After opening retail trading, five key points of Hong Kong's cryptocurrency policy in the coming year
Assets for retail trading must meet three conditions: "exchange due diligence + qualified large virtual assets + written approval from the Securities Regulatory Commission."Author: Wu Says Blockchain
On August 3, HashKey and OSL trading platforms announced the official upgrade of License 1 and License 7, becoming licensed trading platforms in Hong Kong for retail users. In addition to providing support for fiat currency deposits and withdrawals, HashKey trading platform will collaborate with Standard Chartered Bank, Morgan Stanley Asia, ZA BANK, and others to offer fiat currency deposit and withdrawal services to users. Furthermore, the platform has opened compliant OTC trading. After the opening of retail trading, what other highlights can we expect in the coming year?
1. What cryptocurrencies might be available for retail trading?
According to new regulations released in March by Hong Kong, licensed platform operators intending to offer virtual assets to retail customers must ensure that the selected virtual assets are qualified large virtual assets and meet the following specific token inclusion criteria: "Qualified large virtual assets" refer to virtual assets included in at least two "accepted indices" launched by at least two independent index providers; licensed platform operators must ensure that at least one of the indices is launched by an index provider with experience in publishing indices for traditional non-virtual asset financial markets, such as those that have launched indices tracked by SEC-approved index funds.
According to statistics from @tier10k, currently, Bitcoin (BTC) and Ethereum (ETH) are recorded in all indices launched by five mainstream traditional institutions; the second place is occupied by Litecoin (LTC) and Polkadot (DOT), which are included in four indices; the third place is Bitcoin Cash (BCH) and Solana (SOL), which are included in three indices; the fourth place is Cardano, Avalanche, Polygon, and Chainlink, which are included in two indices. Additionally, EOS, BNB, ATOM, FIL, ETC, XLM, UNI, and others are also included once. However, it is important to note that major indices may also change with market fluctuations.
William believes that, under the requirements of the SEC, there are currently 13 cryptocurrencies available as alternatives for retail trading, namely: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH, and CRV. Of course, the aforementioned cryptocurrencies may not necessarily be allowed for retail trading. This is because assets available for retail trading must meet three conditions: "exchange due diligence + qualified large virtual assets + SEC written approval." For example, the current operational situation of SOL and BCH is not optimistic and may be excluded by the SEC.
Currently, HashKey only offers 5 assets and 7 trading pairs, including BTC, ETH, USDT, USDC, and USD; OSL only offers BTC and ETH.
2. Brokers and banks allow ordinary citizens to buy cryptocurrencies
On June 26, Hong Kong's largest bank, HSBC, allowed its customers to buy and sell virtual asset ETFs listed on the Hong Kong Stock Exchange, becoming the first bank in Hong Kong to permit customers to trade virtual asset ETFs listed on the HKEX. This move will expand local users' access to cryptocurrencies. Currently, the cryptocurrency ETFs listed in Hong Kong include the Southern Eastern Bitcoin Futures ETF, Southern Eastern Ether Futures ETF, and Samsung Bitcoin Futures Active ETF.
Hu Zhenbang, CFO of BC Technology, the parent company of the compliant trading platform OSL, stated that last year the SEC and the Financial Management Bureau issued a clear guideline that if banks and brokers want to provide digital asset services to customers, they must cooperate with licensed digital asset institutions. There are two ways to cooperate: one is to directly refer customers, and the other is to apply to the SEC to add digital asset services to their business scope based on existing stock and bond services by collaborating with licensed digital asset service providers. Brokers can open accounts on licensed digital asset trading platforms to buy and sell digital assets for their end customers. Of course, banks can also develop their own trading systems and then apply for licenses, but since digital assets are not the main product of banking, a more efficient way should be to cooperate with external licensed digital asset platforms.
3. The third, fourth, and subsequent Hong Kong licenses
After June 1, the Hong Kong government began implementing the licensing system for virtual asset service providers (VASP licensing system). Before this, the "License 1 and License 7" system was in place, which regulated activities under Class 1 (securities trading) and Class 7 (providing automated trading services). Currently, only HashKey and OSL have obtained these two licenses.
The main difference between the VASP licensing system and the previous system is the addition of retail trading, mandatory licensing (previously only for professional investors and voluntary licensing), and increased investor protection. However, it also sets more thresholds to achieve the goal of filtering quality cryptocurrency exchanges, such as the requirement to establish a physical office in Hong Kong, having at least two ROs (licensed crypto institution heads) with years of management experience in traditional financial institutions and years of virtual currency trading experience, having a certain number of cryptocurrency users and trading volume before June 1, obtaining TCSP licenses as well as License 1 and License 7, and being in formal operation for a year and obtaining regulatory recognition before receiving a formal license.
Currently, at least 10 institutions have announced their application for Hong Kong VASP licenses, including HashKey, OKX, Huobi, BitgetX, BitMart, Bybit, BitMEX, and Gate, as well as traditional institutions like Yibo Financial.
Hu Zhenbang believes that the number of exchanges that will ultimately obtain licenses will not be too many, estimating only four to five. This is because sufficient capital is needed, custody services must be provided, the maintenance and stability of trading systems must be ensured, investments in cybersecurity are required, and compliance requirements close to traditional finance must be met, along with backend support. For companies that do not have compliant business operations, meeting these requirements is not easy.
4. Regulatory framework for opening RWA
Wu Says learned exclusively on July 6 that Elizabeth Wong, head of the Financial Technology Group at the Hong Kong SFC, stated during an interview with Eliptic that the SFC will soon launch an update to change its view on STOs from four years ago (2019), indicating that Securities Tokens or RWAs will not be defined as complex products and will have the opportunity to be opened to retail investors, with RWA being regulated based on underlying assets. Analysts point out that this could potentially drive a new wave of RWA enthusiasm.
5. Regulatory framework for stablecoins
Hong Kong's regulatory framework for stablecoins can be traced back to the first policy address by Chief Executive John Lee after taking office in October 2022, when he stated that the Hong Kong Monetary Authority was studying market opinions on regulating stablecoins and would ensure that the regulatory system aligns with international regulatory recommendations and is suitable for local conditions.
On January 31, 2023, the Hong Kong Monetary Authority released a consultation summary on the discussion paper regarding crypto assets and stablecoins, suggesting that several activities related to stablecoins be brought under regulation, and elaborated on the expected regulatory scope and main regulatory requirements in the summary document. Meanwhile, Binance, Deloitte, Alipay, Animoca, Circle (USDC issuer), HSBC, Mastercard, New Fire Technology, WeChat, and others provided suggestions on the Hong Kong Monetary Authority's "Discussion Paper on Cryptocurrencies and Stablecoins."
On March 20, Hong Kong's Secretary for Financial Services and the Treasury, Xu Zhengyu, stated in a speech that the Hong Kong Monetary Authority is studying the regulatory system for "stablecoins," aiming to implement relevant regulations in 2024. On April 29, the Hong Kong Monetary Authority released its 2022 annual report, emphasizing that the first objects to be regulated will be stablecoins that claim to be pegged to one or more fiat currencies; in 2023, it will begin to formulate more detailed regulatory requirements, considering multiple factors, including the latest market developments, recommendations and best practices proposed by international institutions regarding stablecoin regulation, and responses received regarding the discussion paper on crypto assets and stablecoins. On May 9, the president of the Hong Kong Monetary Authority, Yu Weiwen, stated that in addition to the licensing of virtual asset platforms, a mandatory licensing system for stablecoins will be launched between 2023 and 2024.
On May 23, a document from the Hong Kong Securities and Futures Commission indicated opinions on requiring non-security tokens to have at least 12 months of track record. The regulatory arrangements for stablecoins are expected to be implemented in 2023/24. Before stablecoins are regulated in Hong Kong, we believe that stablecoins should not be included for retail trading. On June 12, Hong Kong's Deputy Secretary for Financial Services and the Treasury, Chen Haolian, stated that the Hong Kong Monetary Authority has conducted public consultations on the launch of stablecoins and will gradually establish a regulatory framework, aiming to introduce it by the end of next year.
Additionally, regarding whether to have a Hong Kong dollar stablecoin or a US dollar stablecoin, Hu Zhenbang, Vice President of Hong Kong University of Science and Technology Wang Yang, and Co-Chairman of the Hong Kong Blockchain Association Fang Hongjin expressed different views. Hu Zhenbang believes that the possibility of a Hong Kong dollar stablecoin is not very high; however, the international demand for a US dollar stablecoin is very large, and if an issuer chooses Hong Kong as the issuance location and accepts the regulation of the Hong Kong Securities and Futures Commission, it is possible. Wang Yang and Cai Wensheng called on the Hong Kong government to issue a Hong Kong dollar stablecoin backed by Hong Kong's foreign exchange reserves, believing that a strong HKDG could challenge the dollar's hegemony in this ecosystem, thereby achieving de-dollarization in substance; under proper regulation, it could also serve as a means to reshape the international strategy of the Hong Kong dollar by delivering stablecoins to other countries. Fang Hongjin criticized Wang Yang and Cai Wensheng's article, stating that the idea of a Hong Kong dollar stablecoin being backed and regulated by the government is a fundamental misunderstanding of the government's role in a market economy; issuing a Hong Kong dollar stablecoin is meaningful, but it should not be issued by the Hong Kong government, but rather by private institutions in compliance with the Hong Kong government's regulations; promoting "de-dollarization" with a Hong Kong dollar stablecoin is impossible, given that the Hong Kong dollar and the US dollar are on a linked exchange rate and can be freely exchanged in Hong Kong.
