[Part II] An Overview of the Development of Cryptocurrency Policies in Hong Kong

So under the New Licensing Regime, which exchanges are expected to be the first to obtain the license to provide compliant cryptocurrency trading services in Hong Kong? To answer this question, we need to first understand the development of Hong Kong's regulation of cryptocurrency assets.

1. Sandbox Regulation

The SFC consultation paper highlights that the volatility of the virtual asset market and the collapse of FTX have revealed not only the risks associated with the increasing connection between the ecosystem of virtual assets and the traditional financial system, but also the importance of implementing effective supervision and monitoring of the virtual asset industry.

But there is no clear standard for what constitutes a "security token" and what constitutes a "non-security token". This has led to complex and confusing regulations in the United States for the cryptocurrency industry, full of controversy. Not only are the regulatory powers of the SEC and CFTC unclear, but banking regulators and state regulators also occasionally intervene, making it difficult to form clear regulatory expectations and causing confusion and difficulties for practitioners and investors.

If Hong Kong wants to regain its position as a crypto trading center, clarifying the regulatory framework is undoubtedly a top priority. If, according to the Securities and Futures Ordinance, the largest market capitalization cryptocurrencies such as Bitcoin and Ethereum are not within the scope of the SFC's jurisdiction, then there can be no talk of 'effective regulation'.

2. Professional Investors Only

The Hong Kong SAR government issued a consultation paper in November 2020, seeking public opinions on establishing a licensing regime for virtual asset service providers under the "Anti-Money Laundering and Counter-Terrorist Financing Ordinance". The proposal aims to bring trading platforms that provide "non-securities type token" trading services within the scope of SFC licensing and regulatory oversight.

However, in order to be cautious, SFC only issues licenses to trading platforms that provide services to professional investors. Therefore, only a few platforms such as OSL and Hashkey have been licensed. They can only serve professional investors, rejecting the vast majority of cryptocurrency investors, causing the cryptocurrency activities in Hong Kong to slump for a period of time.

3. Crypto Manifesto

In October 2022, Hong Kong released a "Policy Statement on Virtual Asset Development", reaffirming its open and friendly attitude towards virtual assets. It proposed to allow retail investors to invest in virtual assets and established a recognition system for virtual asset futures ETFs.

In December 2022, the Bitcoin and Ethereum futures ETFs launched by Southern Eastern were approved for listing on the Hong Kong Stock Exchange, becoming the first batch of cryptocurrency ETFs in Asia. In January 2023, the Samsung Bitcoin Futures Active ETF was listed on the Hong Kong Stock Exchange. With these compliant ETF products, retail investors can indirectly invest in cryptocurrency assets.

4. The New Licensing Regime, allowing Retail Investors.

The recent SFC consultation paper on regulating virtual asset trading platforms goes further. The paper proposes that under the New Licensing Regime, which will take effect on June 1, 2023, individual investors will be allowed to trade high-market-value tokens on SFC-licensed exchanges, provided that safeguards such as knowledge tests, risk tolerance assessments, and reasonable risk exposure limits are in place.

According to this guideline, BTC and ETH clearly meet the requirements and can be made available to retail investors, while other cryptocurrencies still need further observation. Although restrictions have not been completely lifted, the doors have been increasingly opened from professional investors to individual investors, from "sandbox supervision" to the New Licensing Regime. This has triggered the focus of recent global crypto market discussions on "Hong Kong concepts" and "China concepts", igniting the likes of CFX, COCOS, KEY, ACH, FIL and other "Hong Kong concept coins", with some exchanges even setting up a "Hong Kong zone".

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