Legal regulations and free market in Hong Kong
Hong Kong is known for the fact that it’s a very reliable regulator that’s also non-interventionist. You have the rules ready to go and if you have a bit of legal training, you can understand everything without a problem. The rules are not contradictory as they often are, and you do have some good options here. You have to keep in mind that some of the license regimes are on the restrictive side, and they are connected to the real estate world most of the time. You also have licenses that aren't given out to current license holders.
What this means is that the free market principles and the rule of law are prevailing here, however the market is duopolized, and there’s quite a lot of competition to deal with. Even if Bitcoin is not regulated, the reality is that there are some limitations when it comes to using and dealing with bitcoin in this country, which is what matters the most in such a situation.
Bitcoin Regulation in Hong Kong
The thing to note about bitcoin is that it didn’t get under the Hong Kong regulator radar until 5 years ago. There wasn’t that much bitcoin activity, however Bitfinex started to offer this kind of services, and they did provide an exchange for trading bitcoin, which is what started this current. Bitcashout and ANX started to offer this service soon after that, and it was at that time when the bitcoin prices started to increase.
In December 2013, Bitcoin prices were around $1153.27 on Bitstamp. According to John Tsang, the Financial Secretary, there was a lack of support from the issuer or the state. The blog post also covered things like how volatile bitcoin can be and how it might be a bursting bubble in such a situation.
Exactly a year later, this problem was covered by the Hong Kong’s parliament in their Legislative Council. Christopher Cheung, a legislator from the financial services, started to ask whether the government will have a clear position when it comes to bitcoin. Without the right regulations, it would be very hard to figure out what to do with stuff like this.
John Tsang stated that bitcoin is a commodity that was brought by the cyber world. He didn’t see it as electronic money or a powerful payment method. Which is a shame, because a lot of people did think about it that way and it worked quite well for them as a whole in the end.
The policy was created with the C&ED, FTB, SFC, and HKMA that worked closely with the mainland Chinese counterparts. This was a very important factor when it came to the Bitcoin regulation, and changing that approach was extremely hard to do. During a Legislative Council meeting in January 2014, they retained the same idea that Bitcoin is basically a speculative product and people that use it need to be careful.
Bitcoin’s Virtual Commodity Nature
It was due to that reason why bitcoin was mostly a virtual commodity and nothing else entirely. The thing to consider here is that Bitcoin was not regulated by the SFC or the HKMA. Hong Kong is a free port, so they don’t have a lot of restrictions on exports and imports, there are no tariffs charged either.
However, some of the regulatory principles from a financial standpoint can still apply especially in the case of commodity trading.
We can use a Customs and Excise Department document issued on January 30, 2014, as a guideline. If you deal with bitcoin, you need to acquire customer info and update it as needed, the same thing happens when it comes to the relationship and connections you have with the Bitcoin owner. You also have to find the source of funds and wealth, monitor the transactions and talk with the Financial Intelligence Unit if there are any fraudulent approaches or anything like that.
Even if the JFIU doesn’t have any major legal influence, they do showcase a report from 2014 that was created by the Paris-based Financial Action Task Force (FATF), and it can be used as a reference point whenever that’s needed.
Prof KC Chan, the Secretary for Financial Services & the Treasury also stated in 2015 that there’s no need for bitcoin regulation as of yet.
Bitcoin’s Virtual Currency Nature
Multiple institutions in HK have started to refer to Bitcoin as a virtual currency instead of a commodity. The Legislative Council named Bitcoin a virtual currency in some of its recent publications. The same thing was a part of the Money Laundering and Terrorist Financing Risk Assessment Report where the FCTB wrote that Bitcoin is a virtual currency. Even the HKMA stated that bitcoin is a virtual currency in the Whitepaper on Distributed Ledger Technology that they released in November 2016 and their Whitepaper 2.0 in October 2017. This goes to show that Bitcoin is more of a currency instead of an online fad.
Hong Kong has low taxes and a rather simple tax regime. You don’t have to worry about any capital gain or VAT tax. If you perform Bitcoin transactions, you never have to worry about a legal hassle. You do need to pay income tax, and that can be paid in bitcoin or HK dollars.
HKD Exchange Rights
According to the Article 112 of the Basic Law, you will notice that foreign exchange control policies are not applied to Hong Kong. The local dollar can be converted with ease, and markets for futures, gold, securities and foreign exchanges will continue at all times. The idea here is that you don’t have to worry about a ban on bitcoin or anything like that. The law doesn’t state that the government can stop any restrictions, however there are no particular restrictions to worry about at this time.
Bitcoin Exchanges, ATMs and Forex
The Customs and Excise Department stated in January 2014 stated that the Bitcoin ATM, exchange or even the Forex booth does not require any MSO or money service operator license. Why is that? Because Bitcoin is not considered to be money, so there’s no need to talk about the regulatory regime in this situation.
A lot of people are interpreting this that they shouldn’t obtain an MSO. It doesn’t matter that you operate with Bitcoin, you still need to have a licensed and regulated business if you want to operate legitimately in Hong Kong. A lot of Bitcoin ATMs and Bitcoin products were removed if they are unlicensed.
So even if there’s a small legal caveat, it’s safe to say that putting a lot of focus on legality is a crucial aspect here. This only applies to the companies that are licensed under the C&ED regime. If your business is not under that regime, you don’t need to feel restricted.
The HKMA’s relations with banks
HKMA is known for dealing warnings with Bitcoin, but they don’t have any jurisdiction over it. There were some warnings related to the volatility offered by this and the fact that there’s no state backing.
The HKMA guides people towards banks and not using Bitcoin. Even if they agree that this is a decentralized currency used globally, they do focus on dismissing it rather than accepting it.
But many banks are hesitating to create accounts for financial service businesses. If you have anything to do with crypto content like bitcoin, then doing that is even harder than you might imagine. A few private accounts were shut down because there were bitcoin involvements. So, it’s clear that banks don’t want anything to do with bitcoin if possible.
Trading futures and derivatives means carefully following the Securities and Futures Commission requirements, even if bitcoin trading is not exactly regulated. There’s no real precedent as no HK exchange is offering this type of product. However, if an exchange does provide such a thing, it needs to be a part of an unregulated jurisdiction. The SFC doesn’t like regular overseas companies, so you can try to trade derivative products if you are an overseas business.
Hong Kong doesn’t have a particular payment processor that’s active and ready to use. You can use CoinPayments or Bitpay, however they are not exchanging bitcoin to local currency. They only do this type of stuff on demand; it’s not a regular service for them.
There’s also the possibility that HKMA will try to put the payment processors under their own jurisdictions under the SVF license. However, it might take some time until that happens.
If you have a money lending service in bitcoin and you want to advertise it, you need a Money Lenders’ license offered by the Companies Registry. The thing to notice is that this is required for any money lender, it doesn’t matter if you lend bitcoin or not.
It’s easy to see that the securities law is quite complicated, and that lends itself to the bitcoin products as well. It doesn’t matter if you trade bitcoin securities or commodities, everything is examined with great care. Some of the tokens from the ICOs or token creation events are securities most of the time, and offering them to the unqualified HK investors is not something legal. The SFC will not go after any securities that weren’t a part or advertised for the HK investors.
On February 9, 2018, we noticed that the SFC got in touch with Hong Kong exchanges. These were required to delist all the token securities. Even the ICO issuers had to stop their ICO or comply with the regulation for these securities. Brokering tokens, advising any token offerings or trading tokens needs an SFC license.
As the bitcoin popularity increases, this will become more and more regulated. The C&ED will most likely focus on bitcoin as it already does. They might require a VCD license or MSO license for people that want to trade or deal in it. The ATM operators, exchanges and brokers that use bitcoin will have to acquire a license from the C&ED, prove that they have a clean record, a physical location, capitalization, and residency. This is a great system to help eliminate scams.
It’s safe to say that the SFC is set to clarify the derivatives and trading rules. It’s also a possibility that funds like the ETFs and many others might become possible and they might even get listed as well.
But this will take a while, especially if we are waiting for the HK government to consider bitcoin a currency. If that happens, the HKMA will have clear rules, banks will offer bitcoin investment services and products, and you will not have a problem with including bitcoin products into your offer if you have an SVF license.Source