Hong Kong's regulators are looking to foster the young industry, which means setting some house rules.
Hong Kong has tended to take a largely hands-off approach to cryptocurrency regulation so far, preferring the strategy of observing and understanding rather than rushing into a knee-jerk reaction.
This relative lack of interference has seen it become a popular destination for cryptocurrency companies, especially those pushed away from China's mainland by government opposition to cryptocurrencies. At the same time, side-effects of this hands-off approach, such as exempting cryptocurrency from capital gains taxes, has seen a massive influx of cryptocurrency investors and firms.
It has also made more active efforts elsewhere, such as expedited immigration for blockchain-related job seekers.
Generally, the most limiting crypto law to emerge in Hong Kong so far might be that cryptocurrencies that qualify as securities will be regulated as such, similar to what's been decided in many other countries.
Overall, Hong Kong has enjoyed a close and fruitful relationship with cryptocurrencies and blockchain technology for years now. And now it looks like Hong Kong is ready to ask key crypto industry players if they want to move into a regulatory sandbox together.
There's no place like sandbox
A statement from the Hong Kong Securities and Futures Commission (SFC) on 1 November issued new guidance on regulatory standards and announced that the commission was exploring a conceptual framework for crypto exchange regulation.
This can be boiled down to two main points,writes Zheping Huang at theSouth China Morning Post .
The first is that all funds that invest more than 10% of their portfolios in crypto-assets will be under the SFC's umbrella and are required to deal with institutional investors only. This will apply regardless of whether the cryptocurrencies they invest in are classified as securities.
The second, more tentative, proposal is that cryptocurrency exchanges will need some kind of licensing scheme.
Right now, the statement says, "many investors in virtual assets are left unprotected by the conventional approach where financial products are classified as 'securities' or 'futures contracts'. The SFC has decided to adopt a way forward which will bring a significant portion of virtual asset portfolio management activities into its regulatory net."
The working proposal right now is that exchanges will voluntarily enter the regulatory sandbox if they want to be licensed and regulated. Among other things, this testing ground means exchanges will only be allowed to serve professional, institutional investors rather than retail consumers.
After taking stock and learning more from the sandbox, further developments might be expected, but there is no specific timetable for this yet.
"I don't think regulators get the credit they deserve, as they are typically more knowledgeable about cryptos than regular bankers," said PwC fintech and crypto lead Henri Arslanian, at the Refinitiv Pan Asian Regulatory Summit, which ran from 9-10 October.
Part of this is understanding that cryptocurrency can't be regulated out of existence and might not fit the mould of traditional financial instruments, the South China Morning Postnoted a week later after the conference – and a week before the now-revealed SFC statement.
The overarching goal is to keep monitoring cryptocurrencies and digital assets, while embracing blockchain technology to support economic growth in Hong Kong, explained Joseph Chan, Hong Kong Under Secretary for Financial Services and the Treasury, at Refinitiv.
"Crypto will possibly be a concept that people may never wrap their head around, but it's not necessary, just like people who use Gmail don't need to understand how SMTP works, as long as the service offered is reliable, demonstrably cheaper and more efficient than the system they were using before," said Luis Buenaventura of Bloom.Solutions to the crowd at the conference.
"If there is good regulation to help encourage innovation, you will see changes happen. This is how regulators can lead innovation in this space," said Angelina Kwan, COO of Hong Kong-basedBitMEX.
"It will boost investor protection and hence attract more mainlanders to trade cryptocurrency assets in Hong Kong," agreed Gary Cheung, chairman of the Hong Kong Securities Association. "This will help Hong Kong to be among the top cryptocurrency trading centres worldwide because proper regulation is very important for attracting the big players."
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.
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