Global Perspectives
Deep-dive into global regulatory approaches to Web3 to help you learn more about global policies, opportunities, and cross-border synergies.
In the first article of this series on the Hong Kong Web3 landscape, we have explored the overarching regulatory framework that governs virtual asset businesses and customers in Hong Kong, including service providers and trading platforms. From the “opt-in” regime enforced in 2019 (“regulatory sandbox”) to the mandatory regime for Virtual Asset Trading Providers (e.g., Hashkey Exchange, OSL, etc.) that came into effect on 1 June 2023, Hong Kong is moving to a comprehensive licensing framework to carefully regulate VA-related activities.
Before we dive deeper into the current projects and future developments in the local industry, it is essential to clarify the definition of some recurring terms for a better understanding of the Web3 landscape in Hong Kong. In this article, we will explore some key concepts, including:
- What are Virtual Assets (VAs)?
- Does Bitcoin qualify as a VA?
- Are non-fungible tokens (NFTs) considered VAs or not?
- Who can offer VA services in Hong Kong?
What are “Virtual Assets” (VAs)?
According to the city’s anti-money laundering law’s amendment issued in 2022, VAs (also called “tokens”) are “a cryptographically secured digital representation of value.” Virtual assets encompass:
- digital tokens (such as utility tokens, stablecoins, or security- or asset-backed tokens), and
- any other virtual commodities, cryptoassets, or other assets of the same nature.
VAs are a unit of account or store of economic value and can be used (or intended to be used) as a medium of exchange for the following purposes:
- buying goods or services,
- discharging a debt,
- investing, or
- providing rights, eligibility, or access to vote on the management, administration or governance of affairs related to such assets (e.g., DAO tokens).
Virtual Assets include cryptocurrencies, stablecoins, and non-fungible tokens, with variations in the classification and categorization dependant on their functionality.
Some exceptions
Not all tokens are considered VAs. The following categories do not qualify as Virtual Assets under Hong Kong legislation:
- Central Bank Digital Currencies (CBDCs), digital representations of value that are “issued by a central bank or by an entity that performs the functions of a central bank or by an entity authorized by a central bank on its behalf” (LegCo). This means that eHKD and eCNY are not considered Virtual Assets.
- “Limited purpose digital token” is any “…digital representation of value that is similar to a customer loyalty or reward point or an in-game asset and it is not intended by the issuer to be convertible into money or another medium of exchange…” The classification of a token as a Limited purpose digital token is subject to contextual deliberations (see more below).
Is Bitcoin a Virtual Asset?
Most cryptocurrencies, including Bitcoin, are considered Virtual Assets. Yet they usually do not qualify as “Security Tokens”, i.e., tokens regulated as securities under Hong Kong law.
VAs can be categorized as Security Tokens (or “tokenized securities”) or Non-Security Tokens (also “Utility Tokens” or “Virtual Commodities”). Virtual Assets may be considered securities if they:
- represent equity or ownership interests in a corporation;
- create or acknowledge a debt or liability owed by the issuer;
- pay regular returns to investors that amount to dividend or interest; or
- give their holders rights akin to that of a creditor or a shareholder (e.g. voting rights or the right to participate in the distribution of the corporation’s surplus assets upon winding up).
Cryptocurrencies are Virtual Assets. Most cryptocurrencies (e.g., Bitcoin) and stablecoins do not qualify as securities unless they fall under the definition of “securities’’ under the Securities and Futures Ordinance (SFO).
Are stablecoins VAs?
Stablecoins are considered a subset of VAs. Thus, they are not legal tender in Hong Kong.
According to the Conclusion of Discussion Paper on Crypto-assets and Stablecoins published in January 2023 by the HKMA, the Mandatory Stablecoin Licensing Regime will come into effect in 2024/25 to regulate the issuance, governance, stabilization, and provision of wallet services related to stablecoins. Not all stablecoins will be considered but primarily the ones that reference one or more fiat currencies, “irrespective of the underlying stabilization mechanism.”
Do NFTs qualify as Virtual Assets?
NFTs are generally considered to be Virtual Assets. Yet their exact categorization may depend on the context. In fact, NFTs such as collectibles or in-game tokens may or may not be classified as Virtual Assets depending on their exact functionality. NFTs are not Virtual Assets if classified as “limited purpose digital token”. On the other hand, NFTs used for payment or investment purposes may fall under the definition of Virtual Assets.
VA services in Hong Kong
In December 2022, a mandatory licensing regime for centralized Virtual Asset Service providers (AMLO Licensing Regime for VASPs) was announced, expanding the jurisdiction of the Securities and Futures Commission (SFC) to regulate also the non-security tokens services offered by VASPs, and paired with Anti-Money Laundering and counter-financing of terrorism (AML/CFT) obligations.
What are VASPs? VASPs, which stands for Virtual Asset Service Providers, are allowed to perform the exchange, transfer, safekeeping, and administration of VAs. VASPs work with Professional Investors only. Their services include:
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets on behalf of another person that moves a virtual asset from one virtual asset account to another;
- custody service providers;
- participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset or both.
On 1 June 2023, the SFC also started to regulate Virtual Asset Trading Platforms (VATPs) in relation to their services of security and non-security tokens under the Securities and Futures Ordinance (SFO) and the Anti-Money Laundering Ordinance (AMLO). Under a dual licensing regime, VATPs can now apply for a license under the SFO and/or the AMLO. Around the same time, the SFC also released the Guidelines for VATPs that formally allow licensed Virtual Asset Trading Platforms to offer services of non-security VAs to retail customers — and not only Professional Investors.
“Under the new regime, centralized virtual asset trading platforms operating in Hong Kong will need to apply to the Securities and Futures Commission (SFC) for a license under the Securities and Futures Ordinance (Cap 571) (SFO) and/or the AMLO (Dual Licence Arrangement).” (SFC)
According to the current guidelines, all VATPs will be required to have obtained a license by next spring to continue their services in Hong Kong. If not, they will need to leave the market.
Conclusions
Along with building a comprehensive and customer-oriented regulatory framework, Hong Kong is also looking to bridge the gap between traditional and innovative industries with a block-building approach. As this is happening, more pilot programs are being implemented and more platforms are looking to formalize their role in the local market.
What are some of the key pilot projects happening in Hong Kong? And which platforms are looking for a long-term actor in the scene?
Stay tuned for Part 3 with more takeaways from the Hong Kong Fintech Week, including partnerships, future developments, and pilot program insights shared at the event.
This article is only intended to provide a summary of the key regulations and other practices carried out in the region at issue. It is not intended to cover all the legal or regulatory issues that may be involved in– or risks that may arise from–the engagement with virtual assets and any other asset or activities mentioned, and it does not intend to provide any kind of advice or suggestion to individuals and/or corporates.
About V Systems
V Systems (VSYS) is an open-source network that supports the efficient and agile development of decentralized applications. VSYS is designed for real world use cases, making it possible to create, send, trade and track them in a digital form. VSYS is able to handle millions of transactions each day and runs on a decentralized, open network.
Stay Connected
Twitter: https://twitter.com/VSYSCoin
Telegram:https://t.me/VSYSOfficialGroup
Medium:https://medium.com/vsystems
YouTube: https://www.youtube.com/channel/UC3tnJX2dztNKh2yJxFVSDAw
Reddit:https://www.reddit.com/r/V_SYSTEMS/
Github: https://github.com/virtualeconomy/v-systems
VSYS Coin
Coinmarketcap: https://coinmarketcap.com/currencies/v-systems/
Coingecko: https://www.coingecko.com/en/coins/v-systems
Useful Links
VSYS Official Website: https://www.v.systems
Supernode Ranklist: https://vsysrate.com/
VSYS Blockchain Explorer: https://explorer.v.systems
