After the opening of retail trading, five key points on Hong Kong's cryptocurrency policy in the next year
Original Editor: Wu Shuo Blockchain
On August 3rd, HashKey and OSL trading platforms announced the official upgrade of License No. 1 and No. 7, becoming licensed trading platforms targeting retail users in Hong Kong. In addition to supporting fiat currency deposits and withdrawals, HashKey trading platform will also collaborate with Standard Chartered Bank, Nomura Asia, ZA Bank, and others to provide fiat currency deposit and withdrawal services to users. Furthermore, the platform has also opened compliant OTC trading. After the opening of retail trading, what other highlights can we expect in the next year?
1. Which coins may be available for retail trading?
According to the new regulations issued by Hong Kong in March, licensed platform operators intending to provide virtual assets to retail customers should ensure that the selected virtual assets are eligible large-scale virtual assets and meet the following specific token inclusion criteria: "Eligible large-scale virtual assets" refers to virtual assets included in at least two "accepted indices" launched by at least two independent index providers; licensed platform operators should ensure that at least one of the two indices is launched by an index provider with experience in publishing traditional non-virtual asset financial markets, such as an index provider that has launched index funds tracking indices approved by the Securities Regulatory Commission.
According to @tier10k statistics, Bitcoin (BTC) and Ethereum (ETH) are included in all five major indices; Litecoin (LTC) and Polkadot (DOT) are ranked second, with four indices included; Bitcoin Cash (BCH) and SOL are ranked third, with three indices included; Cardano, Avalanche, Polygon, and Chainlink are ranked fourth, with two indices included. In addition, EOS, BNB, ATOM, FIL, ETC, XLM, UNI, and others are also included once. However, it should be noted that major indices will also change in response to market conditions.
William believes that currently, there are a total of 13 cryptocurrencies that can be selected for retail trading, provided they meet the requirements of the Securities Regulatory Commission. These cryptocurrencies are: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH, and CRV. However, not all of these currencies will necessarily be allowed for retail trading. Assets available for retail trading must meet three conditions: "exchange due diligence + eligible large-scale virtual assets + written approval from the Securities Regulatory Commission". For example, the current operating conditions of SOL and BCH are not optimistic and may be excluded by the Securities Regulatory Commission.
Currently, HashKey only offers 5 assets and 7 trading pairs, including BTC, ETH, USDT, USDC, and USD; OSL only offers BTC and ETH.
2. Securities firms and banks allow ordinary citizens to buy coins
On June 26th, HSBC, the largest bank in Hong Kong, allowed its customers to buy and sell virtual asset ETFs listed on the Hong Kong Stock Exchange. It is the first bank in Hong Kong to allow customers to trade virtual asset ETFs listed on the Hong Kong Stock Exchange. This move will expand the exposure of local users in Hong Kong to cryptocurrencies. Currently, the cryptocurrency ETFs listed in Hong Kong include the CSOP Bitcoin Futures ETF, the CSOP Ethereum Futures ETF, and the Samsung Bitcoin Futures Active ETF.
Hu Zhenbang, CFO of BC Technology, the parent company of OSL, a compliant exchange in Hong Kong, said that last year, the Securities and Futures Commission and the Financial Services and the Treasury Bureau released a clear guidance. If banks or brokers want to provide digital asset services to their clients, they must cooperate with licensed digital asset firms. There are two ways to cooperate: one is to directly introduce clients, and the other is to apply to the Securities and Futures Commission to include digital asset services in their business scope through cooperation with licensed digital asset service providers, building on their existing stock and bond services. 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 apply for licenses, but since digital assets are not their main products, it is more efficient to cooperate with external licensed digital asset platforms.
3. The third and fourth Hong Kong licenses and subsequent licenses
Since June 1st, the Hong Kong government has started implementing the Virtual Asset Service Provider Licensing Regime (VASP Licensing Regime). Prior to this, the "1st and 7th Licenses" regime was implemented, which licenses regulated activities in Class 1 (securities trading) and Class 7 (provision of automated trading services). Currently, only Hashkey and OSL have obtained the aforementioned two licenses.
The main differences between the VASP Licensing Regime and the previous regime are the addition of allowing retail investors to trade, mandatory licensing (previously only targeting professional investors and voluntary licensing), and increased investor protection. However, it has also set more criteria to screen for quality cryptocurrency exchanges. For example, it requires setting up a physical office in Hong Kong, having at least two Responsible Officers (licensed cryptocurrency firm executives) with years of experience in traditional financial institutions and cryptocurrency trading, having a certain number of cryptocurrency users and transaction volume before June 1st, obtaining a TCSP license as well as the 1st and 7th licenses, and operating officially for one year and obtaining regulatory approval before obtaining the formal license.
Currently, at least 10 institutions have announced their application for the Hong Kong VASP license, including HashKey, OKX, Huobi, BitgetX, BitMart, Bybit, BitMEX, and Gate, as well as traditional institutions such as Amber Group, etc.
Hu Zhenbang believes that there will not be too many exchanges that will eventually obtain licenses, estimated to be around four to five. This is because it requires sufficient capital, custody services, maintenance and stability of the trading system, investment in network security, compliance requirements close to traditional finance, and backend support. It is not easy for companies that do not have compliant operations to meet these requirements.
4. Regulatory Framework for Open RWA
Wu said that on July 6, she exclusively learned that Elizabeth Wong, the head of the Financial Technology Division of the Securities and Futures Commission (SFC) in Hong Kong, expressed during her visit to Eliptic that the SFC will soon launch an update to change the view on Security Token Offerings (STOs) that was made 4 years ago (in 2019). Securities Tokens or RWAs will not be defined as complex products and will have the opportunity to be open to retail investors. RWAs will be regulated based on underlying assets. Analysts point out that this could spur a new wave of RWAs.
5. Stablecoin Regulatory Framework
The regulatory framework for stablecoins in Hong Kong can be traced back to the first Policy Address by Chief Executive Carrie Lam in October 2022, when she stated that the Hong Kong Monetary Authority was studying the market's views on regulating stablecoins and would ensure that the regulatory system aligns with international regulatory recommendations and suits the local situation.
On January 31, 2023, the Hong Kong Monetary Authority published a consultation summary of the discussion paper on crypto-assets and stablecoins, which proposed bringing several activities related to stablecoins under regulation and outlined the expected regulatory scope and main requirements in the summary document. Binance, Deloitte, Alipay, Animnoca, Circle (issuer of USDC), HSBC, Mastercard, NeoBay Technologies, and WeChat were among the entities that provided suggestions and participated in the consultation of the HKMA's "Discussion Paper on Crypto-assets and Stablecoins".
In a speech on March 20, the Secretary for Financial Services and the Treasury of Hong Kong, Christopher Hui, stated that the Hong Kong Monetary Authority is studying the regulatory regime for stablecoins and aims to implement relevant regulations by 2024. On April 29, the HKMA released its annual report for 2022, emphasizing that the first targets of regulation will be stablecoins that claim to be pegged to one or more fiat currencies. In 2023, the HKMA will start formulating more detailed regulatory requirements, taking into account factors such as the latest market developments, international institutions' proposals and best practices for stablecoin regulation, and the responses received in relation to the discussion paper on crypto-assets and stablecoins. On May 9, Eddie Yue, the Chief Executive of the HKMA, stated that in addition to the licensing of virtual asset platforms, a mandatory licensing regime for stablecoins will be launched between 2023 and 2024.
On May 23rd, the Securities and Futures Commission (SFC) of Hong Kong stated that non-securities tokens must have a minimum track record of 12 months. The regulatory arrangements for stablecoins are expected to be implemented in 2023/24. Before stablecoins are regulated in Hong Kong, we believe they should not be allowed for retail trading. On June 12th, Eddie Yue, Deputy Chief Executive of Hong Kong Monetary Authority (HKMA), announced that HKMA has launched a public consultation on stablecoin regulation and aims to establish a regulatory framework by the end of next year.
In addition, different views have been expressed regarding the use of Hong Kong dollar stablecoins or US dollar stablecoins. Norman T.L. Chan, Vice-President of The Hong Kong University of Science and Technology, Charles d'Haussy, Co-Chairman of the Hong Kong Blockchain Association, and others have shared their opinions. Chan believes that the likelihood of Hong Kong dollar stablecoins is not very high. However, there is significant international demand for US dollar stablecoins, and it is possible if an issuer chooses Hong Kong as the launch location and accepts the regulatory oversight of the SFC. d'Haussy and Joseph Tsai, on the other hand, call on the Hong Kong government to issue Hong Kong dollar stablecoins backed by Hong Kong's foreign reserves. They believe that the strong HKD can challenge the dominance of the US dollar in this ecosystem, effectively achieving de-dollarization. With proper regulation, this can also serve as a way to transmit stablecoins to other countries as part of a strategy to reshape the international role of the Hong Kong dollar. Fang Hong, however, criticizes the articles of d'Haussy and Tsai, stating that it is fundamentally wrong to expect government endorsement and regulation of Hong Kong dollar stablecoins in a market economy. Issuing Hong Kong dollar stablecoins is meaningful, but it should not be done by the Hong Kong government. Instead, private institutions should issue stablecoins in compliance with government regulation. As for promoting "de-dollarization" with Hong Kong dollar stablecoins, it is impossible given the linked exchange rates between HKD and USD and the ability to freely convert them in Hong Kong.
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