Hong Kong's new regulations on virtual assets come into effect, Web3's historical moment in Hong Kong

What does the new regulation in Hong Kong mean for the encryption industry?

Written by: BlockBeats

This year's Children's Day may be a milestone day for crypto.

On June 1, Hong Kong’s new regulations on virtual asset transactions, "Guidelines Applicable to Virtual Asset Trading Platform Operators", were officially implemented, and the application for operating licenses for virtual asset trading platforms began, marking the achievement of Hong Kong’s vigorous promotion of the construction of a global virtual asset center. significant progress.

This is the first time in the history of the encryption industry that it is positive in the mainland.

In the past, the Chinese market has also been a force to be reckoned with in the encryption industry. From 2014 to 2016, a large number of heavyweight players such as OKCoin, Huobi, BitMEX, and Bitfinex were born in the mainland and Hong Kong, which greatly monopolized the liquidity of the industry and left countless prosperity and innovation in the barbaric growth.

On September 4, 2017, the central bank announced that it would define IC0 as an illegal financial activity, explicitly prohibit any Token financing activities, the trading platform was shut down, and the market sentiment collapsed instantly. After several years of going overseas, Binance, the current industry leader, has gradually risen overseas since then.

In the following years, mainland China continued to increase its encryption supervision. On May 21, 2021, the State Council’s financial conference released a signal of “cracking down on Bitcoin mining and trading behavior”, and local governments began to shut down mines and explicitly ban mining. , China's computing power, which once accounted for 75% of the entire Bitcoin network, has since completely disappeared from the map. In November of that year, Bitcoin climbed to an all-time high of $69,000. In the carnival of the entire market, the Crypto industry has lost its voice from the East.

When STEPN made people exclaim "the light of the Chinese", a group of Crypto practitioners became "digital nomads" in Dali during the epidemic; when FTX, which originated in Hong Kong, returned to North America, it ended abruptly at its peak; The myth of Berkshire Hathaway's DCG in the 2022 crash will be shattered, just as the SEC has successively made strong moves in Staking and stablecoin regulation. As time goes by, the gears of history have quietly turned.

On October 31, 2022, the Hong Kong government issued the "Policy Declaration on the Development of Virtual Assets in Hong Kong", announcing its determination to compete as a global virtual asset center. License, the trading platform is licensed to work, and even plans to open virtual asset transactions to retail investors. The speed of advancement is dizzying. At the inauguration ceremony of the Hong Kong Web3.0 Association on April 11 this year, a group of senior officials including Chief Executive of the Hong Kong Special Administrative Region Li Jiachao, Chairman of the Hong Kong Legislative Council Liang Junyan, and Hong Kong Security Secretary Deng Bingqiang appeared on the platform. The unprecedented strength of this policy was reaffirmed.

Behind the strong support is naturally the competition for talents and capital. It is just that the U.S. regulatory authorities have increasingly harshly targeted Crypto, which has given Hong Kong the opportunity to take advantage of the situation and created the current policy pattern of "the west is not bright and the east is bright" in the crypto world. Policy itself is not equal to innovation, but policy is undoubtedly the best soil for industry innovation. In this increasingly fragmented world in the wave of deglobalization, the value of an open and inclusive policy environment is self-evident.

Key points of the New Deal

On May 24, the Hong Kong Securities Regulatory Commission issued the "Consultation Conclusions on Proposed Regulatory Requirements Applicable to Operators of Virtual Asset Trading Platforms Licensed by the Securities and Futures Commission". The summary received 152 submissions during the consultation period and attracted wide-ranging interest, covering comments from industry and professional organisations, professional and consultancy firms, market participants, licensed corporations, individuals and other stakeholders . The majority of respondents welcomed the proposed provisions, but some raised issues that needed clarification. After considering a wide range of opinions and suggestions, the CSRC revised and clarified some of the proposed regulations.

Respondents overwhelmingly supported the SFC's proposal to allow licensed trading platforms to provide services to retail investors. The SFC will take a series of appropriate measures to protect the rights and interests of these investors, including measures to ensure suitability, good corporate governance, enhanced token due diligence, and related disclosures.

The relevant guidelines stipulate a number of standards and requirements applicable to licensed trading platforms, including safe custody of assets, segregation of client assets, avoidance of conflicts of interest, and network security. The SFC will provide additional guidance on the new regulatory requirements, other implementation details, and details of transitional arrangements. Hong Kong's Securities and Futures Commission welcomes applications for licenses from virtual asset trading platform operators who are ready to comply with the SFC's standards. Operators who do not intend to apply for a license should proceed to wind down their operations in Hong Kong in an orderly manner. As for the existing virtual asset trading platforms, Cai Zhonghui said that there are no virtual asset trading platforms operating in Hong Kong before next Thursday, and they cannot continue to operate; as for the platforms that have been operating in Hong Kong before that day, there will be a transition period, which must be completed within 9 months. Apply for a license with the Securities and Futures Commission.

In the final appendix of this summary, the most anticipated regulation, "Guidelines for Operators of Virtual Asset Trading Platforms", came into force today. Here, BlockBeats organizes some key points of the new regulations to provide readers with a clearer understanding.

License

The classification of virtual assets may evolve over time, and the classification of a virtual asset may change from a non-security token to a security token (and vice versa). In order to comply with the requirements of the licensing regime and ensure the continuous operation of the business, it is prudent for virtual asset trading platforms to apply for approval under both the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance under the current regime. The SFC will adopt a streamlined application process so that dual license applications only need to submit one consolidated application form.

To ensure the protection of retail investors, licensed virtual asset trading platforms are required to follow a series of measures covering business relationships, governance, disclosure and token review before providing services to retail investors. Retail investors need to understand the characteristics and risks of virtual assets, and the China Securities Regulatory Commission will continue to cooperate with investors and the Financial Education Committee to carry out relevant education work.

At the same time, the China Securities Regulatory Commission has considered the proposal to relax specific regulations on establishing business relationships with retail customers, and agrees that platform operators should comprehensively assess investors' understanding of the nature and risks of virtual assets, and make corresponding revisions to the "Virtual Asset Trading Platform Guidelines", The China Securities Regulatory Commission will issue a step-by-step guide in the form of frequently asked questions (for example, on how to evaluate customers' risk acceptance and risk acceptance capabilities for virtual assets).

Licensed virtual asset trading platforms should only do so in appropriate circumstances and when there is no suspicion of money laundering/terrorist financing, and when taking into account the results of due diligence on counterparties to virtual asset transfers and screening of virtual asset transactions and associated wallet addresses After that, the virtual assets will be returned. In addition, the returned virtual assets should be refunded to the account of the remittance institution, not the account of the remitter.

Licensed virtual asset trading platforms should take reasonable measures based on risk sensitivity to mitigate and manage money laundering/terrorist financing risks associated with virtual asset transfers to and from non-custodial wallets. The ownership or control of non-custodial wallets may change over time, and licensed virtual asset trading platforms should regularly determine the ownership or control of non-custodial wallets based on risk sensitivity.

The cross-border agency relationship requirements apply to licensed virtual asset trading platforms when they provide services to virtual asset service providers or financial institutions located outside Hong Kong and acting for the relevant clients. The SFC has added a new paragraph 12.6.5 to the "Guidelines on Anti-Money Laundering Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC" to clarify that licensed virtual asset trading platforms should continuously monitor virtual assets Transaction and associated wallet address.

transfer

The SFC considers that submitting the required data as soon as possible after a virtual asset transfer is an acceptable interim measure until 1 January 2024, taking into account the implementation of transfer rules in other jurisdictions. Licensed virtual asset trading platforms should comply with other transfer rules and related regulations from June 1, 2023, and securely submit the required data while taking interim measures. In addition, the use of non-custodial wallets by some customers for virtual asset transfers may pose a higher risk of money laundering and terrorist financing, so the CSRC has listed regulations governing non-custodial wallet transfers in paragraph 12.14.

Fund transfer rules are a key measure for virtual asset service providers and financial institutions in the fight against money laundering/terrorist financing, as they provide the basic foundations needed for sanctions screening and transaction monitoring, among other risk mitigation measures. material. It also helps to prevent virtual asset transfers being processed for criminals and designated persons, and to detect such transfers as they occur.

The Financial Action Task Force (FATF) reiterated that jurisdictions need to implement transfer rules as soon as possible, as the "sunrise problem" cannot be resolved until all virtual asset service providers and financial institutions operating in major jurisdictions comply with transfer rules. got resolved.

Other major jurisdictions such as the US, Singapore, UK and Europe have implemented or are about to implement transfer rules9. Any delay in the implementation of the money transfer rules in Hong Kong will affect the competitiveness of our licensed virtual asset trading platforms as virtual asset service providers and financial institutions operating in other major jurisdictions will face risk management concerns Unable or unwilling to transact with them.

However, developing systems to facilitate the immediate submission of required information to collection agencies may take time, even though licensed virtual asset trading platforms have been well aware that the FATF has been advocating compliance with transfer rules for the past few years. Doubts about immediate submission of information will be resolved over time, given that the active and rapid development of technology programs and networks of transfer rules in recent years has gradually eased the difficulty of exchanging required information between agencies. Furthermore, more and more virtual asset service providers and financial institutions operating overseas will be subject to the transfer rules.

The anti-money laundering regulations will cover centralized virtual asset trading platforms. Therefore, platforms that only provide virtual asset services (such as off-exchange virtual asset transactions and virtual asset brokerage activities) without automated trading systems and additional custody services will not be covered by the anti-money laundering regulations. coverage.

Token

Licensed virtual asset trading platforms should also conduct token due diligence before including each token for sale or purchase. Therefore, it is not appropriate to exempt tokens that have already been included by other licensed virtual asset trading platforms from review. The SFC only requires platform operators to consider the regulatory status of virtual assets in Hong Kong, not the regulatory status of tokens in different jurisdictions where they provide trading services.

The proposal to require non-security tokens to have at least a 12-month history comes in response to the difficulties platform operators may encounter during the review process. While the 12-month rule may not have prevented the recent crashes of some tokens, it was designed to reduce the risk of fraud that would be difficult to reasonably detect and reduce the amount of marketing that takes place before a token’s initial offering.

To ensure the protection of retail investors, licensed virtual asset trading platforms are required to follow a series of measures covering business relationships, governance, disclosure and token review before providing services to retail investors. Retail investors need to understand the characteristics and risks of virtual assets. The Association will continue to cooperate with investors and the Financial Education Committee to carry out relevant education work.

The SFC has considered proposals to relax certain rules for establishing business relationships with retail clients. The Commission believes that platform operators should comprehensively assess investors’ understanding of the nature and risks of virtual assets, and revise the Guidelines for Virtual Asset Trading Platforms accordingly. How to evaluate the customer's risk acceptance and risk acceptance ability of virtual assets).

Conflicts of interest involving committee members and platform operators were also taken seriously. To this end, platform operators should establish internal policies and procedures to properly handle these conflicts. Licensed virtual asset trading platforms need to conduct due diligence before including each virtual asset. The China Securities Regulatory Commission has fine-tuned the information disclosure responsibilities in the "Guidelines for Virtual Asset Trading Platforms", stipulating that platform operators should take all reasonable measures to ensure disclosure specific product information is not false, biased, misleading or deceptive.

What does the new regulation mean for the crypto industry?

The competitive relationship between Hong Kong and Singapore started before Web3.0 and has undergone many changes. In terms of area and population, Singapore is comparable to Hong Kong, China, and both are economically developed countries. Their rising trajectories are highly similar, and their development conditions are also very close. Shopping paradise, multicultural tolerance, finance, trade and shipping industries are well developed in both places, so they are known as the "Pearl of Asia".

As a highly open and outward-looking economy, Hong Kong has undergone three industrial transformations in the past few decades. Although the service industry has a high proportion in Hong Kong's economy, it is mainly concentrated in traditional finance, commerce, shipping logistics and tourism exhibitions and other fields. However, this traditional and single industrial structure has been unable to meet the needs of Hong Kong's development, and has become what some experts call a "resource curse" in Hong Kong.

In order to optimize the industrial structure and accelerate industrial upgrading, Hong Kong is facing enormous challenges. Although there have been attempts to re-develop the manufacturing industry, due to the high physical costs of land and manpower in Hong Kong, high-tech high-end manufacturing has little room for development in Hong Kong. In the wave of global Internet entrepreneurship in the past two decades, Hong Kong has carried the mobile needs of a large number of technology companies, but their business focus is often not in Hong Kong, and Hong Kong has not enjoyed the dividends brought about by Internet technology innovation.

At the same time, some financial institutions and even headhunting companies in Hong Kong have entered Singapore for development, and have brought a large number of Hong Kong talents, especially financial professionals engaged in asset management. The rise of Singapore has put pressure on other big cities in Asia, especially Hong Kong, once the center of Asia. This has led to the loss of Hong Kong's local labor force in recent years, and the outflow of funds, which has impacted its status as an international center. According to the ranking of the Global Financial Center Index (GFCI), Singapore has surpassed Hong Kong to rise to the third place in the world.

Therefore, developing financial technology innovation industries such as Web3.0 and embracing a broader digital space has become one of the best choices for Hong Kong. The battlefields in Singapore and Hong Kong are gradually expanding to the blockchain and Web3.0 fields.

Web3.0 may become a new frontier in Hong Kong-New Controversy

According to the "2022 Global Blockchain Talent Report - Web3.0 Direction" released by OKX and LinkedIn, as of June 2022, Singapore's blockchain talents will grow rapidly, becoming the world's top five blockchain talent countries one. In September 2022, almost all global events in Asia will be held in Singapore, causing the cost of accommodation in Singapore to skyrocket. However, Hong Kong did not stand idly by. They are trying to regain their status as an Asian financial center, and Web3.0 has become an important direction for them to try.

Although Web 3.0 is still in its infancy, Singapore and Hong Kong are increasingly competing in this space. According to Yu Jianing, executive director of the Metaverse Industry Committee of the China Mobile Communications Federation and honorary chairman of the Hong Kong Blockchain Association, the rivalry between Singapore and Hong Kong, China, in the Web 3.0 space can be traced back to their emphasis on fintech and innovation. Both places are international financial centers with strong financial and technological infrastructure, and have good conditions to promote the development of Web3.0.

In November 2022, Hong Kong Fintech Week and Singapore Fintech Week will be held simultaneously, bringing this competition to a climax. Hong Kong and Singapore compete for talents, capital and companies, and both places strive to become "encrypted financial centers" or "global Web3.0 centers".

On April 11 this year, at the inauguration ceremony of the Hong Kong Web 3.0 Association, Chief Executive Li Jiachao delivered a speech at the ceremony: "In order to seize the opportunity of Web3. To Cyberport, accelerate the development of Hong Kong's Web3.0 ecosystem, especially to promote cross-sector business cooperation. Cyberport has also established the "Cyberport Web3.0 Base" earlier this year to better integrate global Web3.0 Startups and talent. "

At the same time, Li Jiachao believes that the development of Web3.0 is now at the golden starting point. This disruptive technology can change many original business operation models and create more new opportunities. Facing the development trend of Web3.0, Hong Kong must dare to be the leader of this wave of innovation.

50 million financial appropriations, Cyberport Web3.0 base, establishment of Hong Kong Web3.0 Association, new regulations on virtual assets... It can be seen from a series of actions that the Hong Kong Special Administrative Region government is full of expectations for the development of Web3.0 in Hong Kong, and hopes that It can build a thriving Web3.0 ecosystem, and even lead the industry in technological breakthroughs, model innovations, and application innovations.

We must admit that Singapore has some first-mover advantages in the development of Web3.0, but Hong Kong, China is also trying to catch up. The road of innovation and change has never been smooth sailing, but we can foresee that the position of the Chinese in the encryption industry can use Hong Kong as a starting point to expand our footprints to the ASEAN market, the Asia-Pacific market, and even the European and American markets. Gain more voice on the Internet.

What people in the industry think about the new regulations in Hong Kong

During the Hong Kong Carnival, BlockBeats conducted an exclusive interview with Waterdrip Capital CEO Da Shan. He believes that for some reason, Hong Kong has suffered a serious loss of capital and talent in the past few years. There is an urgent need for a new starting point to revitalize the economy. Therefore, during the two-day carnival, the Hong Kong Chief Executive also attended many Web3.0 activities intensively, and gave everyone a lot of confidence with practical actions.

Therefore, as practitioners, especially as practitioners in mainland China, everyone does not have much demand for "support". As long as they are not suppressed, they can do things with confidence. What's more, now the entire Hong Kong government in Hong Kong has shown a very positive and supportive attitude, and everyone is swarming up, Dashan thinks it is understandable. When the project party comes, when the institution comes, when the money comes, and when traditional institutions like family offices see such a good environment come in, everything is going in a good direction.

In terms of regulation, Dashan believes that Singapore is actually stricter than Hong Kong. "Because after all, Hong Kong has already approved three compliant companies, but Singapore may not have one now, and they are all pure virtual currency trading houses. Hong Kong may not approve the fourth one in the short term, but this at least gives everyone hope, at least There is the possibility of compliance. Therefore, trading platforms that went to various small countries such as Dubai, Singapore, and Malaysia are now coming to Hong Kong to wait and see.” In his view, Hong Kong’s compliance is aimed at other businesses, including asset management. There are clear protections for management, because one side of compliance is regulation, and the other side is protection.

Reference link:

Consultation Conclusions on Proposed Regulatory Requirements Applicable to Operators of Virtual Asset Trading Platforms Licensed by the Securities and Futures Commission