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South Korea: Exploring the New Virtual Asset Accounting and Disclosure Guidelines

South Korea: Exploring the New Virtual Asset Accounting and Disclosure Guidelines

South Korea has recently taken a significant step towards enhancing the transparency and accountability of virtual asset issuers and operators.

The country’s financial authorities have approved the ‘Virtual Asset Accounting Supervision Guidelines‘, which provide clear and consistent rules for the accounting and disclosure of virtual assets.

These guidelines apply to all externally audited companies from January 1 and aim to address the confusion and uncertainty that have plagued the virtual asset industry.

What are the Virtual Asset Accounting Supervision Guidelines?

The Virtual Asset Accounting Supervision Guidelines are a set of authoritative interpretations that reasonably apply the current accounting standards (IFRS, etc.) to the specific characteristics of virtual assets.

They are not new accounting standards but rather a way to clarify and harmonize the existing ones. They are mandatory for both companies applying the Korean International Financial Reporting Standards (K-IFRS) and the General Accounting Standards (K-GAAP).

The guidelines cover various aspects of virtual asset accounting, such as:

  • The recognition of profits and assets from the issuance and transfer of virtual assets
  • The classification and measurement of virtual assets held by companies
  • The accounting and disclosure of virtual assets entrusted by customers to virtual asset operators (exchanges)
  • The annotation disclosure of the main contents of the white paper, such as the size of virtual asset issuance and performance obligations, the status of internal reservations and free distribution, details of customer consignment virtual asset contracts, storage risks, etc.

The guidelines also specify the conditions and criteria for determining the accounting treatment of virtual assets, such as:

  • The fulfillment of all performance obligations stated in the white paper by the issuing company
  • The control rights over the virtual assets entrusted by customers to the operators
  • The purpose of acquiring the virtual assets and whether they are financial products or not

The guidelines are expected to improve the accuracy and reliability of the accounting information on virtual assets, as they will be verified by external auditors. They will also enhance the comparability and consistency of the financial statements of virtual asset issuers and operators, as they will follow the same rules and standards.

Why are the Virtual Asset Accounting Supervision Guidelines Important?

The guidelines are important for several reasons. First, they reflect virtual assets’ growing recognition and legitimacy as a new form of economic activity and value creation.

South Korea is one of the most active and innovative markets for virtual assets, with a high level of adoption and development. The guidelines show that the country is committed to fostering a healthy and sustainable virtual asset ecosystem by ensuring that the issuers and operators are accountable and transparent to the investors and customers.

Second, they address the challenges and risks that arise from the lack of accounting standards and disclosure practices for virtual assets. The virtual asset industry is still in its infancy, and there are many uncertainties and ambiguities regarding the accounting and reporting of virtual assets. This can lead to confusion, inconsistency, and manipulation of the accounting information, undermining the trust and confidence of the information users.

The guidelines provide a clear and comprehensive framework for the accounting and disclosure of virtual assets, which can reduce the information asymmetry and enhance the protection of the information users.

Third, they set a precedent and a benchmark for other countries and jurisdictions that are considering or developing their own accounting and disclosure rules for virtual assets.

The guidelines are based on the current accounting standards (IFRS, etc.), which are widely adopted and accepted worldwide. They also consider the specific characteristics and challenges of virtual assets, such as their volatility, complexity, and diversity.

The guidelines can serve as a reference and a model for other regulators and standard-setters seeking to establish or improve their own accounting and disclosure regimes for virtual assets.

How do the Virtual Asset Accounting Supervision Guidelines Compare to Other Countries?

They are among the most comprehensive and advanced worldwide, covering a wide range of virtual asset activities and transactions. They also provide detailed and consistent guidance for the accounting and disclosure of virtual assets and reflect the latest developments and trends in the virtual asset industry, such as the emergence of new types of virtual assets and business models.

Other countries and jurisdictions have different approaches and levels of regulation for the accounting and disclosure of virtual assets. Some of them, such as the US, Japan, and Australia, have issued specific accounting standards or guidance for virtual assets. Others, such as the UK, Canada, and Singapore, have adopted a more general or flexible approach. Some of them, such as China, India, and Russia, have not yet issued any accounting or disclosure rules for virtual assets.

The differences in the accounting and disclosure regimes for virtual assets worldwide can create challenges and opportunities for the virtual asset issuers and operators, as well as the investors and customers.

On the one hand, they can create complexity and inconsistency in the accounting and reporting of virtual assets, which can increase the costs and risks for the information users. On the other hand, they can also create diversity and innovation in the accounting and reporting of virtual assets, enhancing the value and utility of the information users.

What are the Implications and Future Prospects of the Virtual Asset Accounting Supervision Guidelines?

The guidelines are a significant milestone for the virtual asset industry in South Korea and beyond. They represent a positive and proactive response to the growing demand and need for transparency and accountability in the virtual asset ecosystem. They also demonstrate the leadership and vision of the South Korean financial authorities in regulating and developing the virtual asset industry.

They are expected to have various implications and impacts on the virtual asset issuers, operators, investors, and customers.

For the issuers and operators, the guidelines will require them to improve their accounting and disclosure practices and comply with the rules and standards set by the guidelines. This may entail additional costs and efforts, but it may also bring benefits such as enhanced reputation, trust, and competitiveness.

For the investors and customers, the guidelines will provide them with more accurate and reliable information on the virtual assets they are interested in or involved with. This may increase their confidence and satisfaction, but it may also raise their expectations and demands.

They are also likely to influence and shape the future of the virtual asset industry, both in South Korea and globally. The guidelines may encourage more innovation and development in the virtual asset industry, as they provide a clear and supportive regulatory environment for virtual asset issuers and operators.

The guidelines may also foster more collaboration and cooperation in the virtual asset industry, as they create a common and consistent accounting and disclosure framework for the virtual asset issuers and operators. The guidelines may also inspire and motivate other countries and jurisdictions to follow suit and adopt or improve their own accounting and disclosure rules for virtual assets.

How does the National Tax Service’s Decision Affect the Virtual Asset Holders?

Another important development in the regulation of virtual assets in South Korea is the National Tax Service’s decision to exclude the cases where virtual assets are held through non-custodial, decentralized virtual asset wallets such as cold wallets (offline wallets) from overseas financial account reporting.

This decision was announced on October 30, 2023, as an official interpretation of the law after some confusion and controversy over whether virtual asset wallets created by overseas corporations such as Ledger and Metamask had to be reported.

The National Tax Service explained that overseas business operators only provide programs to store and store personal encryption keys, etc., and do not have control over them, so they are not involved in selling, buying, exchanging, or holding virtual assets in wallets such as cold wallets.

Therefore, holding virtual assets through such wallets does not constitute a foreign financial account and is not subject to reporting pursuant to Article 53 of the ‘Act on International Tax Adjustment’.

This decision applies to cases where virtual assets are held in a personal wallet created through devices provided and sold by an overseas virtual asset wallet business, and the value of the virtual assets exceeds 500 million won.

Starting in 2023, the National Tax Service will include virtual assets as a target for reporting overseas financial accounts, and those holding more than 500 million won will be required to report them to the National Tax Service. However, this requirement will not apply to the virtual assets held in non-custodial, decentralized virtual asset wallets.

This decision has significant implications for the virtual asset holders, as it reduces the regulatory burdens and costs for them. It also recognizes the difference between centralized and decentralized virtual asset wallets and the degree of control and involvement of overseas business operators.

This decision could potentially encourage the use of non-custodial, decentralized virtual asset wallets, as they offer more security, privacy, and autonomy for the users. However, this decision also raises some challenges for the regulators, as it limits their access and oversight of the virtual assets held in such wallets. This decision might also create some inconsistency and complexity in the reporting and taxation of virtual assets, depending on the type and location of the wallets.

How does the Financial Services Commission’s Proposal Affect the Virtual Asset Market?

Another important development in regulating virtual assets in South Korea is the Financial Services Commission’s proposal to amend its credit finance act, which aims to effectively prohibit local citizens from purchasing cryptocurrencies using credit cards.

The regulator said this proposal was announced as a measure to limit the crypto traders from buying crypto on foreign crypto exchanges.

The FSC explained that the main reason for this new amendment is to prevent the illegal outflow of domestic funds, money laundering, and the encouragement of speculative behavior, which pose risks to the financial stability and security of the country. The FSC also noted that using credit cards to purchase cryptocurrencies is not common in South Korea, as most transactions are done through bank accounts or prepaid cards.

The proposal plans to collect public feedback on the amendment until February 13. According to Yonhap News Agency, it is expected to be reviewed and voted on with the aim of implementation in the first half of 2024.

This proposal by the FSC has significant implications for the virtual asset market, especially for cross-border transactions and exchanges. By prohibiting the use of credit cards to purchase cryptocurrencies, the FSC intends to reduce the demand and supply of foreign cryptocurrencies in the domestic market and discourage traders from using foreign platforms that may have lower regulatory standards or higher risks.

However, this proposal may also have unintended consequences, such as driving the traders to use alternative methods or channels to access foreign cryptocurrencies, such as peer-to-peer platforms, decentralized exchanges, or offshore accounts.

The FSC’s proposal also reflects the increasing scrutiny and regulation of the virtual asset market by the South Korean authorities, who are trying to balance the promotion and protection of the virtual asset industry.

The proposal follows the recent enactment of the ‘Act on Reporting and Using Specified Financial Transaction Information’, which requires the virtual asset operators to register and comply with the anti-money laundering and customer protection rules. The proposal also precedes the planned introduction of the capital gains tax on virtual asset income, which is scheduled to take effect from January 1, 2025.

Their proposal is another example of how South Korea is leading and pioneering in regulating and developing the virtual asset industry. It shows that the country is concerned not only with the accounting and disclosure of virtual assets but also with the taxation and reporting of virtual assets. It also shows that the country is willing and able to adapt and respond to the changing and evolving nature of virtual assets and to balance the needs and interests of the various stakeholders in the virtual asset ecosystem.

The Bottom Line

The Virtual Asset Accounting Supervision Guidelines are not the end but the beginning of a new era for the virtual asset industry. They are a dynamic and evolving document that will be updated and revised as the virtual asset industry grows.

The South Korean regime is comprehensive. I have also briefly covered tax reporting, which works hand in hand with the accounting supervision guidelines. To close up the loop, there is also a proposed amendment to their Credit Finance Act. It proposes to ban local citizens from using credit cards to purchase cryptocurrencies, with concerns over illegal outflows of funds and money laundering and encouraging speculation leading to the decision, with the goal of implementation in the first half of 2024. Both inflows and outflows are taken into consideration. I would expect to see tougher rules for projects and also exchanges in months to come.

They are also a challenge and an opportunity which will test and reveal the potential and performance of the virtual asset industry. They are, above all, a sign and a symbol which show that the virtual asset industry is maturing and advancing and that South Korea is leading and pioneering in this field.

 

Source: https://www.techopedia.com/south-korea-exploring-the-new-virtual-asset-accounting-and-disclosure-guidelines

FAQ

What do the Virtual Asset Accounting Supervision Guidelines entail?

The Virtual Asset Accounting Supervision Guidelines are a set of rules applied to the accounting and disclosure practices concerning virtual assets in South Korea. These guidelines encompass various aspects such as profit recognition, asset classification, and the handling of virtual assets entrusted to operators.

Why are the Virtual Asset Accounting Supervision Guidelines crucial?

The guidelines play a vital role in establishing transparency and accountability within the virtual asset industry. They address uncertainties and risks associated with the lack of clear accounting standards, fostering trust and confidence among investors and customers.

How do the Virtual Asset Accounting Supervision Guidelines compare internationally?

Compared to other countries, South Korea’s guidelines are comprehensive and advanced. While some nations have specific accounting standards for virtual assets, others have a more flexible approach. These disparities create both challenges and opportunities for the industry and its stakeholders globally.

What implications do the Virtual Asset Accounting Supervision Guidelines have for stakeholders?

The guidelines are expected to impact issuers, operators, investors, and customers significantly. They require improved accounting practices, potentially leading to enhanced reputation and trust for issuers and operators. Investors and customers will benefit from more reliable information about the virtual assets they engage with.

How does the recent National Tax Service decision affect virtual asset holders in South Korea?

The National Tax Service's decision specifically excludes certain decentralized virtual asset wallets from overseas financial account reporting requirements. This decision reduces regulatory burdens for holders using such wallets, offering increased security and autonomy. However, it poses challenges for regulators in overseeing assets held in decentralized wallets.

These questions aim to address the key aspects and implications of South Korea’s Virtual Asset Accounting Supervision Guidelines, providing valuable insights for individuals seeking information about this evolving industry.

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Asset Tokenization’s Revolutionary Impact On Finance

Asset Tokenization’s Revolutionary Impact On Finance

In the fast-paced world of finance and investment, a groundbreaking concept is poised to transform the industry as we know it – asset tokenization. This transformative phenomenon is not a fleeting trend but a monumental shift with the potential to reshape the financial landscape for years to come. While the prices of major cryptocurrencies like Bitcoin and Ethereum have experienced significant fluctuations from their historic peaks, real-world assets have been experiencing a remarkable surge.

In 2023 alone, these tangible assets have exhibited an astounding growth rate of 500%. This surge in real-world assets is not just a momentary blip; it signifies the emergence of one of the most dynamic and promising growth markets for the future. The spotlight on asset tokenization couldn’t come at a better time, as traditional financial markets face new challenges and disruptions, making innovation and evolution imperative.

The Boston Consulting Group (BCG) has made a bold prediction, stating that by 2030, as much as 10% of the global Gross Domestic Product (GDP) could be tokenized. In simpler terms, this implies that assets with a combined value of an astonishing USD 16 trillion could be represented as digital tokens in the most conservative scenario. However, considering the best-case scenario, this value soars to an eye-watering USD 68 trillion. This equates to an anticipated 27-fold increase over the next 6.5 years in the base case and the staggering potential for a 113-fold expansion in the best-case scenario.

These figures are nothing short of revolutionary, promising a financial landscape in which the majority of assets are represented in digital token form, ensuring a more efficient, transparent, and accessible financial system. This transformation extends well beyond mere digitization; it encompasses the democratization of finance, offering a broader spectrum of investors the opportunity to engage in traditionally illiquid and exclusive markets.

The Promise of Tokenization: Key Insights From Industry Reports

A closer look at current industry reports reveals a compelling narrative emphasizing asset tokenization’s transformational potential. BCG’s Tokenization Report from 2022 provides valuable insights into the world of global illiquid assets, suggesting that this segment could evolve into a staggering $68 trillion business opportunity by 2030.

These numbers affirm that the potential of asset tokenization is not merely theoretical but supported by substantial data and research. BNY Mellon’s Institutional Investing 2.0 report in 2023 presents a remarkable statistic that cannot be ignored – an astounding 91% of institutional investors express a strong interest in investing in tokenized products. This overwhelming enthusiasm among institutional investors underscores a significant shift in the financial industry’s landscape, signifying their recognition of the potential benefits and opportunities of asset tokenization. Porsche Consulting’s Security Tokenization report in 2023 serves as a clarion call for financial institutions to take immediate action. It emphasizes the need for these institutions to actively develop entry strategies while adapting to the learning curve of digital assets.

The report’s urgency underlines the dynamic nature of the asset tokenization landscape and the need for businesses to adapt swiftly to remain competitive.

EY’s Asset Tokenization report in 2023 further strengthens the case for asset tokenization by revealing that 47% of hedge funds and institutional asset managers are eager to embrace this innovative approach. This statistic demonstrates that asset tokenization is not an isolated phenomenon but rather a movement gaining momentum across the spectrum of financial players.

Moreover, Roland Berger’s Tokenization of RWAs report in 2023 paints a vivid picture of a future in which tokenization will revolutionize how we fund, trade, and manage assets.

The report further suggests that the impact of asset tokenization will be far-reaching, disrupting nearly every industry and sector in modern society. This insight underscores asset tokenization’s profound and wide-ranging implications on various aspects of our lives.

Concrete Initiatives: The Pioneers of Asset Tokenization

While predictions and reports provide a compelling vision, the tangible initiatives currently reshaping the financial landscape offer a practical glimpse into the transformative potential of asset tokenization. Prominent players in the financial world are already diving headfirst into this innovative domain.

UBS, a global financial powerhouse, has launched a Tokenized Money Market Fund. This initiative illustrates how traditional financial institutions actively explore and implement asset tokenization to offer new investment opportunities. By embracing tokenization, UBS is paving the way for other financial institutions to follow suit, further bolstering the credibility and acceptance of this innovative approach. JP Morgan, a banking giant with a storied history, has launched its Onyx Digital Asset Platform. This platform has generated a staggering $300 billion in trading volume, showcasing the practical application and scale of asset tokenization. JP Morgan’s move into asset tokenization marks a significant turning point in the industry, underscoring the technology’s potential to facilitate efficient and secure trading.

Franklin Templeton, a renowned investment management firm, has introduced its own Tokenized Money Market Fund with assets under management (AuM) exceeding $270 million. This substantial AuM figure demonstrates that asset tokenization is not confined to theoretical discussions; it is attracting real investments from traditional financial entities. Franklin Templeton’s initiative signals that the financial world’s interest in asset tokenization goes beyond exploration; it is a tangible investment avenue.

Siemens, a global leader in industrial technology, has issued a Tokenized Bond valued at €60 million. This marks a significant foray into the world of asset tokenization by a major non-financial corporation. Siemens’ move exemplifies how asset tokenization transcends industry boundaries and is adopted by companies seeking to leverage the benefits of blockchain-based solutions.

The government of Hong Kong has also embraced asset tokenization with its Tokenized Green Bond, which is worth HK$800 million. This demonstrates that asset tokenization is not limited to private enterprises; even governments are recognizing its potential in raising funds and promoting sustainable projects. Hong Kong’s pioneering initiative provides a model for other governments to explore similar possibilities in financing projects through tokenization.

Corporate Titans Embrace The Digital Revolution

More companies such as SAP, Vodafone, E.ON, Telekom, BASF, Bayer, Shopify, Shell, and Microsoft have established innovation departments dedicated to exploring and harnessing the potential of tokenization. This surge of interest from traditional industry leaders signifies a broader trend: the adoption of blockchain-based solutions in industries where the technology was once considered an outlier.

SAP, a global leader in enterprise software, recognizes the transformative potential of blockchain technology and has embarked on a journey to explore its applications. By establishing innovation departments dedicated to tokenization, SAP is actively engaging with this technology. This forward- thinking approach by SAP is indicative of how traditional technology companies are leveraging blockchain to remain at the forefront of innovation.

Telecommunications giants like Vodafone and Telekom are also venturing into the world of asset tokenization. Their active engagement in this domain signifies the industry’s recognition of the potential for blockchain and tokenization to revolutionize their operations. As telecommunication providers explore the integration of blockchain technology into their business models, they open up new avenues for secure data management and financial transactions.

Energy companies such as E.ON and Shell are not lagging either. With innovation departments dedicated to tokenization, they are acknowledging the transformative power of blockchain in the energy sector. Blockchain can streamline energy trading, enhance supply chain transparency, and enable decentralized energy markets. These companies understand the importance of staying ahead in the rapidly evolving energy landscape.

Chemical industry leaders like BASF and Bayer are also actively exploring asset tokenization. Their initiatives signify a broader shift in the chemical industry towards embracing blockchain technology. By developing innovation departments dedicated to tokenization, these companies aim to unlock new efficiencies, streamline supply chains and enhance transparency in their complex operations.

Retail giant Shopify is another corporate heavyweight embracing the digital revolution. With an innovation department focused on tokenization, Shopify is positioning itself at the forefront of the evolution of e-commerce. Blockchain and tokenization have the potential to enhance payment processing, supply chain management, and e-commerce security, making them a valuable addition to the company’s portfolio of offerings.

The inclusion of industry behemoths like Microsoft in this lineup is significant. As a leader in the technology sector, Microsoft’s commitment to tokenization signifies the widespread adoption of blockchain technology by major corporations. With a dedicated innovation department, Microsoft is actively exploring the applications of asset tokenization in various facets of its business.

The Critical Timing And Regulatory Frameworks

The growth and acceptance of asset tokenization are intrinsically tied to the establishment of comprehensive regulatory frameworks. These regulatory guidelines are essential to ensure transparency, security, and investor protection. They play a pivotal role in encouraging institutional investors to venture into the blockchain-based asset space, thereby fostering industry growth.

One significant regulatory development is the Electronic Securities Act (eWpG) in Germany, set to take effect in 2024. This legislation provides a robust legal foundation for the issuance and transfer of electronic securities. By facilitating the tokenization of assets, the eWpG offers a competitive edge to Germany as a business hub. This legal framework not only ensures investor protection but also promotes innovation and investment in the digital asset space.

On a broader scale, the European Union’s Markets in Crypto Assets Regulation (MiCA), also scheduled for implementation in 2024, sets standards for the regulation and oversight of crypto assets and digital asset service providers. MiCA’s far-reaching implications encompass the entire EU region, establishing a consistent framework that fosters investor confidence and operational transparency. These regulatory developments are positioning Europe as a favorable destination for digital asset-based businesses and investments. As a result, many financial service providers from the United States and Asia are considering relocating their operations to Europe or establishing new headquarters on the continent. This relocation trend is a testament to the substantial competitive advantage that these regulatory frameworks offer to Europe’s business ecosystem.

Conclusion: A Promising Future For Asset Tokenization

In conclusion, the rise of asset tokenization represents a seismic shift in the world of finance and investment. It is not merely a theoretical concept; it is grounded in robust data and is supported by influential reports from industry leaders. The growth potential is staggering, with predictions of up to 10% of the global GDP being tokenized by 2030. The figures are awe-inspiring, with trillions of dollars of value expected to migrate to digital tokens over the next decade.

Key industry reports from renowned organizations like BCG, BNY Mellon, EY, Roland Berger, and Porsche Consulting all highlight the transformative potential of asset tokenization. They indicate a growing interest among institutional investors, hedge funds, and asset managers to embrace this innovative approach. The future foreseen in these reports is one where asset tokenization disrupts and revolutionizes the way we fund, trade, and manage assets across nearly every industry and sector. Concrete initiatives by financial institutions and corporations, as exemplified by UBS, Franklin Templeton, JP Morgan, Siemens, and the Government of Hong Kong, demonstrate the practical applications and scalability of asset tokenization.

Overall, the future of asset tokenization is promising. It offers a path towards a more transparent, efficient, and inclusive financial system. It democratizes investment opportunities, opening doors for a wider spectrum of investors. As these transformative trends continue to shape the financial landscape, asset tokenization is poised to become a cornerstone of the finance and investment industry, offering a unique blend of innovation and accessibility. It’s a future where traditional boundaries between industries blur, and financial assets find their digital form in the blockchain.

 

Source: https://techmalak.com/asset-tokenizationsrevolutionary-impact-on-finance/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Hong Kong’s Virtual Asset Trading Regulations, Explained

Hong Kong’s Virtual Asset Trading Regulations, Explained

Hong Kong’s new licensing regime for centralised virtual asset trading platforms (VATPs) is a significant development in the global push for cryptocurrency regulations. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) will have come into effect on June 1, requiring all VATPs operating in Hong Kong or targeting Hong Kong investors to obtain a license from the Securities and Futures Commission (SFC).

This new regime is a commendable step towards bringing virtual asset trading platforms under regulatory oversight. With the rapid growth of the cryptocurrency market, it is crucial to establish robust regulatory frameworks to protect investors and prevent money laundering. By requiring VATPs to be licensed, Hong Kong aims to ensure compliance with legal and regulatory requirements and promote the responsible operation of these platforms.

The transitional arrangements outlined in the circular provide a reasonable timeline for existing VATPs to apply for a license and review their systems and controls to meet SFC standards. VATPs that have been providing virtual asset services in Hong Kong before June 1, and can demonstrate a genuine business presence will be allowed to continue operating until May 31, 2024, without breaching licensing requirements. This transitional period allows these VATPs to adjust their operations and align with the regulatory framework while maintaining continuity for their existing clients.

The eligibility criteria for the transitional arrangements focus on factors such as incorporation in Hong Kong, physical office presence, central management and control, key personnel location, and genuine trading volume. These criteria ensure that VATPs with a significant and substantial presence in Hong Kong benefit from the transitional arrangements while preventing shell companies from exploiting the system.

Additionally, individuals performing regulated functions for pre-existing VATPs are also granted a transitional period unti 2024, without breaching licensing requirements. This allows individuals to continue their roles during the transition and ensure a smooth process for both the VATPs and their employees.

Importantly, VATPs that were not operating in Hong Kong before June 1, are not eligible for the transitional arrangements. This sends a clear message that operating without a license will be considered a criminal offense.

Eligibility for transitional arrangements

As mentioned above, to be eligible for the transitional arrangements, VATPs must have been providing a service in Hong Kong before June 1. The SFC will assess the following factors to determine if a VATP is operating a genuine business within Hong Kong: Incorporation; a physical presence; central management and control exercised by a physical staff; and a live operation with clients and a genuine trading volume.

Merely setting up a company or having “shell” operations in Hong Kong will not meet the eligibility criteria.

VATPs operating in Hong Kong before June 1

VATPs that have a meaningful and substantial presence in Hong Kong before June 1, known as pre-existing VATPs, can continue to provide a service in Hong Kong until 2024 without breaching the licensing requirements. This is possible through the non-contravention arrangement. However, pre-existing VATPs must apply for a license, comply with the SFC’s standards, and ensure their systems and controls meet the legal and regulatory requirements.

Individuals performing regulated functions for pre-existing VATPs

Individuals can perform regulated functions for pre-existing VATPs until 2024 without violating the licensing requirements. This is allowed under the non-contravention arrangement. However, it is essential for individuals to ensure they comply with the applicable regulations.

VATPs not operating in Hong Kong before June 1

VATPs that were not operating in Hong Kong before June 1 are not eligible for the transitional arrangements. These VATPs should refrain from engaging in any activities in Hong Kong or actively marketing their services to Hong Kong investors until they obtain a license from the SFC. Engaging in unlicensed activities is a criminal offense.

Individuals performing regulated functions for VATPs not operating in Hong Kong before June 1

Individuals who perform, or hold themselves out as performing, regulated functions for VATPs that were not operating in Hong Kong before June 1 are also not eligible for the non-contravention arrangement. Engaging in unlicensed activities in this scenario is a criminal offense.

It is crucial for all VATPs to understand that they must obtain a license from the SFC before commencing any business activities or marketing their services to Hong Kong investors.

Enforcement actions and licensing process

The SFC has the authority to take enforcement actions against VATPs that operate without a license or fail to comply with the licensing requirements. These actions may include criminal prosecution, fines, or other regulatory measures.

For VATPs that need to obtain a license, they must go through the licensing process outlined by the SFC. The process involves submitting an application, providing relevant documentation, and demonstrating compliance with the regulatory requirements. The SFC will assess each application on a case-by-case basis, considering factors such as the VATPs financial soundness, operational capabilities, and systems and controls for combating money laundering and terrorist financing.

Ongoing compliance obligations

Once licensed, VATPs are required to maintain ongoing compliance with the regulatory obligations set out by the SFC. These obligations include:

· Implementing robust systems and controls to detect and prevent money laundering and terrorist financing activities.
· Conducting customer due diligence, including KYC (know your customer) procedures, to verify their identities.
· Reporting suspicious transactions and maintaining proper record-keeping.
· Complying with relevant regulatory requirements, such as disclosure obligations, and licensing conditions.
· Cooperating with the SFC in inspections and providing necessary information and assistance.

VATPs should ensure that their compliance frameworks are adequate and up to date to meet these obligations.

Impact on the virtual asset trading industry

The introduction of the new licensing regime for VATPs in Hong Kong aims to enhance investor protection, safeguard the integrity of the market, and mitigate the risks associated with money laundering and terrorist financing. By establishing a robust regulatory framework, the SFC aims to foster the development of a healthy and sustainable virtual asset trading industry in Hong Kong.

VATPs operating in or targeting the Hong Kong market should carefully review the licensing requirements and ensure compliance with the new regime. It is advisable to seek legal and regulatory advice to navigate the licensing process effectively and maintain ongoing compliance with regulatory obligations.

Speaking to industry experts

I had an opportunity to speak to industry experts and how they look at the current framework.

Tony Tong, Chairman of the Hong Kong Blockchain Association, said: “I welcome the [new regulations] as this will create many new job opportunities for the regulated crypto industry in Hong Kong. The issuance system for [virtual asset trading platforms] in Hong Kong has opened for applications today. Hong Kong’s comprehensive regulatory framework for virtual assets follows the principle of ‘same business, same risks, same regulation,’ with the aim of providing adequate investor protection and managing major risks. This framework promotes sustainable development and supports innovation in the industry.”

Jay Hao, former Chief Executive Officer of OKX, holds a similar view. “Hong Kong has taken a giant leap towards taming the unruly world of virtual asset trading platforms by introducing a licensing regime. They have decided to bring law and order to the Wild West of cryptocurrency. This move is seen as a positive step towards regulation, which means we can all breathe a collective sigh of relief, or at least a regulated sigh. So, let’s raise our glasses to Hong Kong’s virtual asset licensing regime- a beacon of hope in a sea of crypto confusion. It’s a step towards a more regulated and secure future, where investors can trade virtual assets without constantly looking over their shoulders. It’s time to ride off into the sunset of virtual asset regulation, knowing that Hong Kong is paving the way towards a safer and more controlled cryptocurrency frontier.”

Bitverse’s founder Win is also positive and added that his solution would also help to increase trust among users. “We are extremely excited about Hong Kong’s positive stance towards cryptocurrencies and innovation.”

Bitverse is actively building the industry’s first web3 credit wallet, based on a high-security, highly scalable, and low Gas wallet core using MPC+AA technology, along with a web3 open credit protocol built on an AI+Oracle network. The web3 credit protocol, constructed on decentralized trusted network nodes, not only facilitates various project scenarios in acquiring customers quickly and at a low cost but also enhances product competitiveness through structured enhancements. Moreover, the mechanism of “credit mining” enables highly creditworthy users from the real world to earn greater profits, thereby genuinely attracting more B2B and B2C users to participate in the entire decentralized credit value network.

The deeming arrangement introduced under the AMLO offers an opportunity for pre-existing VATPs and proposed licensed individuals to be deemed licensed from June 1, if they meet specific conditions outlined by the SFC. This provision allows for a smooth transition and avoids disruption in the operation of VATPs and the roles of licensed individuals.

The implementation of the new licensing regime and the transitional arrangements demonstrates Hong Kong’s commitment to the virtual asset trading industry. By bringing VATPs under the oversight of the SFC, the government aims to protect investors, enhance market integrity, and mitigate the risks associated with virtual asset trading. The SFC’s supervisory and disciplinary powers, along with the adherence to regulatory requirements, will ensure a more transparent and accountable virtual asset trading environment.

While the new licensing regime is a significant step forward, ongoing monitoring and continuous adaptation of regulations will be essential. The cryptocurrency market is evolving rapidly, and regulatory frameworks must keep pace to address emerging risks and challenges effectively.

Overall, Hong Kong’s new licensing regime for VATPs is a positive development for the virtual asset trading industry. It sets a precedent for other jurisdictions to follow, fostering greater trust and confidence in the market. As the global cryptocurrency landscape continues to evolve, regulatory efforts like these will play. It will be interesting to observe how Hong Kong’s stance on cryptocurrencies unfolds in the coming months and how it affects the local economy and regulatory landscape.

 

Source: https://intpolicydigest.org/hong-kong-s-virtual-asset-trading-regulations-explained/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
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