Article Author: Meta Era invited author "Crypto Big Brother"

Introduction

It has been exactly one year since the Hong Kong Financial Services and the Treasury Bureau released the "Policy Statement on the Development of Virtual Assets in Hong Kong" in October 2022. This article will review the policies and regulations issued by the government over the past year. With the prosperity of the previous cryptocurrency world, more and more markets have set their sights on the cryptocurrency field. Many institutions and individual investors are eager to try, but due to the unclear policies around 2021, a large amount of capital and institutions "fled" to cryptocurrency-friendly countries such as Singapore and the United States. With the Hong Kong government's announcement in 2022 of the opening and inclusiveness of the Crypto market, many capital sources have chosen to return to their own "battlefield." So, on the first anniversary of the development of virtual assets in Hong Kong, what major policies are being implemented to promote the development of virtual assets? This article will introduce and follow up on the relevant policy content one by one!

Review of Hong Kong's Web 3.0 Support Policies

After vigorously supporting the development of NFT, Gamefi, and other tracks, the Hong Kong government first announced on October 16, 2022, that it would promote the digital Hong Kong dollar as the first bridge to link virtual assets, followed by the issuance of government tokenized green bonds to demonstrate support for distributed ledger technology (efficiency, cost reduction, and increased trust).

During Hong Kong Technology Week (October 30, 2022), the Hong Kong government announced the establishment of a $4 billion technology fund to support the entrepreneurship of blockchain, Web3, and other technology-based enterprises. The Hong Kong government is using real policies to support the industry's development. Following this, the ETF was approved on the same day.

On the same day, the Hong Kong Securities and Futures Commission issued a letter authorizing the public offering of ETFs for trading on virtual asset futures exchanges.

Figure 1 SFC ETF Explanation Letter

The SFC only allows the issuance of index funds for virtual asset futures traded on traditional regulated futures exchanges, and only approves index funds for Bitcoin futures and Ethereum futures traded on the Chicago Mercantile Exchange.

Building on the initial allocation, Hong Kong Financial Secretary Paul Chan allocated HK$50 million for the ecological construction of Web3 in April 2023. If the bear market can show the government's level of attention and financial support for Web3, it is believed that in the bull market, outstanding Web3 entrepreneurs will receive greater help from the government, both economically and in terms of policy support.

Figure 2 Paul Chan, Financial Secretary, speaking on Web3

Regulatory Policy Progress

As early as November 2019, Hong Kong began regulating cryptocurrency exchanges, with only licensed CEXs able to provide corresponding services to investors. However, only one CEX (OSL) obtained a license. It was not until the Hong Kong government officially announced its strong support for the development of the Crypto industry that a turning point was reached. According to the Hong Kong SFC website, there are now many exchanges queuing up for licenses. The exchanges approved in 2022 are HashKey and Meex, which have not been rejected as of 12/10/2023.

In 2022, exchanges were limited to professional investors and did not open retail business to individual investors. However, in August 2023, the Hong Kong government announced that listed exchanges could sell to individual investors, demonstrating the government's determination to promote the globalization of cryptocurrency assets.

The licenses issued by the Hong Kong SFC also have differences, with the most crucial being License 1 and License 7 (securities trading and providing automated trading services, respectively), which are necessary conditions for compliant exchanges to land. License 9 is also a focus of the market, as it can custody user funds, which is a necessary condition for private placement or public offering. Exchanges do not currently need to change licenses.

Regarding the regulation of NFTs, the Hong Kong Securities and Futures Commission issued a notice on June 6, 2022, titled "Reminder to Investors to Pay Attention to NFT Risks," stating that most NFTs are intended to represent their related assets, such as unique versions of electronic images, artwork, music, or films. Overall, if an NFT is a true digital form of a collectible, the related activities are not within the regulatory scope of the Securities and Futures Commission. Like Gamefi and NFTs, any tokens that can generate income, such as tokens, will be included in the list of regulated policies to ensure consumer rights.

Regarding the trading currencies, Tang Yi, President of the Hong Kong Blockchain Association, said, "Tokens such as Bitcoin and Ethereum are defined as utility tokens, so they do not need to be registered and audited. Every token circulating in the market needs to be judged through independent judicial cases or even legal proceedings to determine whether it is a security token or a utility token. You can, like Ripple, submit legal opinions to the Securities and Futures Commission and litigate with them to argue that their interpretation is incorrect."

Figure 3 Tradable Currencies

Regarding stablecoin regulation, according to the Hong Kong Monetary Authority's 2023 "Discussion Paper on Cryptographic Assets and Stablecoins," stablecoins should be fully backed and allow for face value redemption, and they should have high liquidity. Stablecoins based on arbitrage or algorithms will be rejected, such as DAI, which will eliminate potential financial losses to investors from algorithmic stablecoins like LUNA.

Regarding exchange safeguards, according to the documents published by the Hong Kong Securities and Futures Commission, platform operators must maintain a minimum paid-up capital of not less than HK$5 million at all times (i.e., "minimum paid-up capital amount"). Platform operators should always have assets with full liquidity in Hong Kong, such as cash, deposits, government bonds, and certificates of deposit (but not virtual assets), in an amount equal to at least 12 months of actual operating expenses calculated on a continuous basis. In addition, platform operators should establish and implement strict internal monitoring measures and governance procedures for private key management to ensure the secure generation, storage, and backup of all cryptographic seeds and private keys. Seeds and private keys are stored in Hong Kong.

Conclusion

From the support policies to the implementation of regulatory policies, it can be seen that the Hong Kong government is determined and committed to developing the virtual asset industry. In terms of support, the open policy and financial assistance are attracting more and more entrepreneurs to embrace the cryptocurrency industry in Hong Kong.

From the perspective of regulatory policies, the most direct help is the permission for retail trading, not just limited to professional investors. This will greatly promote the user base of the cryptocurrency industry in Hong Kong, while also strictly regulating the currencies and operations listed on the exchanges, providing users with more trading rights and greatly ensuring their safety. Hong Kong will eventually become a cryptocurrency-friendly harbor and return to its peak!

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