18 ASIAN LEGAL BUSINESS – JUNE 2023 WWW.LEGALBUSINESSONLINE.COM CRYPTO technology to issue NFTs as supplementary rewards for good performance. MOVE TOWARDS REGULATION Hong Kong has been an international finance hub for decades and has plenty of experience providing fast and efficient financial services. It is looking to replicate all that in the crypto space. Thanks to a relatively loose regulatory environment, the city was once home to some big names in the crypto space, including Bitmex and the controversial failed exchange FTX. Hong Kong started later than Japan and only recently confirmed the nature of cryptocurrencies in its regulations. In an April case involving the now-defunct crypto exchange Gatecoin, a Hong Kong court ruled that cryptocurrencies are “property” that can form the subject of trust. Before the Gatecoin decision, some case law confirmed that the familiar legal principles of trusts and injunctions could apply equally to cryptocurrency as a novel asset class, though the issue of whether they were property had not been ruled upon directly, according to Man of Baker McKenzie. Man notes that the Gatecoin decision has significant implications for players in the cryptocurrency market by offering greater certainty concerning their legal status and the rights and obligations under the law. “This may positively impact the ability, for example, for banks and other financial institutions to accept (virtual assets) as collateral and take security over these assets,” says Man. “The decision also confirms, for cryptocurrency exchanges and their investors, that the terms and conditions of use of the exchange are a key factor in determining whether the cryptocurrencies deposited are held in trust for an investor and will be returned to users if the exchange is wound up or made available for distribution to unsecured creditors.” Man says VAs are challenging to regulate because blockchain and smart contracts offer almost limitless scope for issuers to determine the nature of a virtual asset and its rights and obligations. This means each VA needs to be considered on a case-by-case basis against the relevant regulations, and its treatment determined in light of the current regulatory regime. However, Hong Kong has ramped up efforts to develop the industry with some regulations in place. “Hong Kong has been very fortunate to have seen an ongoing willingness across key stakeholders and industry participants to contribute to the development of the crypto industry,” says Man. The current environment in Hong Kong is very friendly for Web3 startups, especially those focusing on tech or infrastructure development. Hong Kong has unveiled several initiatives, including a new licensing regime for virtual asset service providers (VASP) that took effect on June 1. The licensing regime centralises virtual asset trading platforms doing business in Hong Kong or actively marketing services to Hong Kong investors, which are licensed and regulated by the Securities and Futures Commission (SFC). Man thinks the changes to the regulatory regime represent an important milestone, and believes Hong Kong is now set for significant development and has the opportunity for healthy growth going forward. “Virtual asset trading platforms (which provide trading services in nonsecurity tokens only) that are currently operating in Hong Kong without a license, or propose to operate in Hong Kong in the future, will be brought within the regulatory remit of the SFC,” Man adds. The new licensing regime will require VA platforms to meet a range of capital and investor protection measures and proposes retail access to licensed platforms. “In addition to regulating from an AML perspective, Hong Kong’s proposed regime imposes both licensing and conduct requirements on platform operators. This includes robust onboarding requirements to conduct investor knowledge and suitability assessments, rules regulating token admission and trading, safeguards on VA custody, and fitness and properness requirements for the individuals and companies that are licensed,” says Man. Man thinks the new regime heralds the next chapter and underscores a renewed and consolidated commitment by the SFC to continue to promote innovation and growth of the VA industry in Hong Kong to all investors. “The SFC’s previous opt-in licensing regime for VA trading platforms which offer at least one security token was one of the first of its kind, and provided a mechanism to foster innovation and investment potential,” says Man. Man believes the revised measures provide an important opportunity to enable the industry’s stable growth and facilitate safer access by a wider group of investors, including the retail segment. Looking ahead, experts think more regulations in the offing will provide even more clarity. Rocky Mui, a partner at Clifford Chance, tells ALB that the SFC published on May 23 the results of its consultation on the proposed regulatory requirements for Virtual Asset Trading Platform (VATP) operators licensed by the SFC. The consultation has received some comments from market participants. “Hong Kong’s proposed regime imposes both licensing and conduct requirements on platform operators. This includes robust onboarding requirements to conduct investor knowledge and suitability assessments, rules regulating token admission and trading, safeguards on VA custody, and fitness and properness requirements for the individuals and companies that are licensed.” — Karen Man, Baker McKenzie
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