Hong Kong takes steps to restrict Bitcoin access for end users
Scooped by the FTSB, but keeping with his 2018 and 2019 traditions, SFC Chief Executive and IOSCO Board Chair Ashley Alder announced at Fintech Week his intentions to further expand the SFC’s authority and introduce a mandatory licensing regime for ‘Virtual Asset’ platforms.
While not strictly opposing the idea of regulation per se, I believe Alder’s proposal constitutes a massive overreach of the SFC’s mandate and a de facto ban of Bitcoin in Hong Kong, and as such must be resolutely opposed in this form.
Tldr:
- Licenses are mandatory for exchanges and restrictive
- Access to Bitcoin will be restricted to accredited investors
- OTC brokerages and ATMs unaffected only at first
- You will still be able to accept Bitcoin as payment
History
Since December 2014 Bitcoin has been designated a ‘virtual commodity’ placed under the supervision of the Customs & Excise Department. C&ED has carefully separated the functions of licensed Money Service Operators and those offering Bitcoin, but otherwise not introduced specific restrictions for exchanges, brokerages or ATM operators. While occasional scams and ransomware do demand payments in Bitcoin, police has stated in its reports that cryptocurrencies are left out of the city’s organized crime.
While the Hong Kong Monetary Authority (HKMA) has covertly assured over the years that its supervised institutions (banks, payment processors and SVFs) steer far away from Bitcoin, the Securities and Futures Commission (SFC) began to discuss the topic openly after the 2017 bullrun.
While I repeatedly criticized the SFC for its use of the undefined term ‘Virtual Asset,’ I have not been overly critical of the attempt to create a opt-in licensing regime for those trading platforms that do desire SFC supervision. Since discussions began three years ago no licenses have been granted to exchanges. The success of the ‘sandbox’ regime and whether any companies ever joined it is unknown (Alder says it has been ‘pursued’ by ‘quite a few’). OSL, which received the only known ‘approval in principle’ for such a license in August 2020, has since off-boarded countless clients that were unwilling or unable to prove a US$1 million balance in financial accounts, a requirement imposed by the SFC to identify ‘institutional’ and ‘accredited’ investors.
According to Citibank, there are about 100,000 individuals in Hong Kong that have over HK$10 million in liquid assets, or 1.3% of the population.
The proposal
There is no clear motivation for this proposal. Alder makes mention of fraud, market manipulation and abusive activities, but focuses the actual proposal around Anti-Money Laundering regulation, a catch-all offense that already applies to operators of cryptocurrency exchanges.
For the first time, the term Virtual Asset is defined, borrowing from FATF terminology: “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.”
While this definition includes gift cards, air miles, in-game currencies and digital art, the SFC will not take interest or enforcement in these sectors unless the tokens are exchangeable (which most are), or possibly self-apply the label ‘crypto.’ Digital representations of fiat currencies are excluded, but stablecoins are included (confusing).
The focus lies on any activity involving the exchange between ‘Virtual Assets’ and fiat currencies or other Virtual Assets, their transfer, custody or provision of services. It is unclear what ‘instruments enabling control’ are in this context, but for now the SFC takes interest primarily in ‘exchanges.’ Peer-to-peer exchanges are explicitly excluded as long as they do not come into possession of the cryptocurrency (what about multi-signature schemes?)
Most importantly, Alder proposes a license that is both mandatory and heavily restrictive. Those holding a SFC license will not be allowed to sell or buy Bitcoin from regular users, ‘at least initially.’
OTC brokerages and ATMs might be excluded at first, as the SFC notes they are of limited scale. The new law however will be built with these modes of operation in mind, and the SFC will reserve the right to extend mandatory licensing to these businesses anytime they wish.
Those violating the new provisions can be fined up to HK$5 million or 7 years in prison.
Easily overlooked is the second part of the proposal, which aims to significantly restrict the Hong Kong precious metal and diamond markets. There is also a peculiar amendment to classify mainland Chinese officials as Politically Exposed Persons (PEP), contrary to FATF practice to only apply restrictions to PEPs of foreign nations.
Motivation & Politics
The proposal is in line with the policies and practices in the mainland of China. It is by far the most restrictive proposal coming out of any other FATF members state, raising the speculation the proposal constitutes an attempt to harmonize the mainland Chinese and Hong Kong cryptocurrency markets, and possibly even introduce capital controls.
Nonetheless, it is as conceivable that the strict proposal is merely an attempt to set expectations for future negotiations, serves the needs of involved individuals to profile themselves or is specifically targeted at a group of high profile, successful cryptocurrency exchanges popularly associated with Hong Kong.
The lack of commentary from Chinese state-affiliated media suggests that this is an initiative from the SFC to implement FATF decisions, not a conspiracy to ban Bitcoin. Given the resistance from the Hong Kong establishment against previous initiatives aimed at money laundering and the vibrant local precious metals market, we expect significant push back here as well.
How to continue
We are currently invited to submit our views to the FSTB directly before 31 January 2021. You can find the specific points we are asked to comment on and how to submit your opinions at the top of the consultation document.
The Bitcoin Association of Hong Kong will formulate its response together with its members. The consultation exercise is largely ceremonial, but we still believe it is best to put our comments on the record.
The amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap 615) will have to be passed by the Legislative Council, which will take time.
If the proposal indeed constitutes capital controls or even infringes on Article 112 of the Basic Law directly, it will be challenged in the courts. The National People’s Council can override such a decision.
Article 112
No foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region. The Hong Kong dollar shall be freely convertible. Markets for foreign exchange, gold, securities, futures and the like shall continue.
Conclusion
SFC/FSTB propose a highly restrictive licensing regime for cryptocurrency exchanges, dramatically limiting the products on offer and shutting out the entire retail market categorically.
Initially, the proposal will have little effect as there are only small cryptocurrency exchanges overtly operating in Hong Kong. The institutions this proposal might be targeted at are already in violation of existing SFC licensing provisions and have zero hope of attaining approval. They will continue to operate.
If the SFC does extend its reach further, ATMs and OTC houses will likely disappear and trade will shift to Peer-to-peer platforms. Accepting Bitcoin as a method of payment will remain permitted under this proposal, acting as a payment processor however will not (and under HKMA provisions is already discouraged). Unlike today, there will be confusion as to whether an institution is regulated by C&ED, HKMA or SFC.
Large cryptocurrency exchanges will continue to offer risky products without KYC or anti-AML measures to Hong Kong residents, but they will be more careful to not give others the impression to be associated with Hong Kong.
Despite the SFC’s attempts to contain Bitcoin, it is inevitable that institutions will offer at least basic cryptocurrency products to Hong Kongers eventually. As with other sections of the highly noncompetitive financial services industry, these institutions will be small in number and overwhelmingly local and existing players. They will charge high fees and lag their overseas equivalents in service and feature.
The only way for you to escape this is to get into Bitcoin early and not go back.
