The new regulations on virtual assets in Hong Kong have officially come into effect, marking a historic moment for Web3 in Hong Kong.

This year's Children's Day may be a milestone day in the crypto industry.

On June 1st, the new regulations for virtual asset trading in Hong Kong, "Guidelines for Virtual Asset Trading Platform Operators", officially came into effect. The license for operating virtual asset trading platforms can now be applied for, marking a significant progress in Hong Kong's efforts to promote the development of a global virtual asset center.

This is the first positive news in the history of the encryption industry in mainland China.

In the past, the Chinese market was also an undeniable force in the cryptocurrency industry. From 2014 to 2016, a large number of heavyweight players such as OKCoin, Huobi, BitMEX, and Bitfinex emerged in mainland China and Hong Kong, greatly monopolizing the industry's liquidity and leaving behind numerous prosperity and innovation during their rapid growth.

On September 4, 2017, the People's Bank of China announced that IC0 was classified as illegal financial activity, explicitly prohibiting any token financing activities and shutting down trading platforms. The market sentiment instantly collapsed, and in a round of more than 50% of the crash, the Eastern Cryptography began a journey of going abroad for several years. The current industry leader, Binance, has also gradually risen overseas since then.

In the following years, China continued to tighten its regulation on encryption. On May 21, 2021, the State Council Financial Committee released a signal to "crack down on Bitcoin mining and trading activities". Local governments began to shut down mines and ban mining, and the Chinese computing power, which once accounted for 75% of the entire Bitcoin network, disappeared from the map. In November of that year, Bitcoin reached its historical high of $69,000, but the Crypto industry had lost its voice in the entire market frenzy.

When STEPN made people exclaim "the pride of the Chinese", a group of crypto practitioners became "digital nomads" in the epidemic in Dali; when FTX, which originated in Hong Kong, returned to North America and ended abruptly at its peak; when DCG, known as the crypto Berkshire Hathaway, collapsed in 2022, the gears of history had quietly turned amidst SEC's strong actions on staking and stablecoin regulation. In the midst of these changes, the wheel of history has quietly turned.

On October 31, 2022, the Hong Kong government released the "Policy Statement on the Development of Virtual Assets in Hong Kong", announcing its determination to compete as a global virtual asset center. In the following months, the policy has been rapidly advancing, with virtual asset ETFs approved for listing, new licenses issued, trading platforms licensed and even plans to open virtual asset trading to retail investors. The speed of progress is staggering. At the Hong Kong Web3.0 Association inauguration ceremony on April 11 this year, a number of senior officials including Hong Kong Chief Executive Li Ka-chung, Hong Kong Legislative Council Chairman Leung Chun-ying, and Hong Kong Security Bureau Chief John Lee appeared on stage, confirming the unprecedented strength of this policy once again.

Behind the strong support lies the competition for talent and capital. However, the increasingly strict regulation of Crypto by the US regulatory authorities has given Hong Kong an opportunity to take advantage of and create a policy pattern of "the West is not bright, the East is bright" in the current encryption world. Policy itself does not equal innovation, but policy is undoubtedly the best soil for industry innovation. In this world that is increasingly divided by the wave of globalization, an open and inclusive policy environment is invaluable.

Key Points of the New Policy

On May 24th, the Securities and Futures Commission of Hong Kong released a summary of the consultation on the proposed regulatory requirements for operators of virtual asset trading platforms licensed by the Securities and Futures Commission. During the consultation period, 152 responses were received, covering opinions from industry and professional organizations, professional and consulting firms, market participants, licensed corporations, individuals, and other stakeholders. Most respondents welcomed the proposed regulations, but some raised questions that needed clarification. After considering a wide range of opinions and suggestions, the Securities and Futures Commission made modifications and clarifications to some of the proposed regulatory requirements.

The vast majority of respondents support the China Securities Regulatory Commission's proposal to allow licensed trading platforms to provide services to retail investors. The Commission will take a series of appropriate measures to protect the rights and interests of these investors, including ensuring suitability, good corporate governance, strengthening token due diligence, and related disclosures.

The relevant guidelines specify standards and regulations applicable to licensed trading platforms, including secure asset custody, segregation of client assets, avoidance of conflicts of interest, and network security. The Securities and Futures Commission will provide additional guidance on new regulatory requirements, other implementation details, and transition arrangements. The Hong Kong Securities and Futures Commission welcomes virtual asset trading platform operators who are ready to comply with its standards to apply for a license. Operators who do not intend to apply for a license should take steps to wind down their business in an orderly manner in Hong Kong. As for existing virtual asset trading platforms, according to Carlson Tong, platforms that are not operating in Hong Kong by next Thursday cannot continue to operate; as for platforms that have been operating in Hong Kong before that day, there will be a transition period and they must apply for a license from the Securities and Futures Commission within 9 months.

At the end of this summary, the highly anticipated regulation "Guidelines for the Operation of Virtual Asset Trading Platforms" has officially come into effect today. BlockBeats has compiled some key points of the new regulations to provide readers with a clearer understanding.

License Plate

The classification of virtual assets may evolve over time, and a certain type of virtual asset may change from a non-security token to a security token (and vice versa). In order to comply with the regulations of the issuance system and ensure the continuous operation of the business, virtual asset trading platforms are cautious in applying for approval under the current regulations of the "Securities and Futures Regulations" and the "Anti-Money Laundering Regulations". The China Securities Regulatory Commission will adopt a simplified application process, allowing dual license applications to submit a comprehensive application form only once.

In order to ensure the protection of retail investors, licensed virtual asset trading platforms must 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 China Securities Regulatory Commission will continue to work with investors and the Wealth Management Education Committee to carry out relevant education.

Meanwhile, the China Securities Regulatory Commission has considered proposals to relax specific regulations on establishing business relationships with retail customers, and recognizes that platform operators should fully evaluate investors' understanding of the nature and risks of virtual assets, and make corresponding revisions to the "Guidelines for Virtual Asset Trading Platforms". The Commission will release further guidance in the form of frequently asked questions (FAQs), such as how to evaluate clients' risk appetite for virtual assets and their risk-taking ability.

Licensed virtual asset trading platforms should only return virtual assets in appropriate circumstances and when there is no suspicion of money laundering/terrorist financing activities. Before returning virtual assets, due diligence should be conducted on the counterparty of the virtual asset transfer and the related wallet addresses should be screened. In addition, the returned virtual assets should be returned 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 reduce and manage money laundering/terrorist financing risks related to 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 and based on risk sensitivity determine the ownership or control of such non-custodial wallets.

When a licensed virtual asset trading platform provides services to virtual asset service providers or financial institutions located outside of Hong Kong and acting for their respective clients, the provisions on cross-border agency relationships apply to the platform. The Securities and Futures Commission has added section 12.6.5 to the "Anti-Money Laundering Guidelines for Licensed Corporations and Registered Institutions Dealing in Virtual Assets" to clarify that licensed virtual asset trading platforms should continuously monitor virtual asset transactions and related wallet addresses.

Transfer

The China Securities Regulatory Commission (CSRC) considers that submitting the required data as soon as possible after the transfer of virtual assets is an acceptable temporary measure until January 1, 2024, after taking into account the implementation of transfer rules in other jurisdictions. Licensed virtual asset trading platforms should comply with other transfer rules and relevant regulations from June 1, 2023, and safely submit the required data while taking temporary measures. In addition, the use of non-custodial wallets by some customers for virtual asset transfers may pose higher risks of money laundering and terrorist financing, so the CSRC has listed regulations for managing non-custodial wallet transfers in section 12.14.

The transfer rules are a major measure for virtual asset service providers and financial institutions to combat money laundering/terrorist financing, as the rules provide the basic information needed for sanction screening, transaction monitoring, and other risk mitigation measures. This also helps prevent the processing of virtual asset transfers for criminals and designated persons, and detect them when such transfers occur.

The Financial Action Task Force (FATF) reiterates that each jurisdiction needs to implement the 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 the transfer rules.

Other major jurisdictions (such as the United States, Singapore, the United Kingdom, and Europe) have already implemented or are about to implement transfer rules 9. If the implementation of transfer rules is delayed in Hong Kong, the competitiveness of virtual asset trading platforms that we issue licenses to will be affected, as virtual asset service providers and financial institutions operating in other major jurisdictions will be unable or unwilling to transact with them due to risk management concerns.

However, it may take time for the development system to conveniently submit the required information to the receiving institution, even though licensed virtual asset trading platforms are well aware that transfer rules have been advocated by special organizations in recent years. Considering the active and rapid development of technology solutions and transfer rule networks in recent years, the concern about submitting information immediately will be resolved over time. Moreover, more and more virtual asset service providers and financial institutions operating overseas will be subject to transfer rules restrictions.

The anti-money laundering regulations will cover centralized virtual asset trading platforms, so platforms that only provide virtual asset services (such as OTC virtual asset trading and virtual asset brokerage activities) without automated trading systems and additional custody services will not be within the scope of the anti-money laundering regulations.

Tokens

Before licensed virtual asset trading platforms include each token for trading, they should also conduct due diligence on the token. Therefore, it is not appropriate to exempt tokens that have already been included by other licensed virtual asset trading platforms from scrutiny. 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.

Regarding the requirement for non-security tokens to have at least 12 months of historical records, the relevant regulations are established to address the difficulties that platform operators may encounter during the review process. Although the 12-month requirement may not prevent some tokens from experiencing recent collapse events, the purpose of establishing this regulation is to reduce the risk of fraud that is difficult to detect and to minimize market promotion before the initial token sale.

In order to ensure the protection of retail investors, licensed virtual asset trading platforms must 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. We will continue to work with investors and the Financial Education Committee to carry out relevant education.

The China Securities Regulatory Commission (CSRC) has considered proposals to relax specific regulations regarding establishing business relationships with retail customers. The CSRC believes that platform operators should comprehensively evaluate investors' understanding of the nature and risks of virtual assets, and make corresponding revisions to the "Guidelines for Virtual Asset Trading Platforms". The CSRC will release further guidance in the form of frequently asked questions (FAQs), such as how to evaluate clients' risk appetite for virtual assets and their risk-taking ability.

The conflict of interest between committee members and platform operators is also taken seriously. Therefore, platform operators should establish internal policies and procedures to properly handle these conflicts. Licensed virtual asset trading platforms need to conduct due diligence before incorporating each virtual asset. The China Securities Regulatory Commission has made minor adjustments to the "Guidelines for Virtual Asset Trading Platforms", stipulating that platform operators should take all reasonable measures to ensure that the disclosed specific product information is not false, biased, misleading, or deceptive.

What does the new regulation mean for the cryptocurrency industry?

The competitive relationship between Hong Kong and Singapore began before Web3.0 and has undergone many changes. In terms of area and population, Singapore is comparable to Hong Kong, both being economically developed countries. Their rise trajectories are highly similar, and their development situations are also very close. Shopping paradises, diverse cultural inclusiveness, finance, trade, and shipping industries are all highly developed in both places, hence they are known as the "pearls 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 the Hong Kong economy, it is mainly concentrated in traditional fields such as finance, commerce, shipping and logistics, and tourism and exhibitions. However, this traditional and single industrial structure has become difficult to meet the development needs of Hong Kong, becoming what some experts call the "resource curse" of Hong Kong.

In order to optimize the industrial structure and accelerate industrial upgrading, Hong Kong is facing huge challenges. Although it has tried to redevelop the manufacturing industry, the high-tech and high-end manufacturing industry with high technological content has almost no development space in Hong Kong due to the high physical costs such as land and labor. In the global Internet entrepreneurship wave of the past 20 years, Hong Kong has carried a large number of technology companies' flow demand, but their business focus is often not in Hong Kong, and Hong Kong has not enjoyed the dividends brought by Internet technology innovation.

Meanwhile, some financial institutions and headhunting companies in Hong Kong have entered Singapore for development, taking away a large number of Hong Kong talents, especially financial professionals engaged in asset management. The rise of Singapore has put pressure on other major cities in Asia, especially Hong Kong, which used to be the center of Asia. This has led to the loss of local labor force in Hong Kong in recent years, and there is also a trend of capital outflow, which has impacted its international center status. According to the Global Financial Centers Index (GFCI) ranking, Singapore has surpassed Hong Kong and risen to third place globally.

Therefore, developing innovative industries such as Web3.0 and fintech, embracing a broader digital space, has become an excellent choice for Hong Kong. The battlefield between Singapore and Hong Kong is also gradually expanding into the blockchain and Web3.0 fields.

Web3.0 or become a new battleground for Hong Kong

According to the "2022 Global Blockchain Talent Report - Web3.0 Direction" jointly released by OKX and LinkedIn, as of June 2022, Singapore's blockchain talent has grown rapidly, becoming one of the top five countries in the world for blockchain talent. In September 2022, almost all global events in Asia were held in Singapore, leading to a surge in accommodation costs in Singapore. However, Hong Kong is not sitting idly by and is striving to regain its position as the financial center of Asia, with Web3.0 becoming an important direction they are trying to explore.

Despite being in its early stages, the competition between Singapore and Hong Kong, China in the field of Web3.0 is becoming increasingly fierce. According to Yu Jianing, Executive Director of the Metaverse Industry Committee of China Mobile Communications Federation and Honorary Chairman of the Hong Kong Blockchain Association, the competition between Singapore and Hong Kong, China in the Web3.0 field can be traced back to their emphasis on financial technology and innovation. Both places are international financial centers with strong financial and technological infrastructure, which provides favorable conditions for the development of Web3.0.

In November 2022, Hong Kong Fintech Week and Singapore Fintech Week will be held simultaneously, pushing this competition to a climax. Hong Kong and Singapore are competing for talent, funding, and companies, both striving to become the "cryptofinance center" or "global Web3.0 center".

On April 11th of this year, the Hong Kong Web 3.0 Association was established. In his speech at the ceremony, Chief Executive Li Keqiang stated: "In order to seize the opportunities of Web3.0, a new 'Financial Budget' has been announced in Hong Kong, allocating HKD 50 million to Cyberport to accelerate the development of the Hong Kong Web3.0 ecosystem, especially to promote cross-industry cooperation. Cyberport has also established the "Cyberport Web3.0 Base" at the beginning of this year to better gather global Web3.0 startups and talents."

Meanwhile, Li Jiachao believes that the development of Web3.0 is currently at a golden starting point. This disruptive technology can change many existing business operation models and create more new opportunities. Faced with the trend of Web3.0 development, Hong Kong must dare to become a leader in this wave of innovation.

The Hong Kong SAR government is full of expectations for the development of Web3.0 in Hong Kong, as can be seen from a series of actions such as a 50 million dollar government grant, the establishment of the Cyberport Web3.0 Base, the establishment of the Hong Kong Web3.0 Association, and the promulgation of new regulations on virtual assets. It hopes to build a thriving Web3.0 ecosystem and even lead the industry in technological breakthroughs, innovative models, and application innovations.

We must admit that Singapore has some advantages in the development of Web3.0, but Hong Kong, China is also striving to catch up. The road of innovation and change has never been smooth sailing, but what we can foresee is that the position of Chinese people in the encryption industry can be expanded from Hong Kong to the ASEAN market, the Asia-Pacific market, and even the European and American markets, and gain more voice in the global market.

Industry insiders' views on Hong Kong's new regulations

During the Hong Kong Carnival, BlockBeats conducted an exclusive interview with Waterdrip Capital CEO Dashan. He believes that for various reasons, Hong Kong has experienced significant losses in both funding and talent in recent years. There is an urgent need for a new starting point to revitalize the economy. Therefore, during these two days of the carnival, the Hong Kong Chief Executive has also attended many Web3.0 events intensively, which has given everyone great confidence through practical actions.

So as practitioners, especially as practitioners in mainland China, we don't really have a great need for "support". As long as we are not suppressed, we can confidently do our work. Moreover, the entire Hong Kong government has shown a very positive attitude of support, which has encouraged more people to join in. When project parties, institutions, money, and traditional family offices see such a good environment, everything is moving in a positive direction.

Regarding regulation, Da Shan believes that Singapore is actually stricter than Hong Kong. "Because Hong Kong has already approved three compliant exchanges, but Singapore may not have any yet, and they are all pure virtual currency trading platforms. In the short term, Hong Kong may not approve a fourth one, but at least this gives everyone hope and the possibility of compliance. Therefore, various small country trading platforms that went to Dubai, Singapore, Malaysia and other places in the past are now coming to Hong Kong to observe." In his view, Hong Kong's compliance provides clear protection for other businesses, including asset management, because compliance is one side of regulation and protection is the other.

Reference link:

"Consultation Summary on Proposed Regulatory Framework for Virtual Asset Trading Platform Operators Seeking to be Licensed by the Securities and Futures Commission" https://apps.sfc.hk/edistributionWeb/api/consultation/conclusion?lang=TC&refNo=23CP1

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