Hong Kong Regulators Give Banks And FIs Green Light To Crypto
The Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) issued a joint announcement giving the financial-services industry the green light to do crypto business.
Licensed institutions have been nervous about handling digital assets without regulatory clarity. The message from Hong Kong’s two most important regulators should clear all related uncertainty and was warmly welcomed by the industry players.
Jehan Chu, Co-Founder of Kenetic, a Hong Kong-based blockchain company and investor said: “This is massive!”
“This model is the one we’ve been expecting for years,” said Gary Tiu, executive director and head of regulatory affairs at BC Technologies Group.
Suitability test
The announcement clears the path to banks and brokers to offer crypto trading services to professional investors in two ways: through an omnibus account (in which assets trade in the institution’s name), or as an introducing broker.
Institutions must ensure digital asset products are suitable for clients, whether they are selling (distributing) or advising on them. According to the SFC/HKMA announcement virtual asset (VA) products should be considered complex products, and therefore unsuited to retail.
“For example an overseas VA non-derivative ETF would very likely be considered a complex product and it should only be offered to professional investors.”
In order to deal in them, the institutions are required to conduct an internal assessment of the client’s knowledge of virtual assets, and form a fiduciary role.
“If a client does not possess such knowledge, the intermediary may only proceed if, by doing so, it would be acting in the client’s best interests and it has provided training to the client on the nature and risks of virtual assets.”
With the current regulation, wealth managers already are required to ensure suitability protocols for traditional investment products. However, crypto assets will require additional processes and know-how, for which private banks and brokers will already have a suitability framework in place. The firms that deal in multi-asset portfolios, can now add crypto.
The announcement details an exception for a handful of overseas regulated exchanges recognized by the SFC that are allowed by their respective regulators to offer VA derivative products to retail investors. Hong Kong will not require these products pass a suitability test.
VA-licensed partners
Regardless of the product, any institutions doing VA business must engage partner that is based in Hong Kong and has a virtual-asset license. This is the case even if the virtual asset is not considered a security.
This means financial institutions acting as intermediaries would not be dealing directly in virtual assets; their execution role would be only as a payment gateway between fiat currency and virtual assets. (The circular does not touch on the prospect of Hong Kong issuing central-bank digital currency and its potential role in these relationships.)
The VA license scheme was announced by SFC in 2020. So far, only OSL, which is operated by BC Technologies, has a VA license for dealing (it also has the only license for a VA exchange). Other blockchain companies such as HashKey and HKbitEX have submitted applications.
For the moment, however, OSL has a lock on servicing financial institutions as a custodian and broker of virtual assets, including responsibility for cybersecurity.
According to Tiu:
“This gives banks and brokers a light lift to do their first trade. There’s no need for them to invest in the infrastructure and conduct the due diligence in what is a safe environment for them to meet client needs.”
Of course, it is now likely that SFC will grant more VA dealing licenses, and not just to blockchain companies. Banks, brokers, and wealth managers will likely be filing for their own licenses.
“This clarifies access to overseas products, so it means more competition,” says the head of digital at a global fund house.
BC’s Tiu acknowledges that many institutions will want to develop full capabilities: “The race has already started for banks and brokers to become a one-stop shop, and some are ready. We welcome competition because it’s good for the space.”
What about retail?
The circular does not address one big unknown, which is the fate of unregulated crypto exchanges and brokers that serve retail customers. These businesses are not directly impacted by the circular and will continue their operations.
They may find themselves under competitive pressure, however, as institutional money flows to regulated operators.
Nor does the circular help bring retail investors under a protected, regulated regime: they remain outside, and therefore vulnerable, so long as financial institutions can only deal in crypto with professional investors.
The fate of retail may have to wait until the city’s Legislative Council revisits the Anti-Money Laundering Ordinance, which it is expected to do later this year. The entire crypto space in Hong Kong has been only regulated by existing AML and KYC rules for payment purposes – a relatively light regime, with no oversight of crypto spot markets.
