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How Hong Kong’s stricter crypto regulations aim to boost investor confidence

How Hong Kong’s stricter crypto regulations aim to boost investor confidence

Hong Kong has been a major financial hub for many years, and in recent years, it has shown increasing interest in blockchain and cryptocurrency technologies. The government of Hong Kong has indicated its support for the industry’s development, and many initiatives are underway to help create a favorable environment for crypto and blockchain businesses.

Hong Kong has a well-established regulatory framework for financial services, which has helped attract many crypto and blockchain companies. The Hong Kong Monetary Authority (HKMA) has launched several initiatives to support the development of blockchain and digital currencies. For example, the HKMA is working on developing a central bank digital currency (CBDC), and has also launched a blockchain-based trade finance platform.

Many active blockchain and cryptocurrency communities in Hong Kong provide support and resources for businesses and developers in the industry. Many events and conferences related to blockchain and cryptocurrency in the city help create networking opportunities and promote the industry’s growth.

In December 2022, the Legislative Council of Hong Kong passed an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), introducing a licensing regime for virtual asset service providers (VASPs).

Hong Kong’s New Regulatory Framework

Hong Kong has recently implemented new regulatory frameworks for cryptocurrency trading and services. The updated Anti-Money Laundering Ordinance is in line with the Financial Action Task Force (FATF) Recommendation 15, which requires virtual asset service providers (VASPs) to adhere to anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations.

The new regulations require all VASPs operating in Hong Kong to obtain a license from the Securities and Futures Commission (SFC). Without a license, individuals and businesses cannot offer VA services or declare themselves as a provider.

The Hong Kong government closely regulates all activities related to the provision of virtual asset (VA) services. The term “VA services” encompasses a broad range of electronic services that include, but are not limited to:

  • (a) Offering virtual assets for sale or purchase regularly, resulting in a binding transaction; regularly introducing or identifying persons to other parties with the purpose of negotiating or concluding virtual asset transactions that are binding or with the reasonable expectation of doing so;
  • (b) Possessing direct or indirect control over client money or client virtual assets in the provision of such services.

It is important to note that crypto trading platforms that allow trading in financial products such as securities and futures contracts are not subject to the new licensing regime, as they are already regulated under the Securities and Futures Ordinance. Another thing to note is that the new licensing requirements extend to all crypto exchanges registered in Hong Kong under the Companies Ordinance, including those based outside of Hong Kong that actively target Hong Kong citizens in their marketing efforts.

Prohibition on Unlicensed VA Service Providers

The amended Ordinance also prohibits unlicensed persons from performing regulated functions related to the business of providing VA services. Such functions may include the buying or selling of virtual assets, managing virtual asset portfolios, and providing virtual asset custodian services.

Unlicensed individuals or businesses cannot advertise VA services in Hong Kong. The SFC can take enforcement actions against unlicensed entities, including issuing fines and revoking licenses.

Impact on VASPs

The new regulations have significant implications for VASPs operating in Hong Kong. The licensing process is rigorous and requires VASPs to demonstrate compliance with AML/CFT requirements. Licensed VASPs are subject to ongoing supervision and monitoring by the SFC.

The licensing process requires VASPs to provide detailed business information, including ownership structure, management team, and risk management systems. VASPs must also conduct customer due diligence and transaction monitoring to detect and report suspicious activities.

VASPs that fail to comply with the regulatory requirements may face severe consequences, including fines, license revocation, and reputational damage. The regulations aim to promote a safe and stable virtual asset market in Hong Kong and protect the interests of investors and consumers.

Benefits of the New Regulatory Framework

The new regulatory framework for virtual asset services in Hong Kong has several benefits for VASPs and investors. Firstly, the regulations provide clarity and certainty about the legal and regulatory environment for virtual asset services in Hong Kong. This clarity can help attract more investors and businesses to the market.

Secondly, the regulations promote transparency and accountability in the virtual asset market. Licensed VASPs must maintain proper records, conduct regular audits, and report suspicious activities to the relevant authorities. These requirements can help deter fraud and other illicit activities in the market.

Thirdly, the regulations help promote a level playing field for all VASPs operating in Hong Kong. The licensing process ensures that all VASPs meet the same high standards and are subject to the same regulatory requirements. This can help create a more competitive and fair market for virtual asset services in Hong Kong.

How to get the license?

Crypto businesses must obtain a license from the Securities and Futures Commission, the regulatory body for securities and futures markets. To get a license, the business must pass a ‘fit and proper’ test that involves criminal background checks, AML/CFT performance history, financial standing, educational or other qualifications, reputation, experience, character, reliability and financial integrity of the person. The business must also apply for approval of the premises to keep records or documents required under the Ordinance. Additionally, each director of the applicant and the ultimate owner must be determined as ‘fit and proper’ to be associated with providing the VA service.

To meet the regulatory requirements of the new Ordinance, licensed crypto businesses must introduce AML/CTF measures, including customer due diligence, transaction monitoring and record-keeping, screening clients against international sanctions and watchlists for PEP status, and screening clients in adverse media. They must also comply with Travel Rule requirements and appoint an eligible auditor within one month after becoming a licensed provider. Furthermore, they must prepare financial statements and other documents for prescribed periods and submit them with the auditor’s report to the Commission within four months after the end of the financial year to which they relate.

The licensed provider must also submit an annual return to the Commission and pay a prescribed fee within one month after each anniversary of the license’s grant date. Finally, the licensed person must notify the Commission in writing of any change in information that the licensed person or ultimate owner has provided under the requirements of the Ordinance, including intended cessation of business or intention to change the address at which it proposes to provide any VA service.

Final words

The SFC will have broad powers to supervise AML/CTF and regulatory compliance by licensed VASPs, including imposing sanctions. Businesses that operate without a license or violate AML rules can face significant fines and imprisonment for senior management. In the case of fraudulent activities or deception involving virtual assets, fines can reach up to 10,000,000 HKD (1,277,000 USD) and imprisonment for up to 10 years.

The new regulations will come into effect on April 1, 2023. Some provisions, including licensing requirements, will go into effect on June 1, 2023. Businesses are advised to start preparing for the new regulations as soon as possible and reviewing their AML/CTF policies and controls to identify potential gaps in the requirements.

Overall, implementing these new regulations is expected to attract more institutional investors to the Hong Kong cryptocurrency market, as they will have greater confidence in the safety and legitimacy of the industry. The move also brings Hong Kong’s cryptocurrency regulations in line with global standards and best practices.

Hong Kong has experienced significant events since 2019 that have had a major impact on the city and its people. Hong Kong has faced many challenges, from protests and political unrest to the COVID-19 pandemic to the introduction of national security law and political changes. I hope the city’s new crypto agenda pushes a critical step forward. By embracing the opportunities of new technologies, protecting investors, and promoting transparency, Hong Kong can continue to be a leader in the global financial industry.

Some “#AnndyLian Food for Thought” before I end this article:

The Japanese government recognized early on that allowing retail investors to participate in the cryptocurrency market could help drive adoption and promote innovation. My question is: “Will Hong Kong follow Japan’s approach to allowing retail investors to trade cryptocurrencies in a regulated environment?”

This could be one of their selling points. I am eager to find out.

 

Source: https://cryptoslate.com/op-ed-how-hong-kongs-stricter-crypto-regulations-aim-to-boost-investor-confidence/

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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China investors call it quits as Xi, ‘zero COVID’ sap confidence

China investors call it quits as Xi, ‘zero COVID’ sap confidence

Taipei, Taiwan – For months, Singaporean investor Anndy Lian has been selling off Chinese stocks to reduce his portfolio’s exposure to the world’s second-largest economy.

Once a regular investor in Chinese tech companies, Lian now views  China as an increasingly risky bet as the country’s autocratic turn under Xi Jinping and ongoing “zero COVID” lockdowns cast a cloud over the economy.

“I started gradually lowering my exposure since last year as that was when the downward trend became obvious, but I’ve increasingly sold off my holdings this year as things have gotten worse,” Lian told Al Jazeera,

“The instability is my biggest concern as an investor. The overall environment in China is uncertain right now, and it goes way beyond the financial sector.”

Lian is among a growing number of international investors who are pulling back from China after years of record inflows.

Overseas investors shed more than $150bn in China-based yuan-denominated assets in the first quarter of this year, the largest decline on record. Chinese bonds alone saw a $61bn sell-off between February and May. Roughly $300bn could exit the country this year, more than double last year’s outflow of $129bn, according to forecasts by the Washington-based Institute of International Finance.

Overseas investors shed more than $150bn in China-based yuan-denominated assets in the first quarter of this year, the largest decline on record [File: Qilai Shen/Bloomberg]

China’s economy barely avoided contraction in the second quarter, expanding just 0.4 percent, a dramatic decline from 4.8 percent growth during the first quarter.

Lian said the effects of last year’s crackdown on the tech sector, which decimated the stock prices of major players such as Alibaba, Tencent and Didi, are still being felt.

In one of the most prominent episodes of China’s “techlash”, ride-hailing app Didi lost 80 percent of its market cap – more than $60bn in value – within a year of going public after Chinese regulators accused the firm of violating data security rules. Facing mounting scrutiny at home, Didi delisted itself from the New York Stock Exchange last month.

“Chinese tech companies may be great performers, but they need to be in the best possible environment to achieve the best returns,” Lian said.

“If you look at the tech crackdown last year, and how the value of a whole company like Didi can be virtually wiped out, it makes you nervous.”

Ride-hailing app Didi lost 80 percent of its market cap after Chinese regulators accused the firm of violating data security rules

Other investors, though, see room to adapt to Beijing’s tightening grip on the economy.

“Investors understand what the goals of the tech crackdown were, taking aim at inequality and related social issues, so I think that makes the sector still very investible,” Ker Gibbs, former president of AmCham Shanghai and a veteran China investor, told Al Jazeera.

“There’s always policy risk in China, and regulation moves much faster than in the US. That is something people must be accustomed to.”

Nonetheless, Gibbs said the lingering uncertainty around the Chinese economy has been a significant concern.

“For me, it’s all about the uncertainty of the lockdowns and zero-COVID and not knowing when it will all end,” he said. “Investors just can’t see where it’s headed. People don’t know what environment they’re in now.”

Beijing has given mixed signals to investors about what to expect.

While Chinese officials have promised to tweak pandemic restrictions for the sake of the economy, Xi has repeatedly ruled out shifting from “zero COVID” to living with the virus.

China has opened up new offerings of asset classes to foreign investors but also stepped up supervision of institutional investors in the country.

This month, authorities announced the launch of Swap Connect, a mechanism to allow overseas investors to participate in mainland China’s financial derivatives market.

Meanwhile, more than 80 Shanghai- and Shenzen-listed exchange-traded funds will be made available to investors in Hong Kong. Beijing has also announced it will substantially raise its currency swap with the territory to new levels to provide extra liquidity for the offshore yuan.

“There is a dramatic opening of China’s securities, insurance broking, and wealth management markets going on,” Duncan Clark, founder of Beijing-based investment advisory firm BDA, told Al Jazeera.

“The transition isn’t going to be easy, though, from N-shares [shares of Chinese companies listed in New York] to onshore Chinese listings or even Hong Kong listings. Investor confidence is shaken and Chinese issuers can’t meet face to face,” Clark added.

Lian said Swap Connect is unlikely to turn the tide of investors exiting the Chinese market.

“On the one hand, it may help attract new investors to China, but I doubt it will do much to retain those who are already moving away, and that is a bigger issue,” he said.

“It will take time to turn the tide. There will probably be a two or three-year trial phase until they get the settings right. Another question investors will ask is ‘How do we exit?’ Can they be assured they can withdraw their stock when they wish? We will have to see what the final details are when it comes out.”

Even as Beijing courts more foreign investors, it is also seeking to monitor them more closely. Last month, the China Securities Regulatory Commission formally issued guidelines mandating the establishment of communist party cells within global hedge funds that operate in China.

“I think it will be problematic, but mostly because of the optics back at headquarters in the US,” Gibbs said, noting that many hedge fund managers specifically asked him about the measures at a recent conference he attended in San Francisco.

“Those of us who operate in China long term understand the role the party plays and the importance of aligning with their goals for society. Actually, the conversations they have with you are often about issues of social compliance, like labour standards or equality, which is not necessarily a bad thing,” Gibbs added, describing the scrutiny as comparable to “Chinese-style ESG [Environmental, social and governance]”.

“But in the US, we see the CCP [Chinese Communist Party] and think of the whole party apparatus, and so the idea of a party official in the boardroom sounds much scarier from an American perspective.”
China’s handling of the pandemic has widened the perception gap between the country and global markets, according to some observers [File: China Daily via Reuters]

Some observers say that the perception gap between China and global markets has only widened since the pandemic.

“Many in China don’t realise how dramatically perceptions have changed overseas about their country,” Clark said. “The wall of zero-COVID and the Great Firewall works both ways: they keep capital out and information skewed on both sides. China will have to hustle much more to raise funds going forward. The penny hasn’t dropped yet.”

Beijing may need to work harder at retaining local capital as well.

“We need to remember this is not just about foreign capital and foreigners leaving China. It impacts everyone,” Gibbs said. “Many Chinese investors are heading out, too, to places like Singapore.”

Lian said he has noticed an increasing number of Chinese tech entrepreneurs setting up in Singapore, especially those working on blockchain-based applications.

“It depends a lot on their business structure, but I believe those who can move will continue to do so,” he said.

“So you have these startups that were founded in China, the largest market of all, by Chinese entrepreneurs, and now they are here in Singapore, and now they are bringing their capital with them. To me, that says it all.”

 

 

Original Source: https://www.aljazeera.com/economy/2022/7/21/china-investors-call-it-quits-as-xi-zero-covid-rattle-markets

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