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Date: 13/04/2022

Title: Regulatory and Operational Impacts of 2022 Virtual Assets Regime Circulars in Hong Kong

Teaser: Virtual asset 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.

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Regulatory and Operational Impacts of 2022 Virtual Assets Regime Circulars in Hong Kong

Author: Adrien Barquissau, Gregory Achache, Kritika Taneja, Katy Kwok, and Marina Mai

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:

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Figure 1:  Virtual Asset  reports timeline

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:

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Figure 2: Key areas of impact of HKMA, SFC and MAS circulars

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:

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Figure 3:  VA-related activities clarified by the SFC

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:

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Figure 4: Regulatory regimes impacted

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)
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In order to embrace those adaptations, the following staggered workstreams shall be engaged by Financial Institutions:

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Figure 5: Operating model adaptations

Why Work with Us?

“Synpulse helped shape the entire value chain, from identifying gaps and formulating controls and implementing solutions to ensuring regulatory compliance.” – Client testimonial

  

Subject Matter Expertise

Synpulse has been proposing multi-dimensional operating model to enable trading, booking, settling, monitoring and reporting of virtual assets in a safe and efficient way. Our expertise in regulatory compliance and risk topic has a proven track for technology-driven business processes re-engineering and target operating model implementation.

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Extensive Industry Experience in the Asian Market

Having worked with eight of the ten largest financial institutions in Asia over the past ten years on an array of successful projects, we understand the most pressing regulatory and compliance challenges this region faces, and aim to support and help our clients face the challenges with our proven methodologies.

We would be delighted to share industry best practices and provide you with further information on how this risk topic may impact your organisation. Reach out now to Gregory Achache (Associate Partner) at gregory.achache@synpulse.com and Adrien Barquissau (Director) at adrien.barquissau@synpulse.com.

   


1 Defined in the introduction to Intermediaries’ Virtual Asset-related Activities as follows: “Virtual assets refer to digital representations of value which may be in the form of digital tokens (such as utility tokens, stable coins or security- or asset-backed tokens); or any other virtual commodities[…] irrespective of whether they amount to securities or futures contracts.”           2 Chainanalysis. The Chainanalysis 2021 Geography of Cryptocurrency Report. Accessed on 5 April 2022.                                                 3 HKMA. Regulatory approaches to Authorized Institutions’ interface with Virtual Assets and Virtual Aseet Service Providers. 28 January 2022.                                                                                                                                                                                                                                       4 SFC. Joint circular on intermediaries’ virtual asset-related activities. 28 January 2022.                                                                                     5 IA. Regulatory Approaches of the Insurance Authority in Relation to Virtual Assets and Virtual Asset Service Providers. 28 January 2022.                                                                                                                                                                                                                                       6 Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets. October 2019.



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Gregory Achache

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