On November 1 2018, the Hong Kong Securities and Regulatory Commission issued the ‘Statement on the Regulatory Framework for the crypto asset portfolio management companies, fund distributors and operators of trading platforms for Cryptocurrency portfolios’. The Crypto currencies allowed under this new regulation are digital tokens (such as digital currency, functional tokens, or tokens collateralized by securities or assets) and assets of the same nature as virtual goods and crypto assets. Therefore, this regulation is considered to be a positive signal for the Cryptocurrency market.

Based on long-term market research on cryptocurrency asset transactions conducted by Hong Kong Security and Regulatory Commission, this statement notices investors’ interests on approaching crypto assets through funds and Hong Kong unlicensed operators are growing and they identify the potential risks of investment on crypto assets.

In order to deal with the risks, Hong Kong Security and Regulatory Commission proposed guidance for regulations imposed on Cryptocurrency portfolio management companies and fund distributors. Meanwhile, they are exploring the possibility of building a conceptual framework for regulating the behaviors of cryptocurrency assets exchange operators.

New Regulations indicate, HK SRC expresses their intention to supervise crypto assets portfolio management companies and fund distributors and their willingness to supervise crypto assets trading platforms. That is to say, three kinds of subjects: crypto assets management companies/ crypto assets fund dealers/crypto assets trading platforms(also known as crypto currency exchange) are the supervision targets of the new regulation.

The bullet points of new regulations:
● Any fund or agency investing in crypto assets must register with HK SRC whether the category of their asset is securities, payment or functionality.
● Any fund or trading platform investing in Crypto assets or crypto currency (funds whose crypto assets occupy more than 10% of the whole asset size) can transact with professional investors.
● Distinguish Crypto assets portfolio management companies from crypto assets fund dealers: when it comes to the former one, HK SRC put regulations on three dimensions: scope of supervision, standard of supervision and procedures of issuing license.
● HK SRC will include the supervision of Cryptocurrency exchanges into “sandbox supervision” (experimental supervision). After the feasibility is confirmed, license may be issued to those exchanges accordingly.

POSSIBLE IMPLICATIONS OF NEW REGULATIONS

Some scholars argued that this statement marks Hong Kong officially as a digital currency port, comparably to Switzerland and Singapore. The author holds the opinion that several positive effects will be caused as followed

On Cryptocurrency dealers and exchange
● Digital currency funds will be the biggest beneficiaries by being officially recognized and their management scale is expected to be significantly expanded
● For exchanges, they will take a big step towards compliance and being supervised reasonably. Some transactions that is out at sea can choose to land in Hong Kong.

For Investors
● Prevention of fraud
The current air coin project is not used as a main means to scam investors as at present. In the future, crypto assets trading platform operators or investment organizers’ companies in Hong Kong will have to undergo the due diligence review of products by SFC before they can launch products to the investors.

● Safeguarding assets
Crypto asset trading platform operators or investment organizers’ companies might place the clients assets into the online wallet (Internet environment with Internet connection). Online wallets are vulnerable to hacking. It is common to see hackers attacking crypto asset trading platforms and stealing crypto assets. It is difficult for the victims to seek compensation from the platforms or hackers and the figure of lost assets could reach as high as a few hundred million US dollars.

Cryptocurrency face unique challenges in view of the limited options when choosing qualified custodians; alternative solutions may not be completely effective.

For the market

● Increasing Trading Transparency

Currently, disruption of operations, market manipulations and violations against rules have occurred occasionally and these have caused significant losses to investors. In the future, exchanges that is supervised by the Hong Kong Securities and Regulatory Commission will have to operate under a set of approved rules that are more transparent.

For Regulatory body

● Easier for detecting, monitoring and managing conflicts of interests between operators

At present, Cryptocurrency trading platform operators may represent the client as agents and principals. Like traditional exchanges, alternative trading systems or securities brokers, this helps to facilitate the distribution of cryptocurrency (such as first-time token issuance) and/or secondary market transactions. If these operators are not supervised under any regulatory body then it will be difficult to detect, monitor and manage any forms of conflicts of interests.

● Lower the risk of money laundering and terrorist raising money

Cryptocurrency are generally bought or sold or owned in an anonymous manner. In particular, the platforms that allows fiat currencies and cryptocurrencies to be exchanged are more likely to be used for money laundering and a channel to raise funds by terrorists. If there is any criminal activities involved, investors might not be able to get back their investment because of law enforcement actions.

Supervision is actively responding to risks and is believed to have a significant effect on the cryptocurrency market. Let’s wait and see.

From STO to new regulations

It is noteworthy that before the Hong Kong Securities Regulatory Commission announced this statement,which also embraced supervision, set off a sizable wave in October . Media stated that NASDAQ, a traditional American stock exchange, is planning to launch a unified securities platform. This platform provides the company with secure token transaction as a new way to raise funds, namely STO.

STO (Security Token Offering), that is, secure token issuance is a public offering under a legal, compliant regulatory framework. The biggest feature of STO is the issuance of government-based regulation. For investors, STO’s appeal to financiers and investors stems from the fact that STO is regulated by the SEC and FINRA in the same way as traditional securities.

Although the US SEC has approved 31 STOs, they have yet to be listed. At present, STO’s assets are homogeneous. Mainly are new VC funds and real estate projects. Most of the Security rights are associated with asset appreciation. After all, STO is still in a very early stage. Even if the project is approved, it has yet to be verified.

In Conjunction with STO and considering the Hong Kong Securities Regulatory Commission’s statement, the original intention is much clearer. This new regulation will not only supervise the Cryptocurrency of the STO category, but will also be incorporated into the application token. Therefore, this new regulation does not have practical significance for STO itself, but it can help to enhance investors’ confidence. For the non-securities ICO projects in Hong Kong, the short-term results will be negative while in the long run, it will be positive.

Blockchain and digital currencies are all new. Policies and regulations are still in the stage of ‘crossing the river by feeling the stones’. Countries across the world has yet to come to a consensus about them. This means that anything is still possible in the future. But no matter how it changes, the authors believes that all regulators should have bold assumption about new things while illustrating carefully. For the cryptocurrency market, it is necessary to guide against financial risks and also to ensure financial stability, as well as to protect the interests of investors. This will never change for industry practitioners, it is more important to comply with existing laws and regulations. Even if supervision is needed in the future, it will only increase protection and endorsement.

References

1.⾹港证监会公布虚拟资产新规(原⽂+解读),http://finance.sina.com.cn/blockchain/roll/2018-11-01/doc-ih
nfikve3120124.shtml
2.洪蜀宁:开放、谨慎、补漏——对⾹港证监会虚拟资产新规的解读,https://www.searchain.net/news/4
0107.html
3.允许持牌机构⼊场,⾹港拥抱虚拟资产 | 解读⾹港证监会新规,http://coinbirds.com/article/detail?art
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