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Fintech: cryptoassets – navigating a fragmented legal framework

Asian cryptoasset rules

The regulatory regimes for cryptoassets across Asia are perhaps almost as diverse in shape as the cryptoassets they cover.

Japan, Singapore and China

Authorities in Japan and Singapore (along with Hong Kong – see below) have been stepping up their ability to supervise cryptoasset activities, while Chinese regulators are rapidly cracking down on cryptoassets by not only banning financial institutions and payment companies from offering services related to cryptoassets, but also shutting down the local cryptoasset mining outfits that facilitate the maintenance and development of cryptoasset ledgers. 

Even among the markets taking a more permissive approach to cryptoassets, the regimes currently stand at vastly different stages of development. Japan was the first to have a legislative definition of ‘cryptoasset’ in 2017 (partly a response to the collapse of the Japanese bitcoin exchange, Mt. Gox), while Singapore has built cryptoassets into an omnibus framework covering both new and traditional payment activities, which came into effect in early 2020.

Hong Kong

Hong Kong is implementing a non-legislative ‘opt-in’ regime as an interim fix while legislative change remains a year or two away. 

The territory’s approach provides a lesson in how to apply indirect regulation to cryptoasset service providers.

For example, despite not having the statutory power to regulate most cryptoassets or custody services, the Hong Kong Securities and Futures Commission (SFC) has nonetheless established clear standards for cryptocustodians by pulling the levers of the regulated entities that make use of cryptocustody services.

These regulated entities include ‘virtual asset trading platforms’, which can opt in to the regime by trading at least one security token on their platform (ie cryptoassets that are legally ‘securities’ or ‘futures contracts’ and fall within the SFC’s existing regulatory perimeter) and fund managers who invest 10 per cent or more of a fund’s gross asset value in cryptoassets.

The SFC expects these entities to put in place appropriate custodial arrangements for clients’ cryptoassets, with relevant factors including the allocation of assets across ‘hot’ and ‘cold’ wallets, insurance coverage, and procedures for blockchain forks and airdrops. 

Hong Kong regulators have for some time been signalling to the market that the rapid evolution of the cryptoasset sector cries out for new, comprehensive legislation that enables innovation in an environment where new risks are addressed properly.

We have started to see this new legislation take shape, as the SFC has consulted on proposals to introduce a new, extended licensing regime for cryptoasset exchanges under Hong Kong’s AML legislation. 

Although it will be some time before this regime is enacted, the proposals should prompt cryptoasset businesses (including offshore exchanges that market their services into Hong Kong) to assess whether they can meet the regulatory requirements to obtain a licence, including a (temporary) complete ban on providing cryptoasset exchange services in Hong Kong to retail investors.