hong Kong Securities Regulatory Commission.

Security tokens are a bit like IPOs. Some financial statement audits are required for assets. The Hong Kong Securities and Futures Commission has also issued some suggestions before, requiring projects with a 12-month operating record to consider issuing STOs.

The Hong Kong Securities and Futures Commission believes that if a security token project is to be issued in Hong Kong, it must have a certain operating record. It should not be a brand new or conceived virtual project that only needs financing to do.

We are also looking at some projects, such as real estate rental projects in Hong Kong, such as mini-warehouses. There are many warehouses in Hong Kong, and they charge a fixed rent every month. These are suitable for applying for security token STO in Hong Kong, and you can apply to the Securities and Futures Commission.

Including data centers, there will be some hardware investment every month, such as servers, bandwidth. Or IPFS mining machines, they can share the income. In terms of distributed storage, we have also participated in some data centers in Hong Kong. They just have fixed income. The data center has network servers, and rents bandwidth, servers, and cabinets to others for cloud computing, cloud services, ipfs distributed storage or Filecoin mining. These are all legal in Hong Kong. These collective investment plans can consider issuing security tokens in Hong Kong through data centers, server rooms, or real estate projects, and applying to the Hong Kong Securities Regulatory Commission.

2. What cryptocurrency exchanges do you know about in Hong Kong? Does it mean that we will have the first batch of compliant exchanges? Based on their application conditions, which exchanges will be the first to obtain licenses?

There are actually many exchanges in Hong Kong. There are at least three exchanges with listed companies in Hong Kong. The first is the previously mentioned BC Technology, HK0863, which previously obtained the principle consent letter from the Hong Kong Securities Regulatory Commission; the second is Huobi, which previously acquired a listed company in Hong Kong through a backdoor listing; the third is OK Group, which also acquired a backdoor listing in Hong Kong through an acquisition, Qianjin Holdings 1499, which is also a listed company in Hong Kong.

There are many other companies, including Coin Super and HKBEX. HKBEX is an exchange founded by a group of people from the former Hong Kong Stock Exchange, and is also applying for the No. 7 license. There is also a company called Global STOX, which I personally participated in. The website is apx.hk. This company is also applying and is one of the first companies to apply for a license from the Hong Kong Securities and Futures Commission.

There are many others, including Bitmax, Bitfinex, FTX and Tether, which is the parent company of USDT. Many famous exchanges in the world have set up companies in Hong Kong because Hong Kong is an international financial center. Some Defi projects have also established companies or projects in Hong Kong.

Other exchanges can also apply for licenses. However, I think this process will take at least 6 to 12 months, because the licenses of these companies that applied for licenses a year ago have not been approved yet.

As for which exchanges will obtain licenses first, of course, companies with stronger financial strength, better compliance and no record of violations should be able to obtain licenses in this regard faster.

I think this includes osl.com under BC Technology Group and hkbex, because most of their people came from the Hong Kong Stock Exchange and have a lot of experience in compliance operations. They also applied for Global STOX Global Securities Token relatively early and spent a lot of resources and funds on compliance.

3. How does Hong Kong define professional investors?

The definition of professional investors in Hong Kong was made by the Hong Kong Securities and Futures Commission many years ago, and it refers to investments in securities and stocks, because some investment products and financial products are designated to be open only to professional investors.

This definition means that you have 8 million Hong Kong dollars in circulating investable assets. Your house is not included. Generally speaking, you need to provide a bank deposit certificate or a monthly statement from a licensed securities company in Hong Kong to prove that you have at least 8 million in stocks. And you have a certain trading record in the past 12 months, such as at least 3-5 buying and selling records, to meet the definition of a professional investor.

Professional investors can be individuals or companies. As long as you provide proof of 8 million investable assets and previous transaction records, you can obtain certification and become a certified professional investor.

4. What impact will exchanges targeting retail investors have?

The requirement issued by Hong Kong that all exchanges obtain licenses in Hong Kong is only an inquiry at present, and it is not a legal requirement. This inquiry period may take more than a year. It will be implemented at the earliest in more than a year .

So if they are retail exchanges, they can consider obtaining licenses from other places. When the Hong Kong government and the Hong Kong Securities Regulatory Commission introduce compliance licensing requirements, they will no longer be able to serve retail investors in Hong Kong.

The obvious question is who will serve more than 90% of retail investors in Hong Kong? Our industry should also communicate and discuss this issue with the Hong Kong government and the Hong Kong Securities and Futures Commission. Because if these compliant exchanges cannot serve retail investors, then retail investors can only be forced to open accounts in some overseas, non-compliant exchanges. This also has risks. How to deal with it, we need to slowly consult with the government.

Regarding the Hong Kong government's inquiry document to the industry, we will also hold some meetings in the industry to provide some advice to the government. How can we make the government agree that our exchanges in Hong Kong can provide services to retail investors in compliance with regulations? However, we still need to communicate with the government. The current government's position is that it hopes that Hong Kong's compliant exchanges will only serve professional investors.

5. How much does it cost to apply for a license? What should I pay special attention to during the application process?

It is important to note that the CEO, CFO, RO, and ultimate beneficiaries of shareholders with more than 30% of the shares must comply with the compliance standards of the CSRC. In other words, there must be no record of violations, no record of violations in any region of the world, no bankruptcy record, and a very healthy financial background.

I know that many people in this industry may have some government condemnation or non-compliance records in China or other governments. This will affect the application for compliance in Hong Kong. The Hong Kong Securities Regulatory Commission will conduct a very detailed background check, criminal record, bankruptcy record, financial record, etc. on every major shareholder, shareholders accounting for more than 30% and every major director and responsible person CEO, CFO, etc.

6. What is the current development of cryptocurrency in Hong Kong? What impact will the implementation of the licensing policy have on the entire cryptocurrency industry?

I think Hong Kong is still a very free economy. Its legal system is more in line with the international capital market and can be connected with the capital market. We also know that several companies in the industry have obtained the Type 9 asset management license approved by the Hong Kong Securities and Futures Commission. They are organizing some virtual asset funds. It is a bit like the Grayscale Fund listed in the United States. I think once these products are launched, they may apply for listing in Hong Kong. It will become a listed Bitcoin encrypted digital currency fund. It will be good for the entire industry.

We are also paying close attention to listed companies, such as those in the United States, that are involved in Bitcoin. The most famous one is the stock of GBTC, which is the Grayscale Fund. Their stocks are traded in the United States. You can buy their stocks, and their money is 100% used to buy Bitcoin. Their business is very simple, that is, you give him money to buy his stocks in the primary market, and he will use the funds you have reserved to buy Bitcoin. Grayscale's stock price is linked to Bitcoin. Now his assets have exceeded more than 5 billion US dollars, and he is also the largest institutional holder of Bitcoin. He holds more than 500,000 or 600,000 Bitcoins.

Grayscale Fund has annual and quarterly reports every year and quarter, and has compliance and audit. They charge a 2% management fee. Its assets are so huge that the annual management fee is tens of millions or hundreds of millions. Moreover, Grayscale only buys Bitcoin, has no other business, and does not sell. In the past year, their returns have been quite good.

There is also a Nasdaq listed company called Michael Strategy. They are a software company with a lot of cash. Their president announced that he used 400 million US dollars in cash to buy Bitcoin and now he has made a lot of money. Their shareholders and analysts also applauded and said that this listed company is working hard to use the extra cash to buy Bitcoin to help shareholders make money.

Recently, the CEO of Twitter also announced that he personally used 50 to 60 million US dollars to buy Bitcoin. He also disclosed that in the United States, some listed companies have used all their operating funds to buy Bitcoin, such as Grayscale, or part of their funds to buy Bitcoin, such as Michael Strategy. I think these are all good news.

In Hong Kong or mainland China, listed companies may not buy Bitcoin yet. But I saw a No. 9 asset management company in Hong Kong that is planning to go public. If it is listed on the Hong Kong Stock Exchange, they will be very similar to Grayscale in the United States.

At least Hong Kong now has a Type 9 license for virtual asset funds, which can charge a 2% management fee and a 20% carry profit share. This is the same as the general hedge fund and private equity fund management model to manage investments, or to conduct high-frequency trading and quantitative trading. This can be done within a compliant framework, and there are at least two or three precedents that have obtained the Type 9 license from the Hong Kong Securities and Futures Commission to manage virtual assets. Although the Type 7 license has been applied for, it has not been issued yet, but I think it will be issued soon.

Hong Kong also has a trust license, which allows companies holding trust licenses to legally custody virtual currencies and provide virtual currency trust custody services. Grayscale has also obtained a trust license in Delaware, USA. Another point trust has obtained a trust custody license in Nevada, USA. OK also announced that it participated in the investment of point trust. This is also a well-known company that can custody virtual assets and legal currencies in compliance with US regulations.

I have previously mentioned the issuance of STO security tokens, and the Hong Kong Securities and Futures Commission has issued relevant rules and suggestions. In the next year, we should see some security token STOs issued in compliance with the Hong Kong Securities and Futures Commission. We are also preparing some projects. Including data centers, servers, mining machines and IPFS services. Combining real estate, data centers, the Internet and distributed storage services, we will issue security tokens.

Through security tokens, we can allow many people, especially professional investors, to invest in these assets and share in the monthly profits or mining profits.

To sum up, Hong Kong has a series of licenses. The No. 1 license of the Securities and Futures Commission is a securities license; the No. 7 license is a securities token issuance and virtual asset trading platform; the No. 9 license is an asset management license; plus the Virtual Asset Management Bureau license; plus the Hong Kong Company Management Office's trust license or tcsp license; plus the Hong Kong lender license, which can provide virtual asset lending services or virtual asset mortgage loan services. Therefore, there are certain licenses and legal compliance frameworks in Hong Kong that allow many crypto asset service providers to participate.

As the Hong Kong Blockchain Association, we also strongly encourage everyone, people, companies, blockchain practitioners, crypto asset exchanges, etc. from all over the world to apply and register companies in Hong Kong. Because to apply for a license from the Securities and Futures Commission, the first thing to do is to register a company in Hong Kong. Secondly, hire a responsible compliance officer, which is a RO, and then apply for the relevant Securities and Futures Commission's No. 1 license, No. 7 license, No. 9 license, trust license, lender license, etc.

Hong Kong has a very good legal framework that protects both operators and investors .

Host: Through Mr. Tang’s sharing, we have a great understanding of the development of Hong Kong’s virtual currency and government policies. The regulatory compliance of the Hong Kong Special Administrative Region for virtual assets has been on the agenda. I believe that the development of the Hong Kong virtual currency industry will become more and more standardized in the future. Thanks again to Mr. Tang for sharing.