Hong Kong shines as a major financial center in Asia, blending Eastern energy with Western influence. Although part of China, it enjoys a unique status that allows it to create policies independently. Once a British colony, Hong Kong has kept many of the liberal economic traits from its colonial past. Today, it is one of the most densely populated places in the world, with a high per capita income, though income inequality is a significant issue. Known for its open attitude towards technology, Hong Kong is now focusing on becoming a key player in the cryptocurrency market.
With new policies aimed at building a solid regulatory framework for digital assets, this is the perfect time to explore Hong Kong’s crypto scene.
1. Crypto Regulations in Hong Kong: An Overview
In Hong Kong, cryptocurrencies are not recognized as 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 different purposes, in line with international standards from the Financial Action Task Force. Cryptocurrencies are divided into two categories: security tokens and non-security tokens. Security tokens are treated as ‘securities’ under the Securities and Futures Ordinance, while non-security tokens are viewed as virtual commodities.
The SFC oversees Virtual Asset Service Providers (VASPs) that handle digital tokens. The Mandatory VASP Licensing Regime sets strict criteria, including compliance with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations and limits on activities such as algorithmic trading. Entities managing a portfolio of virtual assets that exceeds 10% of its value need a Type 7VA license. This licensing system also includes rules on fund management, risk management, and reporting, covering most key crypto activities from trading to investing.
2. Recent Updates in Hong Kong’s Crypto Regulations
Here are the latest developments in the crypto regulations environment in Hong Kong.
July 29, 2024: The Hong Kong Securities and Futures Commission warned the public about Proxinex, a suspected crypto platform engaging in fraudulent activities.
July 28, 2024: Politician Johnny Ng proposed that Hong Kong should consider stockpiling crypto assets.
July 17, 2024: CertiK’s proposals for a stablecoin regulatory regime were accepted by the HKMA and the Financial Services and Treasury Bureau.
July 3, 2024: Lawmakers began reviewing Hong Kong’s crypto regulations amid concerns they could deter exchanges.
May28, 2024: The grace period for crypto exchanges to acquire operational licences ended, with unlicensed entities required to cease operations by this date.
May 24, 2024: OKX withdrew its application to offer digital asset services in Hong Kong.
Jan 2, 2024: The Hong Kong Monetary Authority launched a consultation on stablecoin issuers.
Feb 2, 2024: Plans were announced for a consultation on over-the-counter crypto venues.
June 1, 2023: Hong Kong implemented new regulations focusing on virtual asset trading platforms.
3. Hong Kong’s Crypto Taxation Framework
In Hong Kong, cryptocurrency taxation is outlined in the Inland Revenue Department’s Departmental Interpretation and Practice Notes No. 39 (DIPN 39), which was released in early 2020. This document provides detailed guidance on how different types of digital assets are taxed.
Cryptocurrencies are divided into security tokens and utility tokens. Proceeds from security tokens, which are considered capital assets, are not taxed. Proceeds from utility tokens are taxed if they originate in Hong Kong. Digital assets held for long-term investment are treated as capital assets, so gains from their sale are not taxed.
For businesses dealing with cryptocurrencies, new tokens received, such as airdrops or forks, are treated as business income and taxed. Cryptocurrencies received as employee wages are also taxable. Recent developments like staking and NFTs are not covered by DIPN 39. Additionally, cryptocurrencies are not part of the Unified Fund Exemption regime, and standard provisions for stock borrowing, lending, or interest on money do not apply.
4. Crypto Mining in Hong Kong: What You Should Know
In Hong Kong, crypto mining is a grey area. Starting a crypto mining business in Hong Kong is less likely to be profitable, for the territory’s high electricity cost and its limited land availability. Crypto mining is a process which requires a substantial power supply. High operational cost affects the survival of this business operation. If one starts a crypto mining business, the prime thing is that the mining facility should comply with the Buildings Energy Efficiency Ordinance.
5. Timeline of Hong Kong’s Crypto Regulation Evolution
Here is the timeline of the evolution of cryptocurrency regulation in Hong Kong.
June 2023: The SFC’s mandatory licensing regime for Virtual Asset Trading Platforms came into effect.
January 2023: the SFC and HKMA released a joint circular expanding regulations to include distribution, dealing and advisory services related to VAs.
January 2023: The HKMA announced a proposal for a Mandatory Stablecoin Licensing Regime to regulate entities dealing with stablecoins.
December 2022: The Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill, introducing a mandatory licensing regime for VASPs, covering non-security token trading.
October 2019: The SFC introduced the Type 9VA Licensing Regime for businesses managing portfolios with 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 differentiating between utility and security tokens.
September 2017: The Securities and Futures Commission (SFC) clarified that the digital tokens could be considered ‘securities’ if they represent equity, debt, or offer returns like dividends, in their statement of ICO.
September 2016: The Hong Kong Monetary Authority launched the Fintech Supervisory Sandbox to facilitate the pilot trials of Fintech innovations before broader implementation.
Endnote
Hong Kong’s proactive approach to cryptocurrency regulation in 2024 is a significant milestone in its financial evolution. By adopting digital asset ETFs and exploring the tokenization of traditional securities, the city is enhancing its status as a leader in innovation in Asia. This regulatory clarity not only attracts global fintech investments but also supports local cryptocurrency startups.
With major conferences and events boosting its profile, Hong Kong demonstrates that responsible regulation can go hand-in-hand with technological progress, paving the way for sustained economic growth and reinforcing its role as a vibrant financial center in the digital age.
