Hong Kong introduces regulatory measures for crypto trading platforms to enhance security

Hong Kong introduces regulatory measures for crypto trading platforms to enhance security

As the global crypto industry continues to grapple with increasing regulatory scrutiny and clampdowns, new hubs for the virtual asset industry are emerging. One such emerging hub is Hong Kong, which recently proposed rules allowing retail investors to trade certain “large-cap tokens” on licensed exchanges, contrasting mainland China’s outright ban on crypto-related transactions.

Based on what I know, The Securities and Futures Commission of Hong Kong has not yet specified which large tokens would be allowed. Still, industry insiders speculate it would likely be Bitcoin and Ether, two of the biggest digital assets by market value.

While China’s clampdown on crypto trading was intended to protect individual investors from speculative activity, the increasing number of bankruptcies and layoffs in the global crypto industry may have justified their actions.

Nevertheless, the crypto industry continues to attract talent and investment, making it hard to imagine Beijing sitting idly while the rest of the world develops new building blocks that could potentially spark a new wave of innovation as big as the current internet itself.

China’s crackdown on crypto trading has led many of its web3 startups to look abroad, with many of them setting up new bases in more crypto-friendly locations like Singapore and Dubai. However, with Hong Kong’s introduction of a more relaxed regulatory environment for cryptocurrencies, some Chinese-founded web3 companies in exile may consider returning home to Hong Kong.

Hong Kong has a long history as a financial hub and can potentially be a laboratory for China’s policymakers to test out blockchain’s potential with some buffer for the nation’s one billion netizens. The city’s proposal stipulates that all centralised virtual currency exchanges operating in the city or marketing services to the territory’s investors must obtain licenses from the securities and futures authority.

The proposed requirements cover key areas such as safe custody of assets, know-your-client, conflicts of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering/counter-financing of terrorism, and prevention of market misconduct.

In addition to ensuring suitability in onboarding clients and token admission, the other key proposals relate to token due diligence, governance, and disclosures.

In other words, centralised crypto exchanges must ban Hong Kong IP addresses until they obtain the relevant permits to operate in the city. The regulatory requirements are currently open for consultation until March 31, and the new licensing regime will take effect on June 1.

This move by Hong Kong is strategic, and it can attract crypto companies and investments to the city. Implementing clear regulatory frameworks would help the industry gain mainstream adoption and bring in more institutional investors.

The crypto industry has come a long way since the inception of Bitcoin over a decade ago. With the emergence of DeFi (Decentralised Finance) and NFTs (Non-Fungible Tokens), the industry has grown significantly, and this growth is expected to continue. However, to achieve its full potential, it needs to address its regulatory concerns.

The introduction of clear regulatory frameworks can help crypto companies gain mainstream acceptance, bring in more institutional investors, and pave the way for new and innovative use cases for blockchain technology. Hong Kong’s move towards a more relaxed regulatory environment for cryptocurrencies is a significant step in the right direction, and I hope that other countries will follow suit.

AML crypto regulations in Hong Kong

The Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (AML/CTF Amendment Bill 2022) on December 7, 2022. This bill introduced a licensing regime for virtual asset service providers (VASPs) and imposed anti-money laundering (AML), counter-terrorism financing (CTF), and investor protection obligations upon these actors.

VASPs that are licensed in Hong Kong are subject to a number of AML, CTF, and investor protection obligations. These include:

  • Customer Due Diligence (CDD): VASPs must conduct CDD on their customers, which includes identifying and verifying the identity of the customer, the beneficial owner, and any other person who exercises control over the customer. VASPs must also assess and understand the nature and purpose of the business relationship with the customer.
  • Ongoing monitoring: VASPs must monitor their customers’ transactions on an ongoing basis to ensure that they are consistent with their knowledge of the customer, the customer’s business, and the risks associated with the customer.
  • Record-keeping: VASPs must maintain adequate records of their customers, their transactions, and their risk assessments. These records must be kept for a period of at least five years.
  • Reporting: VASPs are required to report suspicious transactions to the Joint Financial Intelligence Unit (JFIU) of Hong Kong. Suspicious transactions include those that are inconsistent with the customer’s profile, those that have no apparent economic or lawful purpose, or those that involve the proceeds of crime.
  • Investor protection: VASPs must also put in place measures to protect their customers’ assets. This includes measures such as segregation of customer assets from the VASP’s own assets and insurance against losses.
  • Penalties for non-compliance: VASPs that fail to comply with the new regulations are subject to a range of penalties, including fines, suspension or revocation of their license, and criminal liability. Individuals who are found guilty of money laundering or terrorist financing may face imprisonment of up to 14 years and fines of up to HK$5 million.

The new regulations also provide for the imposition of sanctions by the United Nations Security Council or by Hong Kong in respect of breaches of international sanctions.

Licensing and registration requirements for VASPs in Hong Kong

Anyone who engages in a virtual asset exchange business in Hong Kong must apply for a license with the SFC. The AML/CTF Amendment Bill 2022 also introduced regulations for VASPs to comply with the Crypto travel rule.

The HKMA will only grant licenses to VASPs that meet certain criteria, including:

  • The company must be incorporated in Hong Kong.
  • The company must have a permanent place of business in Hong Kong.
  • The company must have adequate financial resources.
  • The company must have appropriate AML/CTF systems and controls in place.
  • The company must have a compliance officer responsible for ensuring the company’s compliance with the new regulations.

VASPs that fail to obtain a license will be prohibited from providing virtual asset services in Hong Kong.

Complying with the crypto travel rule in Hong Kong

The crypto travel rule will be effective in Hong Kong as of June 1, 2023. The new regulatory regime will provide industries with a grace period to prepare for compliance until that date. In Hong Kong, Travel Rule requirements apply regardless of the transaction amount.

The scope of data to be exchanged varies depending on the threshold of the transaction. For virtual assets that amount to HK$8,000 or more, the following information needs to be shared: name, account number, and address of the originator, as well as the beneficiary’s name and account number. For virtual assets that amount to less than HK$8,000, only the name and account number of the originator and beneficiary are required.

There are no differences in customer personally identifiable information (PII) requirements for cross-border transfers and transfers within Hong Kong. However, for wire transfers, the information recorded must include the number of the originator’s account or a unique reference number assigned to the wire transfer by the financial institution.

Non-custodial or self-hosted wallet transactions do not have any specific requirements in Hong Kong. The AML/CTF Amendment Bill 2022 defines virtual asset transfers subject to Crypto Travel Rule requirements as transactions for transferring virtual assets carried out by an institution on behalf of an originator, with a view to making the virtual assets available to the originator or another person at an institution, which may be the ordering institution or another institution.

In conclusion, Hong Kong’s proposal to allow retail investors to trade large-cap tokens on licensed exchanges is a significant development for the global crypto industry.

While China’s crackdown on crypto trading was aimed at protecting individual investors from speculative activity, the regulatory framework proposed by Hong Kong is more relaxed and can potentially attract more crypto companies and investments to the city. The implementation of clear regulatory frameworks would help the industry gain mainstream adoption and bring in more institutional investors.

I am looking forward to seeing a striking balance between the both.

Source: https://e27.co/hong-kong-introduces-regulatory-measures-for-crypto-trading-platforms-to-enhance-security-20230320/

j j j

Crypto Faces Critical Moment as Regulatory Walls Rise

Crypto Faces Critical Moment as Regulatory Walls Rise

I have warned investors that a significant decline in the crypto market could occur if Bitcoin’s value falls below $24,000, amidst a bullish trend since mid-December. This prediction has come true as Bitcoin’s price has dropped by 10% from its February peak, with the possibility of further drops to $20,000. Crypto’s growth in 2022 was driven primarily by monetary policy, but regulations may become a decisive factor this year in determining which companies will succeed and which will fail.

This situation is due to several factors, including the sustained tightening of liquidity and the suspension of bank transfers, notably by Binance in early February. The closure of Silvergate’s exchange network in early March has exacerbated the existing predicament. Furthermore, Signature Bank has recently informed its crypto exchange clients that SWIFT payment transfers of less than $100,000 will no longer be supported, which is related to Coinbase suspending trading of Binance USD. This is a pressing concern that must be considered.

A growing effort is underway to reconsider the relationship between traditional banking systems and the rapidly evolving crypto economy. The fundamental principle of Bitcoin was to create a financial system that operates independently of banks, and some experts are advocating for a completely “bankless” crypto ecosystem. However, the regulatory crackdown this year has given rise to offshore stablecoins such as Tether’s, which continue to gain traction despite a decline in trading volumes.

The lack of a mechanism for transferring traditional currency into the crypto space appears to be causing stagnation, depriving it of the innovation typically associated with a burgeoning industry. This is where Silvergate has emerged as a critical link between investors, hedge funders, and venture capitalists. In addition to facilitating these essential connections, Silvergate allows its clients to settle their balances at any time of day, including weekends and holidays. This 24-hour settlement feature is paramount in the crypto market, allowing investors to capitalize on arbitrage opportunities and ensuring the seamless exchange of collateral, which is managed through smart contracts.

As regulatory hurdles continue to crop up around crypto, the potential consequences of these barriers cannot be ignored. A recent report from Coindesk reveals that close to 200 members of Congress accepted campaign donations from FTX executives. This raises concerns that those who have received these donations may be less inclined to support further regulations, fearing a negative association with an exchange that has previously misused user funds.

Adding to mounting concerns, on January 3, the U.S. Federal Reserve, the FDIC, and the Treasury Department’s Office of the Comptroller of the Currency issued a joint statement warning about the risks that crypto-assets pose to the banking sector. While regulators have previously cautioned against the instability of cryptocurrencies, this latest alert highlights the impact that the crypto ecosystem could have on the financial resilience of traditional banks. This shift in warning, reportedly initiated by the Biden administration, has had a significant impact, causing a chain reaction.

On January 13, the Securities and Exchange Commission (SEC) leveled accusations against the Gemini crypto exchange and Genesis Trading, asserting that the two firms failed to register a crypto lending scheme as a securities offering. The SEC’s stance is that the lending scheme offered by the two firms necessitated registration with the SEC and compliance with relevant securities laws and regulations. The failure to meet these requirements, according to the SEC, put investors at risk and could have violated securities laws.

Custodia Bank, which was founded three years ago to serve as an intermediary between digital assets and the U.S. dollar payment system, suffered a significant setback in late January. The bank was denied membership to the Federal Reserve System and was also refused a master account. One of the primary advantages of being part of the Federal Reserve System is access to a master account, which allows banks to settle transactions with other banks and financial institutions. Custodia Bank’s lack of a master account means that it will have to rely on other banks to handle its transactions, resulting in higher fees and slower processing times. This puts the bank at a significant disadvantage compared to other banks in the digital asset space that have successfully obtained membership in the Federal Reserve System.

Signature Bank has taken a bold move in the face of the crypto industry’s growing regulatory challenges. In early February, the bank announced its decision to suspend SWIFT transfers of crypto-related firms of less than $100,000. The move is a clear indication of the financial institution’s cautious approach to cryptocurrencies, which have been plagued by regulatory ambiguity and concerns over financial crimes. The decision is expected to impact many smaller crypto firms that rely on such transfers, as they may now have to seek alternative methods to move funds. However, some experts argue that the bank’s move is a necessary step to mitigate risks and safeguard the banking sector from potential threats posed by the crypto industry.

In early February, Kraken, a popular crypto exchange, agreed to pay $30 million to settle charges filed by the SEC that it provided unregistered securities through its staking program. The program offered a fixed rate of return to users, regardless of the actual performance of the staked assets, which the SEC determined to be a violation of securities laws. Kraken’s failure to properly register with the SEC put investors at risk and created an unfair advantage for the platform. The settlement serves as a reminder that the cryptocurrency industry is subject to the same rules and regulations as traditional financial markets.

On February 13, Paxos was ordered to halt production of the Binance-branded BUSD stablecoin over concerns that Paxos may have been negligent in monitoring the application of the stablecoin. As a result, the market capitalization of BUSD plunged from $16 billion to its current value of $8 billion. The decision by the New York Department of Financial Services (NYDFS) to halt the production of BUSD caught many in the industry off guard. Paxos had been considered one of the most reliable stablecoin issuers in the market, having received regulatory approval from the NYDFS to operate as a trust company. However, the NYDFS’s move underscores that even well-established firms are subject to regulatory scrutiny.

On March 4, Silvergate Bank made the unexpected move of suspending its exchange network which resulted in the termination of the bank’s relationships with Circle, Crypto.com, and Coinbase. The closure of the exchange network also had potential implications for Bybit, as the exchange had to stop dollar transfers. Silvergate Bank’s decision comes amid mounting scrutiny due to its links with FTX.

On March 8, four days later, Silvergate Bank announced that it was shutting down and liquidating its operations, citing the majority of its deposits leaving its balance sheet, which has impaired its financial stability ratios. The closure of Silvergate Bank highlights the potential fragility of financial institutions in the crypto space and the impact of regulatory changes on their operations.

In a major development for the crypto industry, on March 10, the New York Attorney General’s office filed a lawsuit against KuCoin for alleged violations of securities and commodities laws. The lawsuit accuses KuCoin of misrepresenting itself as an exchange while functioning as a securities and commodities broker-dealer and seeks to block the exchange’s access in New York. However, what is particularly noteworthy about the complaint is the assertion that Ethereum, the second-largest cryptocurrency by market capitalization, is also a security. The lawsuit argues that ETH, along with other cryptocurrencies such as LUNA and UST, is a speculative asset that relies on third-party developers to provide profit to holders of the cryptocurrency. This lawsuit could have significant implications for the entire industry, as it could open the door to increased regulatory scrutiny and potentially even more legal challenges in the future.

I am very sure that crypto investors are not giving up without a fight. Although Kraken faced a staking defeat, Coinbase CEO Brian Armstrong has defended the firm’s staking service and is willing to defend its product in court if necessary. Well-funded firms such as Coinbase and Ripple may have the financial means to take on the SEC. Ripple’s CEO Brad Garlinghouse has warned that SEC regulations could make the U.S. a less attractive location for crypto firms.

Although the SEC had initially opposed Binance’s acquisition of Voyager Digital which filed for bankruptcy after Three Arrows Capital defaulted on a $670 million loan provided by the broker, a bankruptcy judge has approved the deal. While there are still regulatory obstacles to overcome, the judge appears to be leaning toward approval. Following the announcement, the Voyager VGX tokens saw an increase of 16% in 24 hours, potentially resulting in Voyager creditors receiving 73% of their funds back.

In a separate case, judges are questioning why Bitcoin spot markets can be manipulated while Bitcoin futures markets, which are approved for trading on U.S. soil and through ETFs, cannot. The SEC has claimed that a 99% correlation does not equate to causation, citing the fragmentation of Bitcoin spot markets compared to the centralized trading of Bitcoin futures on the CME in Chicago. As a result, the discount on the Grayscale GBTC has decreased from an all-time low of -48% to -36%, as speculation about the possibility of converting the trust into an ETF has increased. The spread has likely reached a floor with a potential downside of -10% and an upside of +33%, which I predicted in our 2023 outlook report published in December 2022. Although a Bitcoin ETF would have been significant two years ago, many interested investors have since set up alternative accounts to buy Bitcoin.

However, all hope is not lost, and these developments indicate potential opportunities in the cryptocurrency market for investors.

Source: https://intpolicydigest.org/crypto-faces-critical-moment-as-regulatory-walls-rise/

j j j

Biden’s plan to close crypto tax loss harvesting loophole is a step in the right direction

Biden’s plan to close crypto tax loss harvesting loophole is a step in the right direction

President Joe Biden’s proposed budget plan has caused a stir in the crypto community due to its intention to terminate tax loss harvesting on crypto transactions. The reactions from the community have been mixed, with some perceiving this as an infringement on the freedom of crypto traders while others view it as a necessary step in regulating the industry and curbing tax evasion.

Tax loss harvesting is a technique used to minimize an individual’s tax liability by deliberately selling an investment at a loss to offset present and/or future capital gains. It reduces the amount of tax one pays for selling profitable investments. Although tax loss harvesting is usually carried out manually towards the end of the year, a systematic approach that identifies these opportunities automatically and acts on them throughout the year can be more effective, even for fixed income or income-generating securities. This approach allows individuals to decrease their tax liability by deducting the losses from their taxable income. However, this strategy has come under fire for being a loophole that enables affluent investors to evade taxes. The termination of tax loss harvesting on crypto transactions is estimated to raise up to $24 billion and reduce the deficit by $3 trillion.

Advocates of this proposition contend that it is an imperative measure to promote fairness and equity among taxpayers by ensuring that everyone contributes their fair share. They argue that the current tax system is biased towards the wealthy, who are able to exploit various tax loopholes and deductions to lower their tax bills. This ultimately results in middle-class and low-income earners being unfairly burdened with a disproportionate share of taxes. This imbalance creates an unjust and unequal tax system.

On the other hand, critics of the Biden budget plan assert that ending tax loss harvesting on crypto transactions is ill-advised as it could discourage innovation and investment in the cryptocurrency industry. They posit that this move could prompt some investors to relocate their assets offshore or to other countries with more lenient tax policies, leading to an exodus of talent and capital from the United States. Moreover, they contend that this change could disproportionately affect small and medium-sized enterprises that depend on cryptocurrency investment and trading for their expansion and growth.

The strategy of tax loss harvesting is commonly utilized by investors in the United States as a means of reducing capital gains taxes on their cryptocurrency investments. However, this approach is not extensively used in other countries due to differences in tax policies specific to cryptocurrency investments. For instance, in Canada, cryptocurrency investments are regarded as commodities and are thus subject to capital gains taxes. Meanwhile, in Australia, profits from cryptocurrency investments are also subject to capital gains taxes, with cryptocurrency considered property for tax purposes.

In the United Kingdom, gains from cryptocurrency investments are taxable under capital gains tax, but it is not possible to use losses to offset other gains. On the other hand, in Germany, cryptocurrency investments held for over a year are exempted from capital gains taxes, but those held for less than a year are taxed at the investor’s personal income tax rate. While other countries like Japan and South Korea have also established tax policies specific to cryptocurrency investments, these policies can differ significantly and may be subject to revision over time.Closing the crypto tax loss harvesting loophole could be viewed as a step in the right direction towards regulating the cryptocurrency industry and ensuring tax fairness. However, it is important to weigh the potential consequences of this policy change.

To summarize, I believe that closing the cryptocurrency tax loss harvesting loophole as proposed in President Biden’s budget plan is not a good policy. It could have negative impacts on small investors, innovation, and the market as a whole, while also not generating significant revenue for the government. Rather than this approach, I suggest exploring alternative policies that promote growth and innovation in the cryptocurrency industry while still ensuring that the government can collect revenue.

By Anndy Lian.

The author is an intergovernmental blockchain expert

Source: https://www.financialexpress.com/blockchain/bidens-plan-to-close-crypto-tax-loss-harvesting-loophole-is-a-step-in-the-right-direction/3013562/

j j j