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On 29 January 2021, Julia Charlton presented the fourth of a 7 part webinar series on Crypto Regulation in which Julia considers the future of cryptocurrency regulation in Hong Kong and what path may be taken, the regulatory strategy adopted in mainland China (including the digital yuan) and Japan’s progressive regulatory framework.
Register here for further webinars in Charltons Online Crypto Regulation Forum
Hong Kong Crypto Regulation
Webinar 4 – 29 January 2021
GOING FORWARD – FATF REQUIREMENTS
Areas for the attention of Hong Kong’s regulators:
- crypto exchanges which only trade cryptocurrencies which are not securities or futures contracts are unregulated;
- proposed FSTB licensing regime is narrower than the FATF Recommendations;
RECENT DEVELOPMENTS – PAYPAL
OCT 2020
PayPal announces the roll out of crypto features for US users and the approval of its conditional Bitlicense
2021 onwards
PayPal users will be able to pay for goods in crypto in transactions with 26m sellers around the world
PAYPAL – WHAT DOES IT MEAN FOR HONG KONG?
- in-person trades
- Bitcoin ATMs
- Bitcoin exchanges
- Hong Kong exchanges
- OTC exchanges
COLLABORATION ON THE DIGITAL YUAN
JAN 2020
HKMA published findings of research into a digital currency project in conjunction with the Bank of Thailand
SEP 2020
HKMA announced that Consensys will lead Phase 2
COMPARISON OF HK AND MAINLAND DIGITAL CURRENCY PROJECTS
Mainland
- tailored to retail market
- developed under the control of the PBoC
- based on a government-run, centralised network
Hong Kong
- restricted to wholesale institutional use
- developed in collaboration with the private sector
- developed using distributed ledger technology
APPROACHES TO VIRTUAL ASSET REGULATION
- application of existing regulation
- retrofitted regulation
- bespoke regulation
- bespoke regulatory regimes
CHINA – REGULATION
SEP 2017
PBoC banned ICOs
DEC 2018
ban extended to security token offerings and airdrops
FEB 2019
restrictions imposed on blockchain information service providers
CHINA’S DIGITAL CURRENCY PROJECT
DCEP (or “digital yuan”) – a CBDC controlled and issued by the PBoC
currently on trial in 4 major cities
- Shenzhen
- Suzhou
- Chengdu
- Xiong’an
JAPAN – REGULATION OF CRYPTO EXCHANGES
APR 2017
PSA revised and crypto recognised as a legal payment method
MAR 2020
23 approved crypto exchanges
MAY 2020
amendments to the Payment Services Act took effect
MAY 2020
amendments to the FIEA
US – REGULATION
SEC – may regulate as securities -> FinCEN – treats them as currency <- CFTC – classifies as commodities
US – ICOs
- ICOBox
- SimplyVital Health
- The DAO
US – DAO AND THE HOWEY TEST
“an investment contract is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”
- purchasers of DAO had invested with a reasonable expectation that they would receive a return
- promotional materials informed investors that they would share in the profits of the projects funded by their investment
- token holders could monetise their investment by reselling DAO tokens in the secondary market
- profits were “derived from the entrepreneurial or managerial efforts of others”
US – UTILITY TOKENS
- statements by SEC officials – “all ICOs are securities offerings” (except Bitcoin and Ether)
- cryptocurrencies can evolve from being securities to non-securities once the network on which they function is sufficiently decentralised such that purchasers no longer expect any person or group to carry out essential managerial or entrepreneurial efforts as required by the Howey Test
- key feature of a utility token – typically provide a right of access to a specific product or service provided or to be provided by a DLT platform
- utility tokens may be securities if marketed as investment products
US – SEC ACTION AGAINST RIPPLE
- DEC 2020 – SEC brought regulatory action against Ripple and two senior executives for allegedly conducting a US$1.3 billion unregistered securities offering
- SEC complaint alleges that XRP is an “investment contract” within the Howey Test
- Ripple disputes the allegation on the grounds that:
- XRP is a currency similar to Bitcoin and Ether (which are not securities);
- XRP has a fully functioning ecosystem and a real use case as a bridge currency that does not rely on Ripple’s efforts for its functionality or price
TELEGRAM
- there was a common enterprise
- a reasonable initial purchaser would have purchased Grams with investment intent and an expectation of profit
- the expectation was based on the essential entrepreneurial and managerial efforts of Telegram
- Telegram failed to demonstrate that it was exempt from the registration requirements under Regulation D
KIK
- KIN tokens were offered in both a pre-sale and a public sale
- the Court concluded that both transactions were integrated and constituted an unregistered securities offering
US – INVESTMENT VEHICLES INVESTING IN DIGITAL ASSET SECURITIES
- SEC Nov 2018 – funds investing in crypto assets that are securities must be registered under the Investment Company Act and fund managers must observe the registration, regulatory and fiduciary obligations under the Investment Advisers Act
US – TRADING DIGITAL ASSET SECURITIES
- a trading platform which offers trading of crypto assets which are “securities” and operates as an “exchange” must be registered with the SEC as a national securities exchange or be exempt from registration
- an exemption is available for an alternative trading system which is registered with the SEC as a broker-dealer and becomes a member of a self-regulatory organisation such as the FINRA
- crypto trading platforms are also regulated by other agencies at both federal and state levels
US – STATEMENT ON BROKER-DEALERS
23 DEC 2020 – provides a path for crypto-focused broker-dealers (operating in some circumstances) to operate free from a possible SEC enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities
US – CRYPTO WALLETS
- 18 DEC 2020 – FinCEN proposed new rules for crypto wallets (now frozen by President Biden pending review)
- VASPs would be required to record the name and address of wallet owners in the case of deposits and withdrawals exceeding US$3,000 where a non-custodial wallet is involved and VASPs would be required to report any deposit or withdrawal greater than US$10,000 to FinCEN through a CTR
