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Hong Kong’s Cryptocurrency Regulations: A Comprehensive Guide

As the digital asset landscape continues to evolve, Hong Kong has taken steps to clarify its regulatory stance on cryptocurrencies. In this article, we’ll explore the key issues and guidelines that businesses and individuals need to be aware of when dealing with virtual assets (VAs) in Hong Kong.

Unified Fund Exemption Regime

The Unified Fund Exemption regime includes securities and other financial products, but most digital assets are not considered securities, making them ineligible for the exemption. This means that VASPs operating in Hong Kong must comply with relevant regulations and licensing requirements.

VA Borrowing and Lending

  • DIPN 39 does not address VA borrowing and lending.
  • Cryptocurrency is generally not considered “stock” or “money”, rendering relief for stock borrowing and lending inapplicable.
  • Provisions related to interest that reference money are also inapplicable.

Money Transmission Laws and Anti-Money Laundering Requirements

  • Hong Kong has no specific legislation governing the transfer of cryptocurrencies between private parties.
  • If such transactions involve conversion into fiat currencies, they may be deemed a money remittance transaction subject to anti-money laundering requirements.
  • Financial institutions must conduct customer due diligence measures for wire transfers exceeding HK$8,000 and maintain records for at least five years.

Anti-Money Laundering Requirements

  • The Anti-Money Laundering Ordinance (AMLO) applies to financial institutions, including banks, licensed corporations, and money service operators.
  • Fund managers managing funds investing only in cryptocurrencies that are not securities or futures contracts do not require a Type 9 Licence and are therefore exempt from AMLO requirements.

SFC Regulatory Sandbox

In September 2017, the Securities and Futures Commission (SFC) launched its Regulatory Sandbox to provide a confined regulatory environment for licensed corporations and startup firms to operate regulated activities. The SFC has since granted licenses to VASPs operating in Hong Kong, including OSL Digital Securities Limited, which became the first SFC-licensed VA exchange.

Fintech Supervisory Sandbox

The Hong Kong Monetary Authority (HKMA) also launched its Fintech Supervisory Sandbox in September 2016 to facilitate pilot trials of fintech initiatives. This sandbox allows authorized institutions to test new technologies and services before launching them on a larger scale.

Ownership and Licensing Requirements

  • There is no restriction on owning cryptocurrencies for investment or otherwise.
  • Ownership is subject to Hong Kong’s laws and regulations governing digital assets.
  • Businesses and individuals should be aware that VAs that amount to “securities” as defined under the Securities and Futures Ordinance (SFO) are subject to specific requirements.

Mining

  • Currently, there is no regulation on cryptocurrency mining in Hong Kong.
  • Due to land scarcity, there may be restrictions on leasing industrial buildings for data centres or mining operations. Miners may need to apply for lease modifications or temporary waivers.

In summary, while Hong Kong’s regulatory framework for cryptocurrencies is still evolving, it is essential for businesses and individuals to understand the guidelines and requirements governing VASPs, anti-money laundering measures, and other relevant regulations. As the industry continues to grow, it is likely that the IRD will provide future guidance in the form of frequently asked questions (FAQs) on its website.