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

Compared with Singapore, Hong Kong, which has been slow to implement cryptocurrency policies, has recently announced that it will bring cryptocurrency exchanges under regulatory supervision. So can Huobi and OK, which already have Hong Kong listed companies, achieve compliance through this? With no progress in Beijing's cryptocurrency policy compliance, can Hong Kong become a breakthrough point, and can it serve as a reference for mainland policies?

This year's Hong Kong Fintech Week was held from November 2 to 6, focusing on "fintech in the post-epidemic era". It was switched to an online mode under the background of the epidemic, and the popularity remained the same or even exceeded that of previous years, attracting hundreds of thousands of visitors. Ashley Alder, CEO of the Hong Kong Securities and Futures Commission, revealed a blockbuster news here: a new regulatory framework will be introduced for Hong Kong's digital asset trading platforms, and all virtual asset platforms operating in Hong Kong or providing services to Hong Kong investors will be regulated.

In fact, as early as last year's Hong Kong Fintech Week, the Hong Kong Securities and Futures Commission launched the virtual asset regulatory sandbox program. Trading platforms can voluntarily join, meet strict compliance, anti-money laundering, and security requirements, apply for virtual asset licenses and accept continuous supervision, and provide safe virtual asset services to institutional investors and professional investors.

In his speech this year, Ashley Alder mentioned that the previous regulatory sandbox program only involved platforms that traded securities-type virtual assets, and was implemented on a voluntary basis, so some trading platforms could completely avoid regulatory compliance procedures. The new regulatory framework will implement a mandatory licensing system, and all platforms that operate virtual assets in Hong Kong or target Hong Kong investors must hold virtual asset-related licenses, otherwise it will constitute a criminal act. At the same time, for now, licensed platforms can only provide services to professional investors.

In addition, Ashley also stated that the regulatory sandbox program launched last year is still valid and operates together with the newly launched regulatory framework, and holds the same regulatory standards. "Same business, same risk, same rules", Ashley hopes to regulate the virtual asset industry with the strict standards of traditional securities brokerages and trading platforms.

Regarding security tokens, Hong Kong already has a set of regulatory rules covering the primary and secondary markets. Ashley Alder reiterated that platforms that issue or trade security tokens in the primary and secondary markets need to hold virtual asset-related licenses. In fact, Hong Kong's extremely strict regulation of ICOs and other issues has not released any room, and there is more likely to be progress in STOs.

The Financial Services and the Treasury Bureau of Hong Kong is also consulting the public on the virtual asset regulatory system. The consultation document lists in detail the Hong Kong government's suggestions and plans for the virtual asset regulatory system. In addition to the mandatory licensing system mentioned by Ashley Alder, the consultation document suggests that only companies established in Hong Kong and with a fixed place of business can apply for a virtual asset service provider license. In addition, within 180 days of the implementation of the licensing system (the exact time is to be determined), all virtual asset exchanges operating regulated activities must hold a valid license from the Hong Kong Securities and Futures Commission. "Any person who engages in regulated virtual asset activities without a license is guilty of a criminal offense and, upon conviction through public prosecution, may be imprisoned for seven years and fined $5 million; if the crime is a continuing crime, an additional fine of $100,000 may be imposed for each day during which the crime continues." Based on the above proposals, Hong Kong's determination to fully regulate the digital asset industry is evident.

BitMEX, which is at the forefront of the regulatory wave, listed Hong Kong, Bermuda and Seychelles as prohibited service areas as early as August 2019, and withdrew from the competition in the Hong Kong market. Another well-known derivatives exchange, FTX, has its office in Hong Kong.

After the news came out, BC Technology Group (00863.HK), which has obtained the approval in principle of the Hong Kong virtual asset license, issued a statement on the same day, welcoming and supporting the decision of the Hong Kong Securities Regulatory Commission, and reiterating its determination to accept supervision and operate with a license. OSL Digital Asset Exchange, a wholly-owned subsidiary of BC Technology Group, stated in an investor briefing in October that it is continuing to advance the license application as planned and hopes to be officially approved before the end of this year. OSL is a comprehensive cryptocurrency trading group that received a $14 million investment from Fidelity International this year.

This may not necessarily be good news for Huobi (1611.HK) and OKEx (1499.HK), which are listed in Hong Kong through backdoor listing. Huobi and OKEx are mainly engaged 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.

For individuals, professional investors need to have an investment portfolio of no less than HK$8 million. The Hong Kong Securities Act defines professional investors as: 1. A trust corporation entrusted with the management of assets of no less than HK$40 million or equivalent in foreign currency; 2. An individual with a total investment portfolio of no less than HK$8 million or equivalent in foreign currency; 3. A corporation or partnership with an investment portfolio of no less than HK$8 million or equivalent in foreign currency or with assets of no less than HK$40 million or equivalent in foreign currency; 4. A corporation whose sole business is holding investments and is wholly owned by individual professional investors.

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.

At present, the cryptocurrency exchange business of Huobi and OKEx does not seem to account for a large proportion in their respective listing systems. According to the company profile of the Hong Kong Stock Exchange, neither Huobi nor OKEx mentioned the blockchain and cryptocurrency exchange business. The two leading exchanges have recently been caught up in the controversy and rumors of senior executives being involved in the case. They have not responded to the move of the Hong Kong Securities Regulatory Commission, but do not rule out injecting some content that complies with the regulatory framework into the listed entity in the future. As for the rumors that they were investigated due to the problem of backdoor listing funds, it has not been confirmed yet, but it will undoubtedly affect the process.

Binance has been very active in applying for licenses in various jurisdictions, and the management has always expressed support and expectations for regulation. Binance also has business operations in Hong Kong, but there is currently no public information on its application for a Hong Kong virtual asset license.

In short, Hong Kong has always been relatively conservative in the field of cryptocurrency. This move may accelerate the pace of competition with Tokyo and Singapore for the Asia-Pacific blockchain financial center, but the distance is still very far, and it is not very attractive to exchanges. It is more about its impact on Beijing's policies. The conclusion of Ashley Alder's speech this year is also very intriguing: "I believe that at next year's Fintech Week, we will have more news to share with you."