Virtual assets have generated a great deal of excitement across the financial world setting boardrooms, cafes and bars abuzz with talk about Bitcoin, blockchain, NFTs and more.
Serious money is moving into the virtual asset space with the market capitalisation of more than US$1 trillion in cryptocurrencies as of January this year, according to Coinmarketcap.com.
As a global financial hub, Hong Kong is an important virtual asset trading centre, coming third-equal in terms of crypto hedge fund managers with 6% (along with Switzerland and Singapore) and behind only the United Kingdom (10%) and United States (30%), PwC reported.
The International Monetary Fund divides virtual assets into six categories – unbacked crypto-assets such as bitcoin and ether; stablecoins such as Tether and Goldmoney; tokenised securities based on bonds or shares, utility tokens used in exchange for services (common in Web 3.0 applications), non-fungible tokens (NFTs) giving, for example, rights to artworks, also common on Web 3.0 and central bank digital currencies (CBDCs) such as the digital yuan.
In a recent report, HKEX said the abrupt collapse of FTX in the US last year had underlined the need to regulate virtual assets.
Regulatory moves
Hong Kong’s Securities and Futures Commission (SFC) in February began a consultation on regulation of virtual asset trading platform managers and released the results last month. The SFC then released Guidelines for Virtual Asset Trading Platform Operators which took effect at the beginning of this month.
The SFC consultation received 152 written submissions from industry and professional associations, professional and consultancy firms, market participants, licensed corporations, individuals and other stakeholders. Respondents generally welcomed the proposed requirements, while a number of them sought clarifications.
Most respondents agreed to the proposal to allow licensed trading platform operators to serve retail investors, the SFC said it would take robust measures to protect these investors including ensuring suitability in the onboarding process, good governance, enhanced token due diligence, admission criteria and disclosures.
Responsible development
“Providing clear regulatory expectations is the key to fostering responsible development,” said Ms Julia Leung, the SFC’s Chief Executive Officer. “Hong Kong’s comprehensive virtual assets regulatory framework follows the principle of ‘same business, same risks, same rules’ and aims to provide robust investor protection and manage key risks. This will enable the industry to develop sustainably and support innovation.”
The Guidelines set out, among others, safe custody of assets, segregation of client assets, avoidance of conflicts of interest and cybersecurity standards and requirements expected of licensed trading platforms. SFC would provide additional guidance on the new regulatory requirements, other implementation details including licence application procedures, as well as more information about the transitional arrangements.
The SFC said operators of virtual asset trading platforms who were prepared to comply with the SFC’s standards were welcome to apply for a licence. Those who did not plan to do so should close their business in Hong Kong.
The SFC would continue its efforts with the Investor and Financial Education Council to warn investors about the risks of trading on unregulated platforms. Despite commencing the regime on 1 June, the SFC said it had yet to approve any virtual asset trading platform to provide services to retail investors and most virtual asset trading platforms currently accessible by the public are not regulated by the SFC.
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Web 3.0 comes of age
