This month has seen the SEC’s enforcement actions and lawsuits against Binance and Coinbase, which have been interrupted as a declaration of war on Crypto and have adversely affected asset prices. Whatever your current favourite conspiracy theory around CZ, CCP and the ongoing US/China showdown, several jurisdictions, including Singapore, Japan, Europe with MiCA, and UAE, are rolling out the regulatory welcome ‘mat’ for digital assets and fintech companies.
These jurisdictions make it easy for digital asset companies to incorporate, innovate and grow their businesses. China is keen to get a slice of this market and enable its citizens to trade within a Hong Kong-based exchange rather than using Tether and other cryptocurrencies to move money out of China. This has been an easy way to avoid capital controls imposed by Chinese financial institutions.
As a whole, Asia has a long history of early technology adoption, especially when it comes to fintech applications, e-commerce and online payments such as Alibaba and wePay. Chinese officials have been quietly mingling at crypto events in Hong Kong over the past year to entice companies with their large mainland retail and institutional investor markets. Although China banned ‘virtual coins’ cryptocurrencies and crypto-mining operations in 2017, they have quietly been rehabilitating technologies they see as crucial to economic growth and innovation, especially blockchain. Hong Kong’s VASP regime is another sign that China’s position on digital assets is changing. This money, market share and these innovations are central to China’s goals around promoting blockchain technology and innovation.
Exchanges and Asset Service providers are lining up for VASP licences in a bid for first mover advantage when accessing China’s vast internal market. For example, Huobi announced the launch of Huobi HK and stated that they would provide cryptocurrency trading services to users in the future. Their users will be able to buy, sell, and hold mainstream cryptocurrencies such as BTC and ETH, as well as other major cryptocurrencies listed on the independent index through Huobi HK.
The implementing legislation for the VASP scheme, currently in the form of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022, came into force on 1st June. Virtual assets (“VAs”) under the Ordinance are defined as:
‘Cryptographically-secured digital representations of value, expressed as a unit of account or store of economic value and either is used, or is intended to be used, as a medium of exchange accepted by the public, for payment for goods or services, discharge of a debt, or investment; or provides rights, eligibility or access to vote on the management, administration or governance of the affairs in connection with, or to vote on any change of the terms of any arrangement applicable to, any cryptographically secured digital representation of value; and can be transferred, stored or traded electronically.’
Interestingly under the proposed new section 53ZRA(2) of the Ordinance, the definition of VA excludes digital representations of fiat currencies issued by central banks or issued by the government, limited purpose digital tokens (such as NFTs), or anything that constitutes a security or financial instrument.
The Hong Kong Monetary Authority (HKMA) has said it will start laying the foundation to implement a retail central bank digital currency in a report published this month. The digital version of the Hong Kong dollar – dubbed "e-HKD" – has gone through two rounds of consultation which have convinced the HKMA that it's necessary to at least start paving the way for possible future implementation of a retail CBDC. HKMA may be leaning towards developing the e-HKD on a permissioned blockchain and allowing private banks to handle ‘piloting’ and implementation.
The Hong Kong Securities and Futures Commission (SFC) has also announced that retail investors may be able to trade digital assets on licensed platforms as early as the second half of 2023. This lays the foundations for a consistent and transparent regulatory framework for digital assets which is in stark contrast to the SEC and the ongoing US Capitol Hill circus around regulation, what constitutes securities and the recent US Federal court ruling against DAO tokens in the CFTC’s case against Ooki DAO.
The digital asset market is a $1.1 trillion industry that will not vanish overnight. The SEC is not a magician (sorry, Gary!). This is regulatory arbitrage in action; China and Hong Kong are once again open for business when it comes to ‘virtual assets’ and cryptocurrency trading. When money is to be made, the rest of the world will welcome those companies fleeing regulatory persecution in the USA with open arms. Hong Kong and other jurisdictions are wisely creating guardrails to regulate the playing field before the games commence.