Hong Kong's plan to crack down on non-compliant encryption business and an overview of advertising content has caused a chilling effect to come into effect in March next year

Wu said the author|Colin Wu
Editor of this issue|Colin Wu

Hong Kong's "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022" is being revised and approved. Among them, there are richer regulatory explanations for cryptocurrencies, and then they have to pass the third reading. It is estimated that it will not be officially passed until August to September, and it will take effect on March 1 next year. But there are already obvious effects: the large number of cryptocurrency advertisements on the streets of Hong Kong in the past have decreased. Non-compliant exchanges such as FTX BITMEX used Hong Kong as their headquarters in the past, and are currently moving out. OSL Hashkey Huobi and others have applied for or are applying for licenses that can only be targeted at institutional and professional investors.

According to reports, some members of the relevant draft committees were concerned that the draft failed to regulate virtual asset platforms registered in foreign countries; some members also suggested that the authorities strengthen investor education. Councilor Lu Hanmin pointed out that many citizens are using mobile phones to invest in the virtual asset market, but he is concerned that the relevant platforms are registered in foreign countries, so they have not been able to supervise. Lu also pointed out that the draft only regulates professional investors and pushes ordinary citizens to use foreign registered platforms. How will the authorities handle the situation. Chen Yingshao, Deputy Secretary for Financial Services and the Treasury (Financial Affairs), pointed out that Hong Kong's licensing system for the virtual asset market is "advanced". Seriously consider the relevant regulatory system, so Hong Kong will have a basis for international cooperation in the future, emphasizing that it is not stifling investment activities. As for another Member, Zhou Haoding, he also pointed out that the regulation of the virtual asset market in Western countries is "relatively loose", and there have been devaluations of virtual currencies in the past, which caused heavy losses to investors. Zhou also pointed out that overseas regulations are not high in comparison, and investors may turn to related markets to invest in virtual currencies. Will the authorities consider increasing transaction costs to make investors aware of the risks. Chen Yingshao responded that any measure must balance the opinions of all parties. The draft itself is aimed at money laundering through virtual assets, so loopholes must be plugged, and investor education must be done well. Also, there is currently no answer as to whether NFTs are included.

Full text link:

https://www.legco.gov.hk/en/legco-business/council/bills.html?bill_key=10015&session=2022

Some important excerpts are as follows:

1. A license is required to operate a virtual asset service business. A photograph is required to operate a business that provides any virtual asset services or to represent oneself as operating a business that provides any virtual asset services. No person shall perform or hold himself out to perform any regulated function in connection with a business providing virtual asset services. On conviction upon indictment, liable to a fine of $5,000,000 and imprisonment for 7 years, etc.

2. Any advertisement in which the relevant person knows that a certain person (advertised person) shows that he is willing to provide virtual asset services. On conviction to a fine at level 5 and to imprisonment for 6 months, etc.

3. Any person uses any means, plan or trick directly or indirectly for fraudulent or deceptive purposes in transactions involving any virtual assets; or engages in any fraudulent or deceptive nature (or will produce fraudulent or deceptive effects) shall be liable on conviction on indictment to a fine of $10,000,000 and to imprisonment for 10 years.

4. The China Securities Regulatory Commission may, upon application, increase, exempt, or otherwise change the virtual asset services that licensed providers or licensed representatives are licensed to engage in.

5. What is a virtual asset: used as or intended to be used as a medium of exchange accepted by the public for one or more of the following purposes: payment for goods or services; liquidation of debts; investment; management of any encryption-protected digital form of value related matters, operation or governance; changes in the terms of any arrangement applicable to the cryptographic protection of value in digital form; transferable, stored or traded by electronic means.

What is not a virtual asset: issued by the central bank, an entity performing the functions of a central bank, or issued by an entity authorized by the central bank on behalf of the central bank; issued by the government of a certain jurisdiction, or an entity authorized by the government of a certain jurisdiction (according to the Issued by a person acting in the authority to issue currency in the jurisdiction); it is a limited-purpose digital token; it constitutes a security or futures contract; it constitutes any stored value amount or instrument deposit stored in a stored value facility.

6. What are limited-purpose digital tokens: customer rewards or reward points; game assets; or any value in digital form that meets the following descriptions: similar to customer rewards or reward points or game assets; and according to the intention of its issuer, the Value in digital form is not convertible into money or another medium of exchange accepted by the public.