Hong Kong Government Signals New Cryptocurrency Policies and Regulations

On October 31, at the launch of this year’s FinTech Week in Hong Kong, the Financial Services and Treasury Bureau (“FSTB”) issued a policy statement outlining its vision for developing the virtual assets (“VA”) sector here and outlined several new initiatives aimed at “promoting sustainable and responsible development of the sector”.

Earlier this year (please click here), the Hong Kong government laid extensive groundwork for a VA regulatory regime which began with the SFC and HKMA jointly issuing a guidance circular for all local intermediaries concerning the distribution of VA and provision of services by virtual asset service providers (“VASPs”) in Hong Kong. Then, in June, the government put forward new legislation for a mandatory licensing and regulatory regime for all VASPs in Hong Kong.

Under this new regime, which takes effect on 1 March 2023, VAs which fall within Hong Kong’s statutory definition of securities or futures contracts can only be traded on crypto exchanges operated by intermediaries that have been licensed by the SFC as VASPs. Intermediaries that distribute, deal with or advise on VAs also need to be licensed and comply with existing SFC regulations. And, for the time being, licensed VASPs are only permitted to provide such services to professional investors.

The FTSB’s policy statement acknowledges the significant potential of VAs and proposes several new initiatives that the Hong Kong government hopes will cement Hong Kong’s status as an international cryptocurrency hub.

• Firstly, the SFC will conduct public consultations on changes that would allow retail investors to trade in VA, possibly via a new class of exchange traded funds. Without such changes, retail investors will only be able to do so via overseas exchanges beyond the regulatory oversight of Hong Kong regulators.
• Secondly, recognizing that Hong Kong’s hidebound legal system does not yet recognise either smart contracts or tokenised assets, the Hong Kong government will undertake a review of existing laws with a view to amending them so both of these can be properly regulated. Smart contracts are simply programs stored on a blockchain that operate like an algorithm when predetermined conditions are met. They are seen as a possible replacement for conventional contracts in special commercial scenarios. Tokenised assets are digital tokens created on a blockchain which can represent either digital or physical assets. They represent a new form of ownership which can bolster both accessibility and liquidity of property ownership.
• Thirdly, the HKMA will follow up its January 2022 discussion paper on expanding the regulatory framework to cover payment-related stablecoins (i.e. cryptocurrency the value of which is pegged to fiat currency or some other asset).
• Finally, over the coming months, the Hong Kong government plans to launch pilot projects to explore proof-of-concept for possible introduction of tokenised ‘Green bonds’ that could be issued by the Hong Kong government and an e-HKD akin to the Digital Yuan used in mainland China.

These are unquestionably ambitious proposals that may go a long way to putting Hong Kong ahead of Singapore as the preeminent cryptocurrency centre of Asia. In the meantime, intermediaries that offer regulated cryptocurrency services have until 1 March 2023 to make all necessary changes to ensure they are fully compliant when the new regulations go into effect on.