Hong Kong’s Virtual Asset Regulation: From Tightening to Acceptance

On April 11th, at the “Policy and Industry Practice” Summit Forum of the Hong Kong Web3.0 Association, Zhao Jiali, former director of the Financial Technology Group of the Hong Kong Securities Regulatory Commission, stated that Hong Kong regulatory agencies had been aware of the need to regulate virtual assets to develop financial technology as early as the 2017 ICO wave. In 2018, while the UK and the US were still thinking, Hong Kong began to construct a virtual asset regulatory framework, although initially it was a tightening policy, But currently, policies are slowly being relaxed and further accepting virtual assets.

Former Director of the Financial Technology Group of the Hong Kong Securities Regulatory Commission: Hong Kong regulatory authorities have been interested in regulating virtual assets since 2017

At the “Policy and Industry Practice” Summit Forum of the Hong Kong Web3.0 Association held on April 11th, Zhao Jiali, former director of the Financial Technology Group of the Hong Kong Securities Regulatory Commission, revealed that Hong Kong regulatory agencies had recognized the urgency of regulating virtual assets to boost financial technology as early as the 2017 ICO wave. In 2018, while the UK and the US were still contemplating, Hong Kong took the lead in establishing a regulatory framework for virtual assets. Although the initial stance was tightening, policies towards virtual assets have gradually been relaxed and further acceptance is evident.

Introduction

The rise of virtual assets has not only catalyzed innovation in the financial industry but also posed challenges for regulators. As a financial hub, Hong Kong had to strike a balance between nurturing virtual asset innovation and managing associated risks. This article will trace Hong Kong’s regulatory development on virtual assets – from the early recognition of regulation needs to the current trend of acceptance.

History of Virtual Asset Regulation in Hong Kong

2017: Hong Kong Takes the Lead in Recognizing the Need to Regulate Virtual Assets

In the global ICO wave of 2017, virtual assets and blockchain technology gained rising attention. In Hong Kong, regulators realized the potential of virtual assets to drive financial technology and the challenges in managing an emerging asset class. As Zhao Jiali noted, the relevant regulatory agencies started discussing regulatory measures for virtual assets as early as 2017.

2018: Hong Kong Establishes a Framework for Virtual Asset Regulation

In 2018, Hong Kong’s Securities and Futures Commission (SFC) announced a regulatory framework for virtual assets. The framework targeted the activities of virtual asset trading platforms, which were required to apply for SFC licenses and comply with regulations in areas such as KYC/AML, custody, and risk management. With the regulatory framework, Hong Kong led the global trend in cracking down on fraudulent ICOs and enhancing investor protection.

Early 2019: Hong Kong Strengthens Regulation on Virtual Assets

At the beginning of 2019, Hong Kong’s government proposed an amendment to the anti-money laundering laws that would mandate virtual asset trading platforms to seek Licensing from the SFC. The amendment aimed to close the regulatory loophole that allowed some virtual asset trading platforms to operate without a license.

Q2-Q4 2019: Hong Kong Policy Shifts from Tightening to Accepting Virtual Assets

In the second quarter of 2019, Hong Kong released a regulatory circular that allowed virtual asset trading platforms to serve professional investors, representing a step towards liberalization. In the following months, Hong Kong further demonstrated its openness to virtual assets. For example, in November 2019, the SFC granted the first two virtual asset licenses to OSL and ANXONE, demonstrating the regulator’s recognition of virtual assets as a legitimate asset class.

Hong Kong’s Approach towards Virtual Asset Regulation: Lessons and Prospects

Hong Kong’s pathway towards virtual asset regulation offers several insights. First, the regulators’ early attention to virtual assets helped Hong Kong stay ahead of the global regulatory curve, which freed Hong Kong from being reactive to others’ moves. Second, the initial tightening stance showed Hong Kong’s determination to tame the risk of virtual assets, even though it might have delayed the adoption and innovation of virtual assets. Third, the gradual shift to accepting virtual assets suggests that Hong Kong aims at a balanced regulatory approach, which respects innovation while maintaining investor protection and financial stability.

Conclusion

Hong Kong’s recognition of the virtual asset phenomenon and regulatory response demonstrate the proactive stance of Hong Kong on embracing fintech while managing risks. From the early discussion to the current licensed trading platforms, Hong Kong’s virtual asset journey reflects a balancing process between risk management and innovation. Although virtual assets remain a newer area, Hong Kong’s experience proves valuable in building healthy ecosystems for virtual assets.

FAQs

**Q1: What is Hong Kong’s regulatory framework for virtual assets?**
Answer: Hong Kong’s Securities and Futures Commission (SFC) introduced a regulatory framework for virtual assets in 2018, which required virtual asset trading platforms to apply for SFC licenses and comply with regulations in areas such as KYC/AML, custody, and risk management.
**Q2: What is Hong Kong’s attitude towards virtual assets now?**
Answer: While initially adopting a tightening policy towards virtual assets, Hong Kong has gradually shifted to accepting virtual assets as demonstrated by regulatory circulars and licensed trading platforms.
**Q3: Has Hong Kong’s approach to virtual asset regulation been successful?**
Answer: The success of Hong Kong’s approach to virtual asset regulation can be testified by being ahead of the global regulatory curve, cracking down on fraudulent ICOs, and fostering the growth of licensed virtual asset trading platforms.