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Hong Kong’s Securities and Futures Commission Sets New Regulations for Crypto Exchanges

The Securities and Futures Commission, Hong Kong’s financial regulator, has set out new regulations for Bitcoin and cryptocurrency exchanges on Nov. 6. Announced by Ashley Alder, Chief Executive of the Hong Kong SFC made an announcement in his speech at the Hong Kong FinTech Week 2019. Following his speech, the SFC also published a new regulatory approach to “virtual asset trading platforms,” on its website.

The approach is technology-neutral

Alder started his speech by saying that the regulator has been contending with the growing list of issues, including the application of existing regulations in the “context of increased automation and the adoption of artificial intelligence and machine learning.”

The SFC has been concerned about financial services that have been outsourced to “big tech” companies, and issued a statement last month on how to make records accessible when firms use cloud computing.

Alder reiterated: “We recognize that we must be open to the benefits of innovation, but our bottom line is that we need to stay vigilant about the risks of new technology. The basic approach is technology-neutral.”

The new regulatory approach to crypto exchanges

Following last year’s announcement on a conceptual framework for the potential regulation of crypto exchanges, the SFC has considered whether it is appropriate to grant licenses to exchanges and regulate them.

These new standards seek to address regulatory concerns regarding custody, know-your-client (KYC) requirements, anti-money laundering (AML), and counter-financing of terrorism (CFT) and others for trading crypto.

Licenses could be granted to the crypto exchanges that choose to include “security virtual assets or tokens for trading,” where investors will be able to differentiate between regulated platforms from those that are unregulated.

Although the SFC is open to supervising crypto exchanges, it has made clear that “the virtual assets traded on the platform are not subject to the authorization or prospectus registration provisions that apply to traditional offerings of “securities” or “collective investment schemes.”

The SFC will also not be able to take action against market misconduct in the traditional securities and futures markets as it cryptos are not recognized as “securities” or “futures contracts,” even if the exchange is licensed. Licensed exchanges will also be placed in the SFC Regulatory Sandbox for some time under close and intensive supervision.

Libra and stablecoins

Apart from the growing interest of Bitcoin futures, which has started offerings in the US by established exchanges, stablecoins such has Libra also caught the SFC’s attention.

“These typically claim to have a mechanism to stabilize their value by backing a virtual token – or coin – with fiat currencies, commodities, or a basket of other crypto assets. That’s not to say that these are 100% stable,” said Alder.

This calls for attention in the areas of domestic data privacy, financial stability, competition, anti-money laundering, and consumer and investor protection.

Image via Shutterstock

United States CFTC Issues Advisory on Digital Currencies for Futures Commission Merchants

The Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission (CFTC) has released an advisory to futures commission merchants (FCMs) clarifying how to hold digital currencies in segregated accounts.

Segregated accounts are customer funds that are held in separate accounts from a company’s own funds. The clients’ funds are held in a separate account so that there is no relationship between their accounts and the company’s bank account.

According to a press release on Oct. 21, the CFTC’s Division of Swap Dealer and Intermediary Oversight’s advisory provides guidance to FCMs on how to hold and report certain deposited virtual currency from customers in connection with physically-delivered futures contracts or swaps.

Additionally, the CFTC’s advisory also provides guidance that FCMs should follow when designing and maintaining risk management programs concerning the acceptance of virtual currencies as customer funds.

DSIO Director Joshua B. Sterling said in the release:

“At the CFTC, one of our core values is to provide clarity to market participants […] As Chairman Tarbert has stated, the CFTC is committed to fostering responsible fintech innovation and improving the regulatory experience of registered firms where doing so is consistent with our rules. This advisory furthers these critical goals and will provide additional certainty on these issues as the Commission works to establish a holistic framework for digital asset derivatives.”

South Korea Top Four Crypto Exchanges Launch Joint Venture To Abide By AML Regulations

Four major crypto exchanges in South Korea have joined hands to establish a joint venture to fight against money laundering. The heads of Bithumb, Korbit, Coinone, and Upbit signed a memorandum to form a system, which will enable them to adhere to the travel rule.

Complying with the travel rule

The travel rule is a global standard imposed by the Financial Action Task Force, an intergovernmental anti-money laundering watchdog, on virtual asset service providers like digital wallet providers and crypto exchanges.

As per the announcement:

“The rule requires virtual asset service providers to share the identities of users involved in any virtual asset transfers over 1 million won ($884).”

The regulation is expected to work like a SWIFT code, which is widely used as the industry standard in traditional financial institutions.

This rule is outlined in South Korea’s cryptocurrency law known as the Act on Reporting and Using Specified Financial Transaction information.

The joint venture is intended to cut costs

In a joint statement, the four companies noted:

“Instead of developing their own systems, the companies decided to co-develop a system that can be used industrywide.”

South Korea has been a notable player in the crypto space.

According to a recent study by Alba Heaven, an information provider, 23.6% of South Korean college students were investing in cryptocurrencies out of 1,750 people.

The survey noted that these students were inclined to invest in this territory based on the global crypto craze experience.

The respondents also cited high investment returns, low barriers to entry, and an opportunity to overcome class hierarchy as other reasons they step into crypto investment.

On the other hand, the South Korean administration announced last month that it was not relenting on its quest to levy a 20% income tax on capital gains from crypto transactions in 2022, despite growing investor concerns for the taxation plan to be delayed.

South Korea May Have to Postpone Crypto Taxation, Lawmaker Declares

Rep. Noh Woong-rae of the Democratic Party of Korea has expressed his scepticism about the possibility of the country’s Ministry of Strategy and Finance actualising its plans of taxing incomes from transacting digital currencies.

According to local news sources Thursday, the lawmaker believed the entities involved do not have the right infrastructure to carry out the exercise, a feat that may affect the success of the exercise.

“In a situation where the relevant taxation infrastructure is not sufficiently prepared, the deferral of taxation on virtual assets is no longer an option but an inevitable situation,” he said, adding his plans to sponsor a bill to defer the exercise, “As the relevant laws for tax deferral and real tax cuts are currently pending in the standing committee, we will actively persuade fellow lawmakers so that they can be dealt with in the regular National Assembly.”

Backing his scepticism with examples bordering on how difficult it would be to obtain data for cryptocurrency transactions coming from overseas and P2P payments, the lawmaker pointed out that this situation can create several blind spots that will make the taxation efforts challenging to achieve success.

The country has been pushing cryptocurrency exchanges to get their books orderly, prompting them to form partnerships with banks operating in the country to capture users’ data easily. While the biggest exchanges in the country, including UpBit, have met this demand from regulators ahead of the September 24 deadline, many others find it difficult to form the right partnership with banks and risk being banned from operating by the deadline.

Amongst the major clamour, the lawmaker is looking to change the taxation model on crypto. The current provision will tax income on crypto transactions as ‘Other Income’, while he will try to change this clause to “income from other financial products.”

South Korean Stakeholders Opposes the Proposed "Know-the-Sender" Rule

Some stakeholders are pushing back against the proposed Know-the-Sender (KTS) rule that the South Korean parliament is looking to pass into law.

At a public hearing organized by the Political Affairs Committee of South Korea’s legislature on Tuesday, Choi Hwa-in of the Financial Supervisory Service (FSS) sounded a note of caution that the growing blockchain industry in the nation could be “severely limited” if the KTS proposal is passed into law.

The Know-the-Sender rule was proposed by Kim Byung-wook of the majority Democratic Party and Yoon Chang-hyeon of the People’s Power Party on Oct. 28. Under the provisions of the regulations, anyone, particularly business entities that receive digital currencies, must share the details of the sender, including their names and locations. The rules are further stretched as businesses that send funds to one another must supply the core details of the sending outfit.

The KTS rule is also stretched to foreign-based firms, as they will now be required to register with the South Korean Financial Services Commission (FSC). Cho as well as Yoon Jong-su pushed back against this stance, highlighting the impracticality of the proposal.

According to the professionals who opposed the bill, the proposal can shut down the digital currency ecosystem, as most foreign virtual asset service providers may not have the requirement to register with the FSC as required.

South Korea tags as a controversial country when it comes to regulating entities providing digital currency services. Despite the long-drawn attempt to tax crypto gains, it is still unclear whether the scheduled timeline of January 2022 will pan out.

The country’s regulators shut down a number of exchanges back in September, with only Upbit and a handful of trading platforms coming off as the only startups who were able to secure banking partnerships to fulfil the needed requirements. The KTS rule has been tagged as the most unfavourable proposal that can further tighten the Korean cryptocurrency space.

Europe's Watchdog MONEYVAL Sees Crypto as a Threat to AML

MONEYVAL, the common and official name of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, has published a report that considered cryptocurrencies a major threat to regulators’ efforts to fight money laundering activities.

According to a statement shared by MONEYVAL’s Chair, Elżbieta Franków-Jaśkiewicz, in the latest annual report for the 2021 Calendar year, the advancing technology underpinning digital currencies has formed a safe haven for money launderers to abuse the international financial system. Elżbieta said the watchdog considers cryptocurrencies as complicit alongside ‘gatekeepers’ that is, professional lawyers and accountants in aiding and abetting tax evaders and criminals laundering the proceeds of fraud.

Elżbieta said the advent of Decentralized Finance (DeFi) is well suited for breaking recommended AML practices. She also noted that small-cap cryptocurrencies, which in accordance with CoinMarketCap have topped 19,000, are also specifically created for the purpose of laundering funds across borders. She believes the large-cap coins are susceptible to price manipulation which she said: “is a major predicate offence for money laundering.”

Coordinating Enforcement Actions

In its bid to stem the growing activities of both gatekeepers and digital currencies, MONEYVAL said it would create structures to help combat the growth of money laundering across the board.

“MONEYVAL is continuing to strengthen its working methods and priorities so as to help its members tackle money laundering more effectively. Several projects aimed at developing the studying of the financial sectors and horizontal trends within our membership have been launched and will allow MONEYVAL to develop further its “think tank” capacity. This capacity is greatly enhanced by our partnerships,” Elżbieta said.

Regulators from around the world have been fighting money laundering and tax evasion with the adoption of innovative tools across the board. While the efforts to combat money laundering are being frustrated by the lack of coordinated regulation amongst countries, other policy experts and regulators have also advocated for a combined effort to be led by the US and the EU.

CBDCs Require Balance between Data Access & User Privacy Protection, HashCash CEO Says

Since central bank digital currencies (CBDCs) are showing more exposure to the market, taming illegal activities requires a delicate balancing act between data access and user privacy protection, according to HashCash Consultants CEO Raj Chowdhury.

Chowdhury pointed out:

“CBDC projects need to address their drawbacks and act considering the potential side-effects. They may lead to the disintermediation of the nation’s banking sector, and lend the government an upper hand in state-sponsored censorship of a citizen’s spending patterns.”

Even though the CBDC idea is revolutionary, Chowdhury believes caution should not be thrown to the wind because of possible dangers regarding storage.

He noted:

“The working principles of CBDC are converse with the ideals behind Bitcoin and blockchain technology. A centralized storage system has grave security risks, which will likely diminish the anonymity and privacy normally associated with conventional cash or crypto transactions.”

Therefore, extensive research is necessary before launch to iron out possible difficulties.

The issuance of CBDCs seems to be a race against time because, in the eyes of many nations, owning a CBDC is instrumental in having control of the global markets.

For instance, the Reserve Bank of Australia (RBA) recently launched a year-long trial to explore innovative use cases and business models of a CBDC, Blockchain.News reported.

Therefore, the pilot project aimed at getting better insights into the regulatory, legal, and technological aspects of CBDCs.

Meanwhile, CBDCs are expected to drive the financial inclusion of nearly 1.7 billion people left out of the banking system once implemented.

This attribute might be propelled by the fact that CBDCs are digital assets pegged to real-world assets and backed by the central banks. As a result, they represent a claim against the bank exactly the way banknotes work.

HK to Issue Tokenised Green Bond, Open Market for Virtual Assets ETFs Trading

The HKSAR government published its latest policy statement Monday related to the outlook of virtual assets development, including the issuance of tokenised green bonds and the preparation of developing the digital Hong Kong Dollar.

Over 200 key finance entrepreneurs gathered at the Fintech Week that started on Monday in Hong Kong, which is one of the critical events for the city to show its confidence in restoring its economy amid the recovery from COVID-19.

Paul Chan, Financial Secretary of HKSAR, spoke to Fintech Week virtually due to his infection with Covid 19 during his overseas trip to Saudi Arabia. Chan introduced the latest policy statement on virtual assets to the public, saying that “We want to make our policy stance clear to global markets, to demonstrate our determination to explore financial innovation together with the global, virtual-assets community,” expecting to be the first global government bonds in the hope that to maximise with the advantages and innovation of fintech in terms of virtual assets.

“The policy statement explains in detail our vision and approach, regulatory regimes, thoughts on investors’ exposures, and our pilot projects to embrace the technological benefits and financial innovations brought by virtual assets.”

Per the latest policy statement issued by the government. Serval pilot projects are ongoing, including:

(a) NFT issuance for Hong Kong Fintech Week (“HKFTW”) 2022: A proof-of-concept project on our part to engage the Fintech and Web3 community;
(b) Green bond tokenisation: Tokenising Government Green bond issuance for subscription by institutional investors;
(c) e-HKD: The potential “backbone” and anchor bridging legal tender and VA, offering price stability and confidence needed to empower more innovations.

Green Bond Tokenisation

Regarding the upcoming tokenisation of green bonds, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority (HKMA), spoke at the same event and disclosed that the authority is planning to issue the first batch of green bonds this year globally by adopting blockchain technology, aiming to promote the product to insitutional investors on a small scale first. Details will be announced further later.

Meanwhile, cross-border payment with digital Hong Kong dollars, or e-HKD, is also ongoing. The head of the regulator said the pilot tests of mBridge were going well. Over $170 million in Hong Kong dollars with 160 crosses broader transactions has been conducted, which are associated with around 20 commercial banks in four regions.

Opening market for VA ETFs trading

Given the increasing acceptance of virtual assets as a vehicle for investment allocation by global institutional or individual investors, the policy statement reads that Hong Kong’s recognition would open the possibility of allowing Exchange Traded Funds (ETFs) on virtual assets in Hong Kong.

Yet, the turmoil and the volatility triggered by the so-called crypto winter in the first half year resulted in significant exposure to investors and hampering the performance of the crypto market. In terms of cryptocurrency trading development, Yue, the head of HKMA, said Hong Kong is capable of developing the ecosystem of virtual assets as long as supported by sufficient education for investors and a comprehensive regulatory system.

The fintech Industry welcomes policy statements in general.

Adrian Cheng, CEO of New World Development, welcomes HKSAR’s latest stance on the development of virtual assets in the city.

Speaking to Blockchain.News through a statement, Cheng said that he fully supports the government’s issuance.

“With our unique position in Greater Bay Area, Hong Kong will dominate regional development of GBA cross-border blockchain infrastructure and blockchain ecosystem.”

New World Development believes in virtual assets financial markets, CBDC payment, and GBA blockchain infrastructures would be key strengths and pillars for the city, transforming the city to be a digital financial centre.

Cheng suggested regulations in Hong Kong “would need to further evolve and expand beyond the current regimes of SFC Type 1 & 2 client asset holding licenses and trustee license.”

The real estate property company is actively engaged in the crypto community and NFT projects. In August, Cheng purchased an NFT of 101 Azukis, but also invested in RTFKT and Animoca Brands, expanding its footprint in the Web 3 industry. Previously, Adrian Cheng planned to raise $500 million in the next 18 months to invest in blockchain assets, credit, and private equity, betting on private companies and digital assets, according to Bloomberg.

“Insurance is a critical component in the virtual asset ecosystem, as it ensures sustainability by offering risk transfer options. At the same time, it also forms the missing piece of the global virtual asset regulatory framework, including Hong Kong,” said Becky Tam, Chief Operating Officer of OneInfinity, adding that “the market will grow systematically ultimately, as credibility will be promoted to expand the audience from the niche blockchain players to the institutional players and further to the public.”

Image source: Blockchain.News

UAE's Ras Al Khaimah to Launch Free Zone for Virtual Asset Companies

Ras Al Khaimah, one of the UAE’s seven Emirates, is set to launch a free zone dedicated to digital and virtual asset companies. The new free zone, RAK Digital Assets Oasis (RAK DAO), aims to create a hub for non-regulated activities in the virtual assets sector. This move comes as the UAE continues to attract global players in the crypto industry, positioning itself as a forward-thinking hub for crypto firms.

RAK DAO will provide a dedicated space for digital and virtual asset service providers operating in emerging technologies, such as the metaverse, blockchain, utility tokens, virtual asset wallets, nonfungible tokens (NFTs), decentralized autonomous organizations (DAOs), decentralized applications (DApps), and other Web3-related businesses. The free zone is expected to start with non-financial activities before introducing financial activities at a later stage.

Entrepreneurs looking to launch a crypto exchange may have to wait as this is an ESCA-regulated financial activity. The Securities and Commodities Authority (SCA) is one of the UAE’s main financial regulators, and it has authority throughout the Emirates, except for the financial free zones such as the Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC).

The new free zone will add to the more than 40 multidisciplinary free zones in the country that have already attracted numerous crypto, blockchain, and Web3 firms. These include the Dubai Multi Commodities Centre (DMCC), DIFC, and the ADGM.

As part of the UAE’s efforts to create a friendlier regulatory environment for crypto firms, Dubai unveiled its virtual assets law in March 2022, along with the Virtual Asset Regulatory Authority. This was followed by the Financial Services Regulatory Authority’s guiding principles on regulating and overseeing the new asset class and its service providers in September 2022.

Sheikh Mohammed bin Humaid bin Abdullah Al Qasimi, the chairman of the RAK International Corporate Centre, the operator of the new free zone, expressed excitement about the project, saying, “We are building the free zone of the future for companies of the future. As the world’s first free zone solely dedicated to digital and virtual asset companies, we look forward to supporting the ambitions of entrepreneurs from around the world.”

The establishment of RAK DAO is a strategic move for the UAE as it seeks to cement its position as a global leader in the crypto industry. By creating a regulatory environment that is friendly to crypto firms, the UAE aims to attract more players in the industry and foster innovation in the emerging technologies sector.

Signum Digital Receives Approval for Security Token Offering Platform

Signum Digital, a joint venture of Coinstreet and Somerley, has announced that it has received approval-in-principle from the Hong Kong Securities and Futures Commission (SFC) for its security token offering (STO) and subscription platform. The STO platform, which will be managed under the brand name “CS-Pro,” is a new category of virtual assets built on blockchain technology that represents ownership of tangible assets, such as private equities, real estate, art, and collectibles. The STOs, linked to real-world assets, are expected to lower the risk for potential investors, facilitate their research process, and provide a foundation for the market value of the investment opportunity.

Signum Digital claims that its platform is a pioneering development in Hong Kong. After receiving final authorization from Hong Kong’s SFC, the CS-Pro platform will allow investors to invest in tangible assets through security tokens. The approval-in-principle from SFC for Signum Digital’s STO platform comes after the Hong Kong SFC released preliminary regulations for virtual asset trading platforms last month, and urged the general public to provide their input. The upcoming licensing system, scheduled to begin in June, mandates that digital currency exchanges submit applications for licenses that would let everyday investors trade specific high-capitalization tokens.

Hong Kong has been proposing new initiatives for the city’s cryptocurrency and digital asset sector since last year when it invited firms interested in providing STO services to pitch proposals. Cryptocurrency exchange Huobi Global also announced last month that it is applying for a license to operate in Hong Kong, possibly moving its headquarters from Singapore to the special administrative region. Recently, Hong Kong has displayed a good deal of interest in becoming a crypto hub as it has invested heavily in supporting the potential of technologies like Web3.

In mid-December, Hong Kong launched its first two exchange-traded funds (ETF) for cryptocurrency futures, which raised over $70 million ahead of its debut. The event came soon after the head of Hong Kong’s Securities and Futures Commission announced in October that Hong Kong is willing to distinguish its crypto regulation approach from the Chinese crypto ban enforced in 2021. Hong Kong’s regulatory framework aims to strike a balance between investor protection and fostering innovation in the fintech sector, including virtual assets. The approval of Signum Digital’s STO platform is expected to further strengthen Hong Kong’s position as a leading hub for the digital asset industry.