Regulation of cryptocurrencies using the example of Hong Kong

Hong Kong, as befits administrative autonomy with its own government and parliament, has until now remained the only cryptocurrency stronghold in the PRC amid a series of bans adopted by the Chinese authorities in this area. What has changed this year and what it is connected with - let's try to figure it out in our article today.

Hong Kong, located on the southern coast of China, is one of the most developed administrative regions of the PRC. And although the People's Republic of China gained sovereignty over Hong Kong in 1997, according to the Sino-British Joint Declaration and the Basic Law of Hong Kong, the territory of Hong Kong is granted broad autonomy until 2047, that is, for 50 years after gaining sovereignty. 

During this period, the Central People's Government of the People's Republic of China took charge of the territory's defense and foreign policy, while Hong Kong retained control over legislation, the police, the monetary system, duties and immigration policy, and also retained representation in international organizations and institutions.

Until 2018, all participants in the cryptocurrency market located in Hong Kong jurisdiction felt very at ease. A minimum of regulatory restrictions and prohibitions has led to the fact that the majority of Chinese cryptocurrency exchanges and exchangers, rightfully fearing persecution from the Chinese authorities, have moved their activities here. And most cryptocurrency startups of Asian origin initially try to take root in Hong Kong.

But such freedom and loyalty became an incentive not only for the development of the entire crypto industry as a whole, but also led to numerous abuses by unscrupulous cryptocurrency players.

As a result, in February 2018 The Securities and Futures Commission of Hong Kong (SFC) sent lettersto 7 cryptocurrency exchanges and exchange offices regarding the listings of ICO tokens they have begun (equating them to securities) without a license. Most exchanges responded immediately by taking immediate corrective action, including removing problematic cryptocurrencies from their platforms.

In a previously unprecedented decision, the SFC “has taken regulatory action against a number of cryptocurrency exchanges and ICO issuers.”.. 

In its letters, which were addressed to cryptocurrency exchanges, the regulator for the first time issued a warning (though not a ban) “that they should not trade cryptocurrencies that are “securities” as defined in the Securities and Futures Regulations (SFO) without a license.” 

This regulatory response by the SFC follows its previous warning dated September 2017, which explicitly stated that digital tokens may be considered securities as defined by the SFO "and in accordance with Hong Kong securities laws."

In addition, the SFC stated that "the majority of Hong Kong ICOs have confirmed compliance with the SFC's regulatory regime or have immediately ceased offer tokens to Hong Kong investors," adding that it "will continue to closely monitor ICOs and will not tolerate any violations of Hong Kong securities laws."

In addition, the Commission stated that it "may take further action where appropriate" against any crypto exchanges (exchanges) that have not taken into account the provisions of the SFO, or have committed repeated violations.

Recall that last fall the SFC repeatedly warned investors about risks associated with cryptocurrencies and investments in ICOs. Following the warning in September 2017, the Commission issued a follow-up circular in December warning investors about the risks associated with Bitcoin futures contracts and other cryptocurrency investments.

The Commission noted at the time that it had received a number of complaints from investors related to their failure to withdraw fiat and cryptocurrencies from their accounts on crypto exchanges. “Some complainants alleged that cryptocurrency exchanges misappropriated their assets or manipulated the market, claiming that technical glitches on their platforms caused them significant losses,” the regulator said. Verbatim: “Several complaints against ICO issuers had signs of illegal or fraudulent activity.”

At the time, FSC CEO Ashley Alder commented: “We will continue to monitor the market and enforce where necessary.” .... But we also encourage market professionals to perform due diligence to prevent fraudulent or questionable fundraising and to help us enforce the law."

However, while Chinese authorities prohibit foreign crypto exchanges, Hong Kong, unlike the mainland, still allows unregulated trading of digital tokens provided they fall out of the format where they can fall under the jurisdiction of the FSC.