Hong Kong crypto consultation:  A step towards retail inclusion

• Hong Kong and Singapore have previously stood at opposite ends of the regulatory spectrum for cryptoassets – with Hong Kong banning retail access whilst Singapore has encouraged activity. 
• Both jurisdictions are now moving away from their previous positions, with a recent consultation in Hong Kong opening the door to retail investors. 
• This should not be misunderstood as a potential “Big Bang” moment for crypto in Hong Kong, but rather as a first step towards retail participation. 
• The regulatory landscape for crypto in the Asia-Pacific will remain highly volatile; firms will need to be agile and well-informed to maximise opportunities and avoid regulatory threats to their commercial viability.  

Following a number of crises in the nascent cryptoasset industry in 2022, most notably the implosion of FTX, politicians and regulators across the world have called for tougher regulation of cryptoasset firms and activities. 

However, this global shift in approach to the regulatory landscape for cryptoassets does not uniformly translate to key jurisdictions in the Asia-Pacific. In recent years, a significant bifurcation of approaches has occurred. 

To ban or not to ban 

At one end of the spectrum, China and Hong Kong have sought to prevent retail access to cryptoassets, with the Reserve Bank of India also maintaining a strong stance in support of a ban. At the other, jurisdictions such as Singapore and Taiwan have sought to position themselves as the region’s hub for cryptoasset activity. 

With scrutiny of the sector rising, the Monetary Authority of Singapore published two consultations in October 2022, proposing new regulation to protect consumers from harms related to the trading of cryptoassets and support the development of stablecoins as a reliable means of payment. These consultations serve to increase the level of regulatory scrutiny which crypto firms will be subjected to, and signal a shift by Singapore towards the crypto-sceptic end of the regulatory spectrum although they are conscious to not drive retail offshore into the unregulated sphere. 

In this context, the consultation published by the Hong Kong Securities and Future Commission (SFC) on 20 February represents a significant shift in regulatory approach. The SFC’s proposals would lift Hong Kong’s ban on retail investment in certain cryptoassets (those categorised as “eligible large-cap virtual assets”) and open the door of this major financial centre to crypto firms for whom it was previously closed. To this extent, Hong Kong and Singapore are both moving towards the middle from the opposite positions they originally occupied. 

A new approach in Hong Kong 

The consultation follows the passage of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 in December 2022, which introduces a new licensing regime for centralised virtual asset trading platforms. This regime will go live on 1 June 2023. As proposed in the consultation, cryptoasset trading platforms operating in Hong Kong will be subject to new Guidelines for Virtual Asset Trading Platform (VATP) Operators. 

These Guidelines will be based on the existing Terms and Conditions for Virtual Asset Trading Platform Operators, which are imposed as licensing conditions on Securities and Futures Ordinance-licensed trading platforms. 

The most notable new component of the proposed Guidelines is a specific admission criteria that a virtual asset must qualify as an “eligible large-cap virtual asset” to be offered to retail investors. Such assets are those which are included in at least two “acceptable indices” issued by at least two independent index providers which limits the range of assets available to retail quite considerably. Other key additions include new onboarding and governance requirements for platforms, a requirement for due diligence and admission criteria, and the introduction of new disclosure obligations on platforms. 

It is important to stress at this point that this does not mean that retail access to a wide range of cryptoassets and trading platforms will suddenly open on 1 June – there will not be a “Big Bang” at a single point in time. Rather, these proposals open the door for retail participation in the future, by creating a pathway for platforms to receive authorisation to provide their services to retail customers. 

Firms operating in the Asia-Pacific need to be aware of the rapidly changing regulatory environment, and the speed with which willingness to permit widespread retail participation in the cryptoasset space can disappear following a downturn. There is a significant risk that certain jurisdictions (e.g. Singapore) impose regulatory burdens which threaten the commercial viability of existing activities. 

Successful firms must anticipate and respond rapidly to these risks, whilst also identifying and maximising the potential of opportunities in the other direction – such as that now provided by Hong Kong. 

Mark Austen is Managing Director of Flint’s Asia-Pacific operations and Partner. Before joining Flint, Mark was CEO of ASIFMA, the leading financial services trade association in Asia. Conor Sewell is a Manager at Flint and supports clients on global financial services policy and regulatory issues. Before joining, he worked on financial services at HM Treasury and within the Bank of England’s Capital Markets Division.

To find out more about how Flint can help you navigate the risks and opportunities of these developments, get in touch.