Original Edit: Wu on Blockchain
On August 3rd, HashKey and OSL trading platforms announced the official upgrade of their licenses, becoming licensed trading platforms for retail users in Hong Kong. In addition to providing support for fiat currency deposits and withdrawals, the HashKey trading platform will also collaborate with banks such as Standard Chartered Bank and DBS Bank to provide fiat currency deposit and withdrawal services to users. Furthermore, the platform has also opened up compliant OTC trading. After opening up retail trading, what other highlights can be expected in the coming year?
1. Which coins may be available for retail trading after opening up?
According to the new regulations released by Hong Kong in March, licensed platform operators intending to provide virtual assets to retail clients should ensure that the selected virtual assets are eligible large-scale virtual assets and meet 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 traditional non-virtual asset financial markets, such as an index provider that has previously launched index funds recognized by the Securities and Futures Commission.
According to @tier10k statistics, currently, five mainstream traditional institutions have launched indices, with Bitcoin (BTC) and Ethereum (ETH) included in all indices; Litecoin (LTC) and Polkadot (DOT) are ranked second, included in four indices; Bitcoin Cash (BCH) and SOL are ranked third, included in three indices; Cardano, Avalanche, Polygon, and Chainlink are ranked fourth, included in two indices. In addition, EOS, BNB, ATOM, FIL, ETC, XLM, UNI, and others are also included once. However, it should be noted that the composition of major indices may change with market fluctuations.
William believes that, subject to the requirements of the Securities and Futures Commission, there are currently a total of 13 cryptocurrencies that can be considered as alternative options for retail trading, namely: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH, and CRV. However, the above-mentioned cryptocurrencies may not necessarily be allowed for retail trading. This is because the assets available for retail trading need to meet three conditions: "exchange due diligence + eligible large-scale virtual assets + written approval from the Securities and Futures Commission." For example, the current operational situation of SOL and BCH is not optimistic and they may be excluded by the Securities and Futures Commission.
Currently, Hashkey only provides 5 assets and 7 trading pairs, including BTC, ETH, USDT, USDC, and USD; OSL only provides BTC and ETH.
2. Securities firms and banks allowing the general public to buy cryptocurrencies
On June 26th, Hong Kong's largest bank, HSBC, allowed its customers to buy and sell cryptocurrency ETFs listed on the Hong Kong Stock Exchange, becoming the first bank in Hong Kong to allow customers to buy and sell cryptocurrency ETFs listed on the Hong Kong Stock Exchange. This move will expand local users' access to cryptocurrencies. Currently, the cryptocurrency ETFs listed in Hong Kong include the CSOP Bitcoin Futures ETF, CSOP Ethereum Futures ETF, and Samsung Bitcoin Futures Active ETF.
Hu Zhenbang, CFO of BC Technology Group, the parent company of OSL, stated that last year, the Securities and Futures Commission and the Financial Services and the Treasury Bureau issued very clear guidelines. If banks and securities firms want to provide digital asset services to customers, they must cooperate with licensed digital asset institutions. There are two ways to cooperate: one is to directly introduce customers, and the other is to apply to the Securities and Futures Commission to add digital asset services to their existing stock and bond services through cooperation with licensed digital asset service providers. Securities firms can open accounts on licensed digital asset trading platforms and buy and sell digital assets for their end customers. Of course, banks can also develop their own trading systems and then apply for licenses, but after all, digital assets are not the main products of banks, so the more efficient way should be to cooperate with external licensed digital asset platforms.
3. The third and fourth Hong Kong licenses and subsequent licenses
The Hong Kong government began implementing the Virtual Asset Service Provider Licensing Regime (VASP Licensing Regime) after June 1st, replacing the previous "1st and 7th licenses" regime, which refers to the licensing for Type 1 (securities trading) and Type 7 (provision of automated trading services) regulated activities. Currently, only Hashkey and OSL have obtained the above two licenses.
The main differences between the VASP Licensing Regime and the previous regime are the addition of retail trading, mandatory licensing (previously only for professional investors and voluntary licensing), and increased investor protection. However, more thresholds have been set to select high-quality cryptocurrency exchanges, such as the requirement to establish a physical office in Hong Kong, the need for at least two Responsible Officers (ROs) with years of experience in both traditional financial institutions and cryptocurrency trading, the need to have a certain number of cryptocurrency users and trading volume before June 1st, the need to obtain a TCSP license and the 1st and 7th licenses, and the need to operate formally for a year and obtain regulatory approval before obtaining the official license.
At least 10 institutions have announced their application for the Hong Kong VASP license, including HashKey, OKX, Huobi, Bitget, BitMart, Bybit, BitMEX, and Gate, as well as traditional institutions such as Yibo Finance.
Hu Zhenbang believes that the number of exchanges that will ultimately obtain licenses will not be too many, estimated to be only four to five. This is because it requires sufficient capital, custody services, ensuring the maintenance and stability of the trading system, investment in network security, compliance requirements close to traditional finance, and backend support. For companies that do not have a compliant business, it is not easy to meet these requirements.
4. Regulatory framework for opening up RWA
Wu mentioned on July 6th that Elizabeth Wong, head of the Financial Technology Group at the Securities and Futures Commission (SFC) of Hong Kong, stated during a visit to Eliptic that the SFC will soon release an update that will change the view on Securities Tokens (STOs) from four years ago (2019). Securities Tokens or RWAs will not be defined as complex products and will have the opportunity to be opened up to retail investors. RWAs will be regulated based on the underlying assets. Analysts pointed out that this may potentially drive a new wave of RWA enthusiasm.
5. Regulatory framework for stablecoins
The regulatory framework for stablecoins in Hong Kong can be traced back to the first policy address of Hong Kong Chief Executive Carrie Lam in October 2022. At that time, she stated that the Hong Kong Monetary Authority was studying the market's views on regulating stablecoins and would ensure that the regulatory system is in line with international regulatory suggestions and suitable for local conditions.
On January 31, 2023, the Hong Kong Monetary Authority released a summary of the consultation on the discussion paper on crypto assets and stablecoins, proposing to include several activities related to stablecoins in regulation and outlining the expected regulatory scope and main regulatory requirements in the summary document. Meanwhile, Binance, Deloitte, Alipay, Animoca, Circle (issuer of USDC), HSBC, Mastercard, Nova Technology, and WeChat all provided suggestions on the Hong Kong Monetary Authority's "Discussion Paper on Cryptocurrency and Stablecoin."
On March 20th, Hong Kong Financial Secretary Paul Chan stated that the Hong Kong Monetary Authority is studying the regulatory system for stablecoins, with the goal of implementing the relevant regulations in 2024. On April 29th, the Hong Kong Monetary Authority released its 2022 annual report, emphasizing that the first objects to be regulated will be stablecoins pegged to one or more fiat currencies; detailed regulatory requirements will be formulated in 2023, taking into account various factors, including the latest market developments, international institutions' suggestions and best practices for stablecoin regulation, and responses to the discussion paper on crypto assets and stablecoins. On May 9th, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, stated that in addition to the licensing of virtual asset platforms, a mandatory licensing system for stablecoins will be launched between 2023 and 2024.
On May 23rd, a document from the Hong Kong Securities and Futures Commission stated the opinion that non-securities tokens should have a track record of at least 12 months. The regulatory arrangement for stablecoins is expected to be implemented in 2023/24. Before stablecoins are regulated in Hong Kong, it is believed that stablecoins should not be included for retail trading. On June 12th, Hong Kong Financial Secretary and Treasury Secretary Christopher Hui stated that the Hong Kong Monetary Authority has conducted a public consultation on stablecoins and will gradually establish a regulatory framework, with the goal of launching it by the end of next year.
In addition, there are different opinions on whether it will be a Hong Kong dollar stablecoin or a US dollar stablecoin, expressed by Hu Zhenbang, Vice President of Hong Kong University of Science and Technology Wang Yang, and Co-Chairman of the Hong Kong Blockchain Association Fang Hong. Hu Zhenbang believes that the possibility of a Hong Kong dollar stablecoin is not very high; however, there is a great international demand for a US dollar stablecoin. If an issuer chooses Hong Kong as the place of issuance and accepts regulation by the Hong Kong Securities and Futures Commission, it is possible. Wang Yang and Cai Wensheng called on the Hong Kong government to issue a Hong Kong dollar stablecoin backed by Hong Kong's foreign exchange reserves; they believe that the strong HKD can challenge the dominance of the US dollar in this ecosystem, effectively achieving de-dollarization. Under proper regulation, it can also serve as a means to reshape the international strategy of the Hong Kong dollar by transmitting stablecoins to other countries. Fang Hong criticized the article by Wang Yang and Cai Wensheng, stating that a Hong Kong dollar stablecoin should be endorsed and regulated by the government, which is a fundamental misunderstanding of the role of the government in a market economy. Issuing a Hong Kong dollar stablecoin is meaningful, but it should not be issued by the Hong Kong government, but by private institutions in compliance with the supervision of the Hong Kong government. The de-dollarization of the Hong Kong dollar is impossible, given the linked exchange rate between the Hong Kong dollar and the US dollar, and the free exchange in Hong Kong.
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