Regulation
Hong Kong Cryptocurrency Regulations 2024
Hong Kong is the most dynamic financial hub in the Asian region. Although it is part of China, it enjoys a special status that allows it to create policies independently to a certain extent. Officially, it was a colony of the British Empire. Its economy still retains some of the liberal features that its former European masters gave it. The territory is one of the most densely populated regions in the world. The city enjoys one of the highest per capita incomes, although income inequality is one of the serious issues that trouble 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 towards becoming a major hub for cryptocurrencies and virtual assets. The local government of Hong Kong has recently introduced several policies to establish a comprehensive regulatory framework for cryptocurrencies. If you want to know more about the regulatory environment of cryptocurrencies in Hong Kong, you should never miss this article.
1. Cryptocurrency Regulation in Hong Kong: An Overview
In Hong Kong, cryptocurrencies are not considered legal tender. The 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 consistent with international standards set by the Financial Action Task Force. Cryptocurrencies are generally classified as either security tokens or non-security tokens. Security tokens are digital tokens classified as “securities” under the Securities and Futures Ordinance. Non-security tokens are considered virtual commodities. The SFC regulates virtual asset service providers that deal in digital tokens. The VASP compulsory licensing regime provides strict criteria for retail investor access, compliance with AML/CTF regulations, and restrictions on activities such as algorithmic trading. Managing a virtual asset portfolio of more than 10% of its value requires a Type 7VA license in the city. This SFC’s licensing regime includes specific conditions 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 crypto-related activities, from trading to investing.
2. Cryptocurrency regulation in Hong Kong: what’s new
Here are the latest developments in the cryptocurrency regulatory environment in Hong Kong.
July 31, 2024: Politician Johnny Ng has proposed that Hong Kong consider storing crypto assets.
July 29, 2024: The Hong Kong Securities and Futures Commission has warned the public about Proxinex, a cryptocurrency platform suspected of engaging in fraudulent activities.
July 22, 2024: CertiK’s proposals for a stablecoin regulatory regime have been accepted by the HKMA and the Financial Services and Treasury Bureau.
July 4, 2024: Lawmakers have begun reviewing cryptocurrency regulations in Hong Kong, fearing they could deter trading.
May 31, 2024: The grace period for cryptocurrency exchanges to acquire operational licenses has ended, with unlicensed entities required to cease operations by that date.
May 25, 2024: OKX has withdrawn its application to offer digital asset services in Hong Kong.
February 2, 2024: Plans have been announced for a consultation on over-the-counter cryptocurrency platforms.
January 2, 2024: The Hong Kong Monetary Authority has launched a consultation on stablecoin issuers.
June 3, 2023: Hong Kong has implemented new regulations focused on virtual asset trading platforms.
3. Explanation of the tax framework for cryptocurrencies in Hong Kong
In Hong Kong, cryptocurrency taxation is governed by the Taxation Department’s Departmental Interpretation and Practice Notes No. 39 (DIPN 39). The document, which discusses in detail how different types of digital assets are taxed, was published in early 2020.
The document mainly categorizes cryptocurrencies into two types: security tokens and utility tokens. Proceeds from security tokens are not taxable, as the document considers these tokens as capital assets. Proceeds from utility tokens are taxed if they are sourced in Hong Kong. Digital assets held for long-term investment are considered capital assets, and gains from their disposal are not subject to tax. Proceeds from initial coin offerings are taxed based on the nature of the tokens issued.
For businesses that trade cryptocurrencies, 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 recent developments in the crypto sector, such as staking and NFTs, are not covered in DIPN 39.
Cryptocurrencies are not included in the Unified Fund’s exemption regime, and the standard provisions relating to borrowing and lending of shares or interest on money do not apply.
4. Cryptocurrency Mining in Hong Kong: What You Need to Know
In Hong Kong, cryptocurrency mining is a grey area. Starting a cryptocurrency mining business in Hong Kong is less likely to be profitable, due to the high cost of electricity and limited land availability. Cryptocurrency mining is a process that requires a large power supply. High operational costs affect the survival of this business activity. If one is starting a cryptocurrency mining business, the most important thing is that the mining facility complies with the Energy Efficiency of Buildings Ordinance.
5. Timeline of the evolution of cryptocurrency regulations in Hong Kong
Here’s a timeline of how cryptocurrency regulation has evolved in Hong Kong.
June 2023: The SFC’s compulsory licensing regime for virtual asset trading platforms has come into force.
January 2023: The SFC and the HKMA issued a joint circular expanding the regulation to include distribution, trading and advisory services related to VAs.
January 2023: The HKMA has announced a proposal for a compulsory stablecoin licensing regime to regulate entities dealing with stablecoins.
December 2022: The Legislative Council has passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill, introducing a compulsory licensing regime for VASPs, covering trading in non-securities tokens.
October 2019: The SFC introduced the Type 9VA licensing regime for firms managing portfolios containing significant holdings of virtual assets.
November 2018: The SFC issued a circular establishing the SFC Regulatory Sandbox, providing a controlled environment for testing new financial technologies and distinguishing between utility and security tokens.
September 2017: The Securities and Futures Commission (SFC) clarified that digital tokens could be considered “securities” if they represent equity, debt or offer returns such as dividends, in its ICO disclosure.
September 2016: The Hong Kong Monetary Authority has launched the Fintech Supervisory Sandbox to facilitate pilot testing of fintech innovations before wider implementation.
Endnote
In conclusion, Hong Kong’s proactive approach to cryptocurrency regulation in 2024 marks a significant moment in its financial evolution. By embracing digital asset ETFs and enabling the tokenization of traditional securities, the city has positioned itself as a model of innovation in Asia. This regulatory clarity not only attracts global fintech investment, but also fosters fertile ground for local crypto startups to flourish. With major conferences and events further raising its profile, Hong Kong is proving that responsible regulation can coexist with technological progress, paving the way for sustained economic growth and reaffirming its status as a dynamic financial hub in the digital age.