To date, Bitcoin (BTC) and Ethereum (ETH) remain the top two cryptocurrencies by market cap. Other popular and most traded cryptocurrencies include Binance Coin (BNB), XRP, Solana (SOL), Cardano (ADA), Dogecoin (DOGE), Tron (TRX), Toncoin (TON) and stablecoins such as Tether (USDT) and USD Coin (USDC). Some of the largest and most well-known global crypto exchanges include Binance, Coinbase, Kraken, Bybit and OKX.
As crypto, blockchain and decentralized finance (DeFi) platforms seek to tap into the Hong Kong and Asia markets, it is important to understand how the legal and regulatory framework applies to them.
Crypto and Fintech Licensing
As of today, there are only two virtual asset trading platform (VATP) operators licensed by the Securities and Futures Commission (SFC): OSL and HashKey. License applicants include BGE, HKbitEX, HKVAX, VDX, Meex, PantherTrade, OKX and VAEX.
Zodia Custody (backed by Standard Chartered) announced in late 2023 that it would offer crypto custody services in Hong Kong.
External Assessment Report (EAR)
A VATP license applicant needs to submit an external assessment report (EAR). The EAR will need to cover the following eight areas:
- Governance and Staffing
- Token Admission
- Custody of Virtual Assets
- Know-your-clients (KYC)
- Anti-money laundering and counter-financing of terrorism (AML/CFT)
- Market surveillance
- Risk management
- Cybersecurity.
Payment license in Hong Kong – MSO License
Airwallex, Alipay and Wise Payments are among the most well-known brands that have obtained the Money Service Operator (MSO) license. The MSO license is administered by the Customs and Excise Department (C&ED). It is required for persons operating a money service, which includes money-changing service and remittance service.
The MSO license is not concerned with crypto itself. The C&ED has clarified that BTC or other similar virtual commodities are not “money” and do not fall within the scope of MSO. However, if a proposed business is a money service (as defined by C&ED) – whether or not crypto is involved – an MSO license will still be required.
Tokenization and Security Token Offering (STO)
Security token offerings (STO) are starting to gain popularity as the traditional equity and debt capital markets stall. STO and tokenization of real-world assets (RWA) can be a quick and cost-efficient way to raise capital, without the complicated process involved in a conventional stock exchange and listing. An STO utilizes distributed ledger technology (DLT) to ensure that a security token holder is given the same rights and entitlements as securities holders in a traditional securities offering.
In 2023, the Hong Kong Monetary Authority (HKMA) launched a HK$800 million tokenized green bond offering, being the first tokenized green bond issued by a government. The full cycle of a bond offering is digitalized and performed on a blockchain network, which includes primary issuance, coupon payment, settlement of secondary trading and maturity redemption.
From a legal perspective, the issuer should consider how securities laws in Hong Kong apply to an STO. The issuer should consult with its lawyers to advise on (i) whether the tokens are securities under the SFO and (ii) whether the prospectus requirements apply. A token offering could be structured in a way such that the safe harbours under the public offering regime would apply (e.g., if the product is being offered to professional investors (PI) only).
SFC Guidance on Tokenization and Distribution of Tokenized Products
In November 2023, the SFC reminded market participants that any new tokenized investment products are subject to the SFC’s authorization, and prior consultation with the SFC is required. Distributors of tokenized products should be SFC-licensed firms and should comply with SFC regulations, including client onboarding requirements and suitability assessment of the investors.
Any intermediaries dealing in, advising on, or managing portfolios investing in tokenized securities are required to conduct due diligence on the issuer and their third-party vendors/service providers involved in the tokenization arrangement. A discussion of the proposed business plan with the relevant case officer of the SFC in advance is required.
Looking Forward – Crypto Scam and Recovery
As the SFC continues to roll out new regulations on virtual assets, it has also named and shamed several platforms including JPEX which – as the SFC puts it – “falsely claimed to have obtained licenses from certain overseas regulators to operate VATP which is in fact not true”. Crypto romance and investment scams are now on the rise. Applying for court injunctions and taking action against fraudsters (which may involve crypto firms and their founders) can assist victims with the recovery of their stolen crypto.
This article is for general informational purposes only and does not constitute legal advice. If you require an initial consultation, please contact us at info@allolawyers.com.