Regulatory and Operational Impacts of 2022 Virtual Assets Regime Circulars in Hong Kong
Virtual asset1 (VA) markets have been burgeoning in the last two years in Asia. Zooming in on cryptocurrencies, the region contributed to 43% of global activity, the equivalent of USD 296 billion in transactions in 2021 alone2 . With the increasing adoption and use of virtual assets in financial systems and markets, regulatory clarity and certainty will be key to maintain market stability through the course of the coming years.
In response to growing interest on the part of financial institutions in providing VA-related products and services, regulatory bodies in Hong Kong issued three circulars in January 2022, after an initial consultation on stablecoins earlier the same month, to lay out a regulatory framework for VAs:
- The first circular from the Hong Kong Monetary Authority (HKMA) on “Regulatory approaches to Authorized Institutions’ Interface with Virtual Assets and Virtual Asset Service Providers”3
- The second circular from the HKMA and the Securities and Futures Commission (SFC) on “Intermediaries’ Virtual Asset-related Activities”4
- The third circular from the Insurance Authority (IA) on “Regulatory Approaches of the Insurance Authority in Relation to Virtual Assets and Virtual Asset Service Providers”5
The Hong Kong circulars are the latest milestones in a high-paced series of publications, also embraced by the Monetary Authority of Singapore (MAS), patterned on output from Financial Action Task Force (FATF) working groups:
These circulars mainly target virtual exchanges, financial intermediaries and insurers, providing comprehensive guidance on VA-related activities with a focus on risks, regimes and frameworks to comply with. Here are some key considerations for market participants who wish to engage in VA-related proprietary investments and client services:
Key requirements for VA-related activities
The circulars have tightened scrutiny over those undertaking VA-related activities by introducing controls and restrictions in the following main areas:
Impacts on existing regulatory regimes
While they retain a strong focus on the protection of professional investors, the circulars also target aspects such as market surveillance and licensing:
Target timeline and next steps
Authorised institutions must adapt their operating model either:
- Immediately (for those who have already embarked on a VA journey)
- Within six months, e.g., early July (for those who have not yet started advising on, dealing or selling virtual asset services or products to clients)
In order to embrace those adaptations, the following staggered workstreams shall be engaged by Financial Institutions:
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