What’s Coming Next for Hong Kong Crypto Regulations 2023?

What’s Coming Next for Hong Kong Crypto Regulations 2023?

“Oh, please, please make cryptocurrency legal in Hong Kong….” No, you’re not dreaming. It’s happening! In a recent move, the Hong Kong Securities and Futures Commission (SFC) surprised the community by proposing new rules for cryptocurrency exchanges last month. Either you’re a crypto enthusiast or you’re just starting your foray into the crypto world should follow the new proposals, especially that could shake things up. So read on to stay in the know!

For the new rules, the Hong Kong Securities and Futures Commission (SFC) is now eagerly awaiting public feedback, especially on the question of whether retail investors should be able to dabble in crypto trading on licensed platforms, and what kind of protective measures these exchanges should have in place.

Before We Jump In — Quick Recap of Crypto Rules Released Last December

Last December, the Hong Kong Government got serious about putting crypto in line by passing the Anti-Money Laundering and Counter-Terrorist Financing Bill 2022, which introduced a licensing regime for Virtual Assets Service Providers (VASP, the fancy way to call crypto exchanges in Hong Kong).

That means only licensed crypto exchanges can run their business.

So what does that mean for all you Hong Kong investors out there? Well, any VA trading platforms that do business in Hong Kong or actively market to Hong Kong investors will need to apply for a license from the SFC. Otherwise, they’ll be forced to close down because all other unlicensed cryptocurrency trading activity will be deemed illegal starting.

The new law starts to be in force from June 1, 2023. It seems there’s not much time left for exchanges to get a license. But no sweat. Existing crypto exchanges have a 12-month transition period to get a license (at latest on 30 May, 2024). And new crypto exchanges that aren’t operating yet only need a license when they’re open for business.

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What’re the New Regulations?

Then in February, the SFC proposed the regulation details, asking for public feedback. Here are a few ideas they’ve put forward.

Crypto exchange will be responsible for managing retail trading

Under the new proposed regime, crypto exchanges will be the “financial manager” for its clients—To decide which crypto tokens are suitable for retail trading and how much retail investors can invest, and the following possible actions:

Customer assessment. To better protect the investors, the crypto exchanges need to do a detailed KYC about their knowledge about investment and set exposure limits for customers based on their financial situations.

New token due diligence. Crypto exchanges will also need to form token admission and review committees responsible for setting obligations for issuers to inform operators about:

  • any hard forks,
  • airdrops,
  • regulatory action and for making final decisions on whether to admit, halt, suspend or withdraw offerings,
  • virtual asset management team,
  • tokens’ maturity and liquidity, and
  • the security infrastructure of its blockchain protocol.

Possible available tokens. Operators can only offer tokens that meet the SFC’s criteria for an “eligible large-cap virtual asset”. That said, operators should’t offer virtual assets that fall within the “securities” definition.

Compensation coverage. Worry about losing your money during an event like FTX-collapse? Here’s a solution—The SFC suggests that operators have a backup plan in case anything goes wrong instead of setting a fixed limit on how much money can be kept in a cold wallet.

The backup plan needs to be approved by the SFC and should include how operators will pay customers if there are any problems. Operators will also need to monitor how much money customers give them daily and adjust the backup plan as needed.

Potential stablecoin regulations

Apart from the crypto exchange regulation details, they didn’t forget stablecoins.

Hong Kong plans to regulate stablecoins in June this year. Mandatory licensing for stablecoin issuers will be set to go, and officials clearly state that “algorithmic stablecoins” (like terraUSD) won’t be approved. Any business operating stablecoin services would need to get a license.

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What Does It Mean for You, Investors?

Rules aren’t always bad things. “Regulate to protect” will be positive to lay a solid ground for crypto investing. As a crypto investor (or to-be), here’re a few reminders for you about the new changes:

  • Check with your exchanges if they’ve plans to obtain the license. Without a license, those exchanges can’t continue to run the business. So, do spend some time researching if your exchanges have plans to get a license.
  • Be prepared with a cap of the investment amount. Under the new rule, there’s a chance that your crypto exchange limits your maximum investment due to the KYC rules.

How’s Hong Kong’s Future for Crypto?

To answer the question, some argue it’s positive, but some don’t agree. But why waste time bickering over whether the answer is positive or negative? Let’s cut to the chase and present you with some concrete facts.

Is Hong Kong ready for crypto?

Don’t you know that Hong Kong won the title of “the Most Crypto-Ready City” in 2022? Based on the Worldwide Crypto Readiness Report, Hong Kong has the highest density of blockchain startups per 100,000 people and crypto ATMs per capita, defeating the United States and Switzerland in the rankings.

What’s more, the government’s planning to invest HK$50 million (US$6.37 million) to develop the Web3 sector. Plus, there’s no capital gains tax and capital control in Hong Kong, and both act as catalysts for innovative development.

So, Is Hong Kong ready for crypto? It’s a big Yes.

An experimental Sandbox for China

Hong Kong could act to be a sandbox for blockchain tech experiments for China. Policymakers can test the waters and explore the potential of blockchain without causing too much of a ripple effect.

But that’s not all. Thanks to Hong Kong’s relaxed regulatory approach to cryptocurrencies, some of the Chinese-founded Web3 companies in exile might come back to this hassling, but cozy metropolis.

One such company, the crypto exchange Huobi Global, is even looking to move its Asia headquarters from Singapore to Hong Kong! (According to Justin Sun, an advisor to the exchange, Huobi Global is also in the process of applying for a crypto trading license in Hong Kong.)

Hong Kong Government stands for cryptocurrency

Leonhard Weese, the co-founder of the Bitcoin Association of Hong Kong, also mentioned that the regulatory clarity and stability introduced by Hong Kong authorities could help alleviate the years of uncertainty in the industry.

This could potentially make Hong Kong a more attractive location for cryptocurrency and blockchain companies looking for a stable and regulated environment to operate in.

So, it looks like the city’s regulatory pivot towards cryptocurrencies is already bearing fruit.

Could this spark a new trend of Chinese companies flocking back to Hong Kong? Only time will tell, but for now, it seems like Hong Kong got all it needs to be set to become a new crypto hub in Asia.

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How to Tell Which Exchanges Are Legit?

At the time of writing, Gate.io, Huobi Global, OKX, and Bitget have been reported to have applied for a crypto trading license in Hong Kong. Do follow their official news updates to check their progress in getting a license.

Click here to get more information about Hong Kong Crypto Exchanges.

Investment involves risks. The information on this website is for educational purposes only and should not be construed as investment advice or recommendations. Therefore, it should not be considered as the basis for making any investment decisions or taking any investment actions.

Frequently Asked Questions (FAQs)

Can You Trade Crypto in Hong Kong Legally?
The consultation paper published on Monday sets out proposed requirements, like assessing clients’ risk profiles and setting limits to ensure their exposure is “reasonable.”

Does the new regulation affect Bitcoin ETFs?
Bitcoin ETFs don’t fall into the Virtual Assets category, Exchange Traded Funds (ETFs) won’t be affected.

Who can invest in crypto now?
Only institutions and professional investors with portfolios of US$1 million or more to trade digital assets.

Can you trade crypto derivatives in Hong Kong?
Trading crypto derivatives are still off the table of discussion.

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