Cryptocurrencies & Their Regulation in Hong Kong

Because the number of investors interested in obtaining a license for cryptocurrency activities in HK is constantly growing, regulators are trying to make their job easier by publishing recommendations on the distribution & marketing of cryptocurrency products in HK. Thus, the SFC, HK’s major financial regulator, has come up with several circulars outlining regulatory standards applicable to VAPMs. Among other things, the circulars address the issue of regulation of operators of platforms where virtual assets are traded & exchanged.

Old vs New

Due to being based solely on SFC-issued circulars, HK’s cryptocurrency regulation regime used to be quite limited. Also, the question of whether cryptoassets should be considered securities & whether they should be regulated by the SFO remained wide open.

Under the 1st circular, distributing funds invested in cryptoassets, including managing cryptocurrency funds, are considered regulated activities. Therefore, distributors & managers of such funds, irrespective of whether they’re HK-based or not, had to obtain a cryptocurrency exchange license in HK. 

Pursuant to the 2nd circular, cryptoassets falling under the SFO’s definition of futures contracts or securities automatically fell under the SFC’s scope of regulation. In its turn, the SFC confirmed that HK-licensed companies seeking to provide cryptoasset management services in HK must inform it of their plans.

If you’re planning on registering a company for crypto activities in HK SAR, you should keep in mind that doing so requires getting SFC’s permission. Failure to obtain permission authorizing conduct of cryptocurrency activities is deemed a crime & punished accordingly.

It’s worth noting that the SFC’s regulatory ambit extends only to futures contracts & securities. Therefore, if a crypto asset doesn’t qualify as one of the two, it isn’t subject to the SFC’s scope of regulation.

Requirements for VAFMs

To ensure protection of investors' rights with respect to cryptoassets that didn't qualify as securities, special regulatory standards had been introduced. Under the new rules, distributors & managers of cryptoassets had to comply with the same regulatory requirements, regardless of whether their cryptoassets qualified as securities or futures contracts.

Also, HK-licensed companies and those who were just planning to obtain a crypto license in HK had to comply with special licensing terms. In particular, they required them to:

• Comply with SFO-issued recommendations (both existing & future ones);
• Ensure that cryptofunds are only offered to pro-investors;
• Ensure the most appropriate storage mechanisms;
• Conduct occasional testing of cryptofunds;
• Check cryptocurrency exchanges for reliability;
• Appoint independent auditors;
• Have the required minimum share capital.

HK: Obtaining a License for Cryptocurrency Exchange

Failure to comply with the above standards will disqualify one from obtaining a cryptocurrency license in HK. There's also additional requirements for cryptocurrency platform operators:

• All cryptocurrency activities must be carried out by an SFC-licensed legal entity;
• Platform operators must comply with all regulatory requirements applicable to their activities;
• Platform operators must only provide their services to pro-investors;
• Trading in cryptoassets issued within a year of ICO completion or until the 1st profit is prohibited;
• Clients’ consent is required for performing any transactions; no financial services can be provided to customers.

Conclusion

It is hoped that the current standards will eliminate the need for classification of each & every crypto asset (be they securities or not). Though quite comprehensive, the existing requirements may need to be modified in the future to address the current legal gaps:

• uniform audit requirements & standards for cryptoassets’ valuation;
• taxation of cryptocurrency assets in HK.