Regulation
Cryptocurrency Regulation in Hong Kong 2024
Hong Kong is the most vibrant financial hub in the Asian region. Although it is part of China, it enjoys a special status, which allows the territory to create policies independently to a certain extent. Formally, it was a colony of the British Empire. Its economy still retains some of the liberal features bestowed upon it by its former European masters. The territory is one of the most densely populated regions in the world. The city boasts one of the highest per capita incomes, although income inequality is one of the serious problems that plague its population. The city is known for its welcoming attitude towards technology. It is no wonder that it is now a favorable destination for fintech enthusiasts. Interestingly, in recent years, Hong Kong has turned its attention to becoming a major hub for cryptocurrencies. The local government of Hong Kong has recently introduced several policies to establish a comprehensive regulatory framework for cryptocurrencies. If you are someone who wants to learn more about the regulatory environment of cryptocurrencies in Hong Kong, you should not miss this article.
1. Cryptocurrency Regulations in Hong Kong: An Overview
In Hong Kong, cryptocurrencies are not considered legal tender. Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA)) define virtual assets as digital representations of value used for various purposes. The definition is in line with international standards established by Financial Action Task Force. Cryptocurrencies are generally classified as either security tokens or non-security tokens. Security tokens are digital tokens that are classified as “securities” under the Securities and Futures Ordinance. Non-security tokens are considered virtual assets. The SFC regulates Virtual Asset Service Providers that manage digital tokens. The Mandatory VASP Licensing Regime provides strict criteria for retail investor access, AML/CTF compliance, and restrictions on activities such as algorithmic trading. Managing a virtual asset portfolio exceeding 10% of its value requires a 7VA license in the city. This SFC licensing regime includes specific terms on fund management, risk management, and reporting. Crypto fund managers must also adhere to similar rules. Hong Kong’s cryptocurrency regulatory framework literally covers almost all major cryptocurrency-related activities, from trade to invest.
2. Cryptocurrency Regulations in Hong Kong: What’s New
Here are the latest developments in the cryptocurrency regulatory environment in Hong Kong.
July 29, 2024: Hong Kong’s Securities and Futures Commission has warned the public about Proxinex, a cryptocurrency platform suspected of engaging in fraudulent activities.
July 28, 2024: Politician Johnny Ng has proposed that Hong Kong consider stockpiling cryptocurrencies.
July 17, 2024: CertiK’s proposals for a regulatory regime for stablecoins have been accepted by the HKMA and the Financial Services and Treasury Bureau.
July 3, 2024: Lawmakers have begun reviewing Hong Kong’s cryptocurrency regulations, fearing they could hamper exchanges.
May 28, 2024: The grace period granted to cryptocurrency exchanges to acquire operating licenses has expired, and unlicensed entities are required to cease operations by that date.
May 24, 2024: OKX has withdrawn its application to offer digital asset services in Hong Kong.
January 2, 2024: The Hong Kong Monetary Authority has launched a consultation on stablecoin issuers.
February 2, 2024: Plans have been announced for a consultation on over-the-counter cryptocurrency markets.
June 1, 2023: Hong Kong has introduced new regulations focusing on virtual asset trading platforms.
3. Explanation of the regulatory framework for cryptocurrency taxation in Hong Kong
In Hong Kong, cryptocurrency taxation is guided by the interpretation and departmental practice of the Inland Revenue Department. Notes n. 39 (DIPN 39)The document, which discusses in depth how different types of digital assets are taxed, was actually published in early 2020.
The document mainly classifies cryptocurrencies into two types: security tokens and utility tokens. Income from security tokens is not taxable, as the document considers these tokens as capital goods. Income from utility tokens is taxed if it is sourced from Hong Kong. Digital assets held for long-term investment are considered capital goods and any gains from their disposal are not subject to tax. Income from Initial Coin Offerings is taxed based on the nature of the tokens issued.
For businesses that operate in cryptocurrency, new tokens received, such as airdrops or forks, are treated as business income and taxed accordingly. Cryptocurrencies received as employee compensation are considered taxable income.
Some of the latest developments in the cryptocurrency industry, such as staking and NFTs, are not covered in DIPN 39.
Cryptocurrencies are not included in the exemption regime of the Unified Fund and the standard provisions for loans and grants of shares or for interest on money do not apply.
4. Cryptocurrency Mining in Hong Kong: What You Should Know
In Hong Kong, cryptocurrency mining It is a gray area. Starting a crypto mining business in Hong Kong is less likely to be profitable due to the high cost of electricity in the territory and its limited availability of land. Crypto mining is a process that requires a significant supply of energy. The high operating costs affect the survival of this business. If you start a crypto mining business, the main thing is that the mining facility complies with the Building Energy Efficiency Ordinance.
5. Timeline of the evolution of cryptocurrency regulations in Hong Kong
Here is a timeline of the evolution of cryptocurrency regulation in Hong Kong.
June 2023: The SFC’s compulsory licensing regime for virtual asset trading platforms has entered into force.
January 2023: the SFC and the HKMA released a joint circular that expands the regulation to include distribution, negotiation and consultancy services relating to VAs.
January 2023: The HKMA announced a proposal for a mandatory licensing regime for stablecoins to regulate entities operating with stablecoins.
December 2022: The Legislative Council has approved the Anti-Money Laundering and Countering Terrorist Financing (Amendment) Bill, introducing a compulsory licensing regime for VASPs, covering trading of non-equity tokens.
October 2019: The SFC has introduced the 9VA licensing regime for firms managing portfolios with significant holdings of virtual assets.
November 2018: The SFC has issued a circular establishing the SFC Regulatory Sandbox, providing a controlled environment for testing new financial technologies and distinguishing between utility tokens and security tokens.
September 2017: In its statement on the ICO, the Securities and Futures Commission (SFC) clarified that digital tokens could be considered “securities” if they represent shares, bonds or offer returns such as dividends.
September 2016: The Hong Kong Monetary Authority has launched the Fintech Supervisory Sandbox to facilitate pilot trials of fintech innovations prior to wider implementation.
Final note
In conclusion, Hong Kong’s proactive approach to cryptocurrency regulations in 2024 marks an important moment in its financial evolution. By embracing digital asset ETFs and enabling tokenization of traditional securities, the city has positioned itself as a beacon of innovation in Asia. This regulatory clarity not only attracts global fintech investment but also fosters fertile ground for local cryptocurrency startups to thrive. With major conferences and events further boosting its profile, Hong Kong is proving that responsible regulation can coexist with technological advancement, paving the way for sustained economic growth and reaffirming its status as a dynamic financial hub in the digital age.