As the United States tightens its regulations on cryptocurrency, Asia is taking a different approach by embracing the potential of digital assets. Hong Kong, one of Asia’s prominent international financial centers, recently made a significant decision to formally approve the retail trading of crypto assets, effective from June 1, 2023. Furthermore, the Web3 economy in Asia considers this development a significant milestone. The Securities and Futures Commission (SFC) released a conclusion paper highlighting several key points regarding the new regulations. Here’s some key points you NEED to know about Hong Kong’s crypto regulations which will come into effect on 1st June 2023.
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Here are 11 important key points from the SFC’s Conclusion Paper:
1. Expansion of Crypto Trading Accessibility:
Firstly, retail traders in Hong Kong can now participate in cryptocurrency trading, expanding access beyond professional or accredited investors.
“We note the strong support expressed for allowing licensed VA trading platforms to provide their services to retail investors and will allow licensed VA trading platforms to provide their services to retail investors.” (p 4)
2. Risk Assessment:
In addition, as part of the onboarding process, retail users will still need to complete a risk tolerance assessment test.
“For example, the proposed requirement to assess a client’s risk tolerance is part and parcel of the existing suitability requirement.” (p 6)
3. Track Record for Utility Tokens:
Utility tokens seeking listing will need to demonstrate a 12-month track record before being eligible for trading, eliminating primary offerings.
“While a 12-month requirement may not have prevented the recent collapses of some tokens, this requirement aims to reduce the risk of reasonably hard-to-detect fraud as well as the possible impact on the price of a token of the marketing efforts leading up to its initial offering, especially since token offerings are generally unregulated and not subject to the safeguards which are present in the traditional securities markets.” (p. 9)
4. Security Tokens Exclusivity:
Moreover, retail traders will not have access to security tokens, as the Hong Kong Stock Exchange (HKEX) maintains a legal monopoly on equity trading within Hong Kong.
“Security tokens cannot be offered to retail investors in breach of the prospectus regime under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (C(WUMP)O) and the offers of investments regime under Part IV of the SFO.” (p. 9)
5. Stablecoin Limitations:
Nevertheless, the finalized policy by the Hong Kong Monetary Authority (HKMA) excludes stablecoins from trading by retail users.
“Prior to stablecoins being subject to regulation in Hong Kong, it is our view that they should not be admitted for retail trading.” (p. 12)
6. Token Listing Requirements:
To ensure a certain level of market recognition, the SFC mandates that listed tokens must satisfy the requirement of being included in a minimum of two “acceptable indices”.
“The SFC would like to reiterate that being included in two acceptable indices is not the sole criterion for admitting a virtual asset. It is merely a minimum criterion.” (p. 11)
7. Restrictions on Giveaways:
Additionally, while the SFC prohibits trading platforms from conducting giveaways, they can make an exception and offer fee discounts to users.
“we have now made the prohibition of gifts explicit in the VATP Guidelines, with the exception of discounts of fees or charges.” (p. 12)
8. Asset Custody and Insurance:
Trading platforms must ensure full financial coverage for custody of assets. However, the requirement for assets stored in cold storage does not mandate 100% insurance coverage, but it does require a minimum of 50% coverage. Self-coverage is also permissible, provided the platforms hold reserve assets in the same form as the client’s holdings.
“we remain of the view that client virtual assets held in hot and other storages should be fully covered by the compensation arrangement of a licensed VA trading platform.” (p. 14)
“We are thus prepared to lower the coverage threshold to 50% for client virtual assets held in cold storage, on the basis that 98% of client virtual assets will be required to be held in cold storage” (p. 15)
9. Evaluation of Derivatives:
Both retail and institutional traders are still awaiting formal approval for derivatives trading. Evaluation of this aspect will take place at a later stage.
“We are grateful for the detailed and informative responses submitted on this question. As we have explained in the consultation paper, the SFC is aware of the importance of virtual asset derivatives to institutional investors. We will take the large number of comments into consideration and conduct a separate review in due course.” (p. 17)
10. Restrictions on Earning and Lending/Borrowing:
On the other hand, the new regulations do not allow for the operation of earning, lending, and borrowing products associated with cryptocurrencies.
“As such, licensed VA trading platforms will not be allowed to conduct these activities at this stage.” (p. 18)
11. Compliance with Travel Rule:
Lastly, full compliance with the travel rule, which mandates the sharing of transactional information between virtual asset service providers, is a requirement for all participants.
“the SFC considers that submission as soon as practicable after the virtual asset transfer to be acceptable as an interim measure until 1 January 202410 , having regard to the implementation status of the Travel Rule in other major jurisdictions. Licensed VA trading platforms should comply with all other Travel Rule and relevant requirements in paragraphs 12.11 to 12.13 with effect from 1 June 2023, including submitting the required information to the beneficiary institution securely, while adopting the said interim measure. Amendments have been made to paragraphs 12.11 to reflect this.” (p. 20)
Hong Kong’s decision to allow retail trading of crypto assets marks a significant shift in the region’s regulatory landscape. In light of this, the introduction of these new crypto regulations, Hong Kong aims to strike a balance between investor protection and fostering the growth of the Web3 economy. To summarize, the impact of this move on the future of crypto adoption in Asia and beyond is still uncertain and awaits further observation.