Hong Kong’s Securities and Futures
Commission appears to be laying groundwork to expand its current licensing
regime for virtual-asset players to let them serve retail investors.

Since the SFC announced its licensing regime
nearly two years ago, it has restricted licensed exchanges and intermediaries to
serving only professional investors, that is, those with about $1 million or
more in liquid assets.

While the SFC was an early mover in
creating a licensing regime for “VASPs” – virtual-asset service providers
– its stance left Hong Kong’s retail market to its own devices, closed to
the services of licensed entities.

That stance appears to be changing,
according to minutes released today from a meeting at the city’s Legislative Council
to read a bill amending laws regarding anti-money laundering and
counter-terrorist financing.

“The SFC is aware of major crypto exchanges are leaving Hong Kong,” said Henry Yu, principle partner at LY Law Office. “As a regulator, it cannot invite them to come back, but this bill will cause exchanges to rethink the value of obtaining a license.”

Crypto exodus

While OSL and HashKey have obtained Type-7
licenses to operate exchanges hosting digital assets, many of the city’s
biggest crypto marketplaces have exited for Singapore, Dubai, or other offshore
centers. Crypto.com, FTX, Diginex (now Eqonex), BitMEX, Huobi and OKEx had at one
point a Hong Kong domicile.

Other businesses have gone straight to Singapore seeking to operate under its Payments Securities Act, including Coinbase, Binance and Gemini. Singapore has already granted licenses to DBS, Independent Reserve, and FOMO Pay.

The exodus is largely due to the fact that these firms cater to retail investors and didn’t see the value in obtaining an SFC license. Although this has left the field to a handful of players such as OSL, they are also deprived of a vibrant ecosystem, while retail investors are left in the cold.

LegCo members raised this point. Rock Chen
noted that local investors are now conducting virtual-asset transactions
through overseas online platforms. Another legislator, Robert Lee, said it
would be better to boost investment education for retail investors rather than
exclude them from the services of licensed VASPs.

VASPs can facilitate transactions in cryptocurrencies, securities tokens, stablecoins, and (in theory) central-bank digital currencies, as well as traditional fiat currencies and securities.

The pivot

The Hong Kong government is not addressing crypto
directly, but through an update to its laws to control money laundering and terrorist
financing, which is in line with how the SFC has sought to frame crypto among
global securities regulators. The proposals stem from a circular issued jointly
by the SFC and the Hong Kong Monetary Authority in January 2022 seeking industry
feedback.

The bill’s reading took place on 19 August
but the minutes were released on 20 September. They cite multiple officials
supporting the expansion of the licensing regime to include retail.

Under questioning from LegCo members, SFC
officials said they would conduct a public consultation on whether
virtual-asset service providers (VASPs) should be allowed to service retail
investors.

The SFC also told LegCo, however, that it
would continue to regulate against offshore collective investment schemes or
initial coin offerings that were pitched to Hongkongers.

Another topic of debate was non-fungible
tokens (NFTs). Officials from the Financial Services and the Treasury Bureau said
that so long as NFTs were used as collectibles, they did not meet the definition
of a virtual asset. However, if NFTs were used for payments or as investment
instruments – regardless of how they are marketed – they would have to be
considered collective investment schemes, similar to a mutual fund.

The LegCo minutes also confirm the SFC’s view
that any securities token offering (ie, a security represented in digital form)
requires SFC approval before listing. This means meeting conventional
requirements such as third-party custody, explaining the role of involved parties
(eg sponsor banks, brokers, etc), and details of the offering – plus the
requirement unique to virtual assets that the exchange explain the code of the
underlying asset.

The FSTB was represented by May Chan, deputy
secretary, and Justin To, principal assistant secretary.

Julia Leung, deputy CEO, represented the
SFC, along with Elizabeth Wong, director of licensing and head of its fintech
unit.