May 17, 2023

The Shyft Perspective - Hong Kong’s New Crypto Climate: the Regulated Road Ahead

The Shyft Perspective - Hong Kong’s New Crypto Climate: the Regulated Road Ahead

The estimated global crypto ownership rate is around 4.2%, with more than 420 million crypto users worldwide. Although Hong Kong falls beyond the global average with an ownership percentage of 2.35%, more than 175,000 people own cryptocurrency there. 

With the new regulations are set to come into place in June 2023. Industry experts, analysts, large investors, individual participants, and crypto enthusiasts - all are busy assessing potential challenges and opportunities that lie on this regulated road ahead.  

Understanding the new climate

The new regulations come with the final guidelines for crypto exchanges looking to launch in Hong Kong this May. 

According to a regulatory synopsis issued on 27th April 2023 by Ms. Julia Leung, the CEO of Hong Kong’s Securities and Futures Commission, the SFC is “working with global counterparts to set baseline standards to regulate centralized virtual asset exchanges for adoption in major markets.”

The commission held public consultations on crypto exchange regulations last year to determine the best way for retail investors to access cryptocurrencies. It also wanted to test the feasibility of offering crypto exchange-traded funds (ETFs) in the geography. Indicating considerable buzz for the framework to come into place, the SFC received over 150 responses from the public.

The new regulations are also considered a milestone as they would let investors trade in major cryptocurrencies like Bitcoin and Ethereum from June 1st this year. 

More on the topic: Hong Kong's Proposed Asset Regulation Sparks Industry Optimism

Current crypto situation 

The new regulations will considerably impact the crypto climate in Hong Kong, presenting a significant market opportunity for the crypto industry. According to Chainanalysis, cryptocurrency values received by internet addresses in Hong Kong were around US$70 billion in the first half of 2022 alone.  

The New Regulations

The new regulations come under the legislative purview of the ‘Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022.” 

According to its stated objectives, the bill wants to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinances (AMLO) to establish a licensing system for Virtual Asset Service Providers and apply the customer due diligence and record-keeping requirements under Schedule 2 to AMLO to VASPs.

Impact on Cryptocurrency Exchanges

Once the new regulations come into effect, crypto-related service providers will require an SFC license to operate in Hong Kong. And to obtain a license, they would have to furnish a detailed plan for combating money laundering risks and protecting their investors from such breaches and intrusions. 

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In a broader sense, the new regulations would help set standards and benchmarks for crypto regulations in Hong Kong, a region actively pursuing the goal of becoming a crypto hub - not only in Asia but at a global scale - for some time now. 

Numbers suggest that over 80 foreign and Mainland China companies have already expressed interest in setting up their Web3 company through this licensing mechanism. The interest indicates positivity towards norms that advocate system regularization and protection of investor rights and interests. 

Comparison With Previous Regulatory Frameworks

Many new regulations often come at the cost of destabilizing the traditional system, but that is not the case with the Hong Kong crypto licensing rules, as it would subject providers to the same AML and counter-terrorist financing legislation that traditional financial institutions follow. Hence, one can expect a seamless or at least considerably less friction in the transformative process when it becomes effective from June 1st onwards. 

Implications for Cryptocurrency Exchanges

Although the new regime is set to come into effect from June 2023, at least 23 businesses, out of the 80 that expressed interest, according to Hong Kong’s Secretary for Financial Services and Treasury Christopher Hui, are already setting up their presence in Hong Kong. And these 23 not only include crypto exchanges but Web3 security companies, blockchain payment providers, blockchain infrastructure builders, and more. 

Adaptation strategies of local exchanges

Adapting to the imminent regulatory shifts and challenges could be easy for local exchanges by fulfilling the core demand: exhibiting the capability to perform due diligence on their customers and meet Hong Kong’s AML and anti-terrorist financing standards. Only then would it become easier to receive a license!

Potential challenges and opportunities

The potential challenge may arise from something common to most of the transformative processes worldwide: arranging provisions for compliance and setting up a robust mechanism for conducting adequate due diligence. It involves upskilling the existing compliance team. The team needs to become aware and set up the system following what has been asked for. 

What awaits providers at the end of the compliance and diligence tunnel are enhanced trust from consumers, increased transparency in the system, and the scope of a pumped-up audience base. 

The Hong Kong authorities are also coming out with increased support for virtual asset service providers willing to pass through this regime. For instance, Hong Kong has allocated HK$50 million in its annual budget spending to the growth of the Web3 ecosystem.  

Comparative analysis with other jurisdictions

Similar to Hong Kong, a lot of adjacent and global jurisdictions are also proactively taking up the job of regulating virtual assets and the Web3 economy. And crypto entrepreneurs believe that when compared to Singapore and South Korea, Hong Kong’s new crypto regulations would be much similar to Singapore’s approach. Both are focused on protecting investors, institutional and retail alike. 

Global and Asian Crypto Climate

Like Singapore and South Korea, being part of the Asia continent helps Hong Kong become a participant in the most thriving crypto market globally. Out of more than 420 million estimated crypto owners worldwide, more than 260 million are from the Asian market itself. 

Key trends in global cryptocurrency adoption

It has to be kept in mind that Asia is also the most populous geographic region among continents in the world. However, other continents are also picking up speed in terms of gaining adoption and traction. 

The number of owners in North America is more than 54 million, followed by Africa (38 million+), South America (33 million+), Europe (31 million+), and Oceania (15 million+).

In Asia, while regions like Singapore and Hong Kong are keen to encourage growth in the Web3 ecosystem, some countries like South Korea want to tread cautiously. Hong Kong, on the other hand, is moving forward in a structured way. The current exchange licensing system will be followed by stablecoin regulations in 2024.

Influence of international regulations 

Along with its Asian counterparts, there are many countries or regions which are considering introducing similar regulatory systems. 

For instance, the European Parliament has already approved the first set of comprehensive rules to regulate cryptocurrency markets, known as MiCA or Markets in Crypto Assets Regulation. 

Dubai has also set up the Virtual Assets Regulatory Authority as a unique body regulating Virtual assets across Dubai. 

All these international regulatory institutions are expected to duly influence the crypto market in Hong Kong. 

More on the topic: EU Parliament Greenflags MiCA - Potential Impact on the Crypto Landscape

History of Cryptocurrency in Hong Kong

Hong Kong, for some time now, has been looked at as one of the most preferred crypto destinations in the world. In fact, the Worldwide Crypto Readiness Report termed Hong Kong as the most crypto-ready location in 2022.

In 2022, Hong Kong topped the charts in all categories, including the number of blockchain startups per 100,000 people and the number of crypto ATMs proportional to the population. The region was ahead of some of the most thriving global economies, including the US and Switzerland.

Over the years, multiple local crypto companies have emerged in the region, such as Kikitrade, Saxo Crypto Products, MYETHSHOP,, and other cryptocurrency trading and educational platforms, hubs, and more.

Regulatory Framework and Government Initiatives

We have already discussed the form and potential use cases of the upcoming crypto licensing mechanism in Hong Kong. It is also to be noted that the region’s AMLO aligns with the global recommendations of FATF. It requires VASPs across countries to adhere to an anti-money laundering benchmark in countering fraud, breaches, and financing terrorism regulations.

The Securities and Futures Commission is the primary body looking after the execution of the imminent licensing regime in Hong Kong.

Securities and Futures Commission (SFC)

Founded in 1989, the Commission's job is to work as an independent statutory body to regulate Hong Kong’s securities and futures markets. Its principal responsibilities are to maintain and promote fairness, efficiency, competitiveness, transparency, and orderliness in the securities and futures industry. 

Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO)

One of the most crucial legislations that the SFC is bothered with in regulating the crypto industry is the AMLO. In the Hong Kong special administrative region, the legislation comes with an ordinance. The ordinance amends the laws to apply customer due diligence and record-keeping requirements to virtual asset service providers. 

Government support and initiatives

While regulations are set in place, the Hong Kong government is also keen to keep its support window open for the holistic growth of the Web3 ecosystem. 

Cyberport came up with Web3@Cyberport in the early half of the 2023-24 financial year. According to the official budget document, HK$50 million was allocated to expedite the Web3 ecosystem development by “organizing major international seminars” and  promoting “cross-sectoral business cooperation.”

Collaboration with Mainland China

When it comes to calibrating the region’s crypto strategies with that of Mainland China, Xiao Feng, the Chairman of the Hong Kong Crypto exchange HashKey, believes that the Hong Kong government’s emphasis is on practicing different laws from mainland China under the "One Country, Two Systems" framework.

Market Opportunities and Key Players

The SFC list of licensed virtual asset trading platforms in Hong Kong includes OSL Digital Securities Limited and Hash Blockchain Limited. Invariably the list of such exchanges is set to grow in the coming days, with local exchanges coming up in accordance with the regime and increasing their market share and accelerating growth.

Brands like Hex Trust, fully licensed, insured digital asset custodians, are also active in Hong Kong. 

NUTS Finance is a blockchain development lab active in Hong Kong that focuses on building secure, composable, open-source technology to enable decentralized finance services. DTTD, another Hong Kong-based service, makes managing NFTs across multiple crypto wallets easy. Xversem, a Hong Kong-located service, aims at building effective Bitcoin wallets for Web3. Hong Kong-based Pictta is a mobile-first, gasless, and social-enabled NFT marketplace. 

Such examples are many, and the bouquet of such service & product companies is bound to grow in the coming days. 

Challenges and Risks

It is evident that implementing the licensing mechanism will come with its share of challenges and risks. 

Any new regulation introduced in an existing market is bound to create friction in the system. Companies will have to exhibit to the regulators and their consumers that they can do due diligence and protect the investor from potential hacks, attacks, breaches, laundering, and other possible mismanagement of funds. At the same time, they will have to comply with global benchmarks for protecting user data.

Necessarily, it would have to be a consistent effort, demanding a fixed cost to be incurred by businesses every quarter. There are chances that occasional volatility in an emergent market like crypto will take a toll on the company’s bottom line. It is essential to have efficient fund management practices in place so that companies do not lack in their compliance and diligence efforts.

The People's Republic of China’s Digital Yuan promised to achieve a “relatively high degree of financial inclusion” and aid in developing “various large-scale financial platforms” that reduce the cost of providing financial services. Its presence could also play a decisive role in shaping the future of crypto services in Hong Kong.  

Future Outlook and Trends

Despite all these potential challenges, Hong Kong is looking toward a brighter future in crypto services. Blockchain and DeFi are high-potential areas with a lot to offer to people who still lack access to traditional finance avenues.

Merging of blockchain and crypto services to the traditional finance functions of lending and borrowing, underwriting, etc., have already started. One only needs to be careful of promises made to promote the new economic order that Web3 has the power to introduce through the decentralization route. 

Final Note

The imminent regulations and licensing regimes in Hong Kong present both risks and opportunities to the crypto investor and user communities. 

While regulatory compliance may lower the speed of innovation and pump up costs, the investors stand to gain from a more protective atmosphere in general. There is also the scope for businesses to enjoy long-term premiums by offering enhanced trust and transparency.

Every stakeholder must stay updated on the shifts and changes happening in the regime. It always helps steer ahead in an evolving market with less friction and optimal cost-efficiency.

Mickey and the Hong Kong Crypto Quest

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