Hong Kong's enthusiasm for cryptocurrencies and virtual assets has been evident at a policymaking and retail investment level. In its 2023-2024 budget - published on February 22nd, 2023 - Hong Kong earmarked HK$50 million, equivalent to US$6.4 million, to develop its Web3 ecosystem.
It aimed to spread awareness and conduct discussions around the Web3 ecosystem by organizing significant international seminars. At a more functional level, the funds were expected to encourage business cooperation and hold workshops for young enthusiasts in this space.
Hong Kong's financial secretary Paul Chan started a task force to help develop virtual assets. The task force would include policy bureau members and representatives from different regulatory bodies and industries.
This policy is in line with the enthusiasm shown by Hong Kong citizens towards virtual assets. For example, according to a survey conducted between November 2021 and February 2022, 42 percent of the respondents in Singapore and Hong Kong did not own cryptocurrency but were interested in or planning to purchase it in the future.
Another report by Chainanalysis shows that cryptocurrency values received by internet addresses in Hong Kong reached a whopping US$70 billion in the year to June 2022.
Overall, Hong Kong's dynamism in the world of virtual assets and the web3 ecosystem as a whole is something that has caught everyone's attention. Here, we delve deeper to examine its latest crypto measures and what they mean for the city's investors and industry.
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On February 20th, 2023, the Securities and Futures Commission (SFC) launched a consultation paper on the proposed regulatory requirements for Virtual Asset Trading Platform Operators licensed by the SFC. It welcomed comments from market participants and interested parties on the subject of consultation.
The regulatory requirements on which the Hong Kong SFC asked for consultation involved three key areas:
Before going through each of these aforementioned sets of guidelines, we must be aware of the premise of these guidelines. They have come in the context of a new licensing regime that will take effect on June 1st, 2023. All centralized virtual asset trading platforms carrying on business in Hong Kong or actively marketing to Hong Kong investors will need to have SFC licenses.
The licensing will happen under the AMLO VASP regime, combining the Anti-Money Laundering Ordinance and Counter-Terrorist Financing Ordinance.
With the commencement of the AMLO VASP regime, it will be required that the SFC-licensed VA trading platforms comply with the Guidelines for Virtual Asset Trading Platform Operators, also known as the VATP guidelines.
The proposed VATP guidelines are based on the existing regulatory requirements for SFO-licensed platform operators. These requirements are as follows:
The Hong Kong SFC has prepared a list of risk indicators for institutional and customer risk assessment. The broad categories of such risks include country risk, customer risk, product/service/transaction risk, and delivery/distribution channel risk.
The second set of guidelines is on AML/CFT. They apply to licensed corporations and SFC-licensed VASPs. These guidelines ask for the following:
With the Disciplinary Fining guidelines to be published in detail, the above is a gist of the proposed regulatory measures for Virtual Asset Trading Platform Operators that have obtained licenses from the Securities and Futures Commission in Hong Kong.
Moreover, the obligations that VASPs, both beneficiary, and originator, will have under Hong Kong's proposed rules align with that of the FATF Travel Rule. So, as soon as this law is enforced in the city-state, VASPs will have to begin using Travel Rule Solutions, like the Shyft Veriscope.
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If we look at the global order, the regulatory scrutiny - often hovering on the verge of a crackdown - has increased significantly in the major economies of the United States and China. For instance, the SEC-led US regulators have initiated several enforcement actions against some of the biggest digital asset companies in recent weeks. The agencies are also scrutinizing banks that support these companies with payment and custody solutions.
In early February 2023, Huang Yiping, a former member of the Monetary Policy Committee at the People's Bank of China, asked the Chinese government to reconsider its crypto ban. However, what remains a fact is that cryptocurrencies are still banned in mainland China.
In such a scenario, Hong Kong's willingness to set up a regulated and structural environment for VA trading platforms is a positive sign to many. Apart from initiating a licensing regime for crypto service providers, the SFC is also keen to discuss and know whether licensed providers should serve retail investors. The discussion will also help ascertain investor protection measures.
In Hong Kong, the retail traders - so far - were trading crypto assets on unlicensed exchanges. Offering retail trade permissions to licensed operators would mean a big boost for Hong Kong in attracting crypto businesses to the territory.
According to Hong Kong SFC Chief executive Julia Leung, "there is a clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected, and key risks are effectively managed."
The intention of the HK SFC is a welcome signal for industry participants in Hong Kong. According to Henri Arslanian, managing partner at crypto asset management firm Nine Blocks Capital Management, "this sends a powerful message that Hong Kong wants to reclaim its status as a global crypto hub." He also expressed optimism that these regulations would add to the renewed momentum the city is seeing, especially after many crypto businesses faced operating difficulties due to the covid-induced travel restrictions.
The consultation paper on the proposed regulations will remain open to feedback and input till March 31st, 2023. Respondents may choose to stay anonymous with their feedback. Otherwise, their feedback may get published with their names on the SFC website.
So, if you would like to share your feedback on the proposed rules, you must definitely go for it, as it could help the regulators see the user's side of things, which they may not otherwise.
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It's crucial to see how the rules and regulations will impact the end users, as no industry can prosper without prioritizing user experience and privacy.
Although the rules are rather extensive, they also include several user-focused measures, such as directing VASPs not to store over 2% of user funds on the hot wallets. Hot wallets are more prone to hacks, as they are connected to the internet, unlike cold wallets. Moreover, crypto hacks cause billions of dollars in losses every year, with hackers stealing a whopping $4 billion in 2022 alone.
Having learned its lessons from the much-publicized case of FTX collapse, the proposed rules also bar VASPs from using client funds for any purposes that could put it at risk. That said, some suggested measures could also get privacy advocates to raise their eyebrows, such as making on-chain tracking of some virtual assets mandatory.
While it’s crucial to decipher how regulators’ actions will impact the end users, it’s equally important to look at the VASPs' role as well. If the VASPs fail to ensure minimal impact on user privacy and experience while transitioning into this new regulated future, it can severely dent the future prospects of the entire industry.
For instance, if the suggested measures become Hong Kong's new crypto rules, VASPs will have to begin collecting originator and beneficiary details while facilitating crypto transfers. Imagine what if VASPs start collecting the originator and beneficiary detail manually? It would severely impact the user experience, and many users may turn away from the crypto ecosystem altogether.
Now, let's say the VASPs chose a Travel Rule Solution that automatically facilitates user data transfer but stores it on third-party servers outside their control. In this case, the VASPs may not even know when the third-party servers get breached, putting the personal data of their users at risk. Hence, VASPS must comply with these rules while prioritizing user experience and privacy.
By using Shyft Veriscope, VASPs can solve both the privacy and user experience-related issues they may face while complying with the "Virtual Asset Transfer" requirements under the suggested crypto rules under the consultation paper.
Overall, both regulators and industry stakeholders will have to work together to protect user privacy and experience while promoting innovation in the crypto space.
Shyft Network powers trust on the blockchain and economies of trust. It is a public protocol designed to drive data discoverability and compliance into blockchain while preserving privacy and sovereignty. SHFT is its native token and fuel of the network.
Shyft Network facilitates the transfer of verifiable data between centralized and decentralized ecosystems. It sets the highest crypto compliance standard and provides the only frictionless Crypto Travel Rule compliance solution on the blockchain while protecting user data.
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