Hong Kong Authorities Release Findings, Feedback of Consultation Paper on Digital Asset Regulations

Hong Kong’s Financial Services and the Treasury Bureau (FSTB) has published a paper that reveals the key findings and conclusions reached after a consultation on a proposed licensing requirement for digital asset trading platforms.

Hong Kong‘s government has reportedly proposed certain regulatory changes in order to improve existing AML and (counter-terrorist financing) CTF guidelines by providing an updated regulatory framework for virtual asset services providers or VASPs.

At present, VASPs are regulated by a voluntary licensing framework. Since the guidelines were introduced in November 2019, the Securities and Futures Commission (SFC) in Hong Kong has taken four applications for review and issued only one license to OSL.

The FSTB intends to bring the region’s digital asset exchange operators within the regulatory framework enforced by the SFC – which was introduced in November 2020. It involved a 3-month consultation on a suggested regulatory framework, so that the agencies could assess the general public’s views on regulating the new asset class.

The Consultation Conclusions paper, released this month, covers important feedback the Hong Kong regulators received from the general public and industry participants like the Bitcoin Association of Hong Kong, the Hong Kong Digital Asset Exchange and PwC. The paper also reveals the regulatory authority’s stance and views on these recommendations.

The first proposal recommended a licensing framework for digital currency exchanges only. It reportedly excluded over-the-counter (OTC) trade and P2P exchanges, which many respondents did not like too much. The respondents said that a wider range of VASPs should be covered.

Currently, crypto exchanges in Hong Kong are quite prevalent and have matured considerably. They are ideal for local traders and investors when it comes to trading cryptocurrencies,  the paper noted.

Since funds transfers carried out by virtual currency platforms are traceable for AML/CFT purposes, there’s no need to include such activities into the existing regulatory guidelines.

The paper also mentioned:

“For now, flexibility will be built in the licensing regime such that it may be expanded to cover forms of virtual asset activities other than virtual asset exchanges where the need arises in future. We will nevertheless keep in view the evolving landscape in Hong Kong and consider the need for regulation as the market evolves.”

The proposal also recommended that only local firms with a permanent place of business in Hong Kong should qualify for any applicable permits or licenses. Although a few respondents appeared to have agreed with this suggestion, more than a dozen said the non-locally incorporated businesses may also be permitted to take part in the regulatory regime.

Hong Kong’s authorities added that they would keep updating the proposal to allow firms incorporated in other jurisdictions to register operations in Hong Kong (so they may apply for a domestic license).

Notably, there were more than 40% who said retail investors should be permitted to take part in some of the similar offerings as accredited or professional investors in the region.

However, the government insists that the significant potential risks of trading crypto-assets and their highly volatile nature makes them too risky for retail investors.

The paper noted:

“As the virtual asset industry is an emerging sector involving higher risks than conventional financial markets, the requirement of confining the services of a virtual asset exchange to professional investors only is necessary to ensure a proper degree of protection for the investing public, in line with the policy objective of promoting the healthy and orderly development of the market. We consider that the requirement is appropriate at least for the initial stage of the licensing regime. We will continue to monitor the evolving landscape and review the position as the market becomes more mature in future.”


Hong Kong VASP consultation digital assets responses May 2021

 

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