A fresh approach to cryptocurrency licensing from Hong Kong has stirred discussion amongst financial industry leaders. The Hong Kong Securities and Futures Professionals Association (HKSFPA) has voiced serious concerns, suggesting that the proposed regulations might restrict traditional asset managers from engaging with cryptocurrencies. On Tuesday, their submission highlighted that revoking the current low-level investment flexibility could dampen market innovation, posing challenges to Hong Kong’s ambition to become a key player in the global cryptocurrency ecosystem.
New Licensing Concerns and the “De Minimis” Threshold
The primary contention from HKSFPA surrounds the potential removal of the “de minimis” threshold, a critical condition for Type 9 licensed portfolio and asset managers. Presently, these companies can dedicate up to 10% of their total asset value in cryptocurrencies without an additional license, though they must inform the regulator. This system, as outlined by the legal firm JunHe LLP, maintains a balance in the financial sector.
The proposal suggests abolishing this threshold entirely. Consequently, even a minimal bitcoin investment would require securing a comprehensive virtual asset management license. The HKSFPA criticizes this model as “all or nothing,” indicating it could result in high compliance expenses for comparatively low-risk ventures. Such hurdles may dissuade conventional fund managers from exploring cryptocurrency opportunities.
Scrutiny Over Custody Rules and Regulatory Landscape
Another major aspect under scrutiny is the intention to mandate cryptocurrencies to be stored through custodians licensed by the Securities and Futures Commission (SFC). HKSFPA warns that this policy might be unfeasible for private equity and venture capital funds that invest in emerging cryptocurrencies. As local custodians may not support these assets, Web3-focused funds operating out of Hong Kong might face operational challenges.
JunHe law experts highlight that this proposal signifies a marked departure from current regulatory standards. Presently, managers whose portfolios are entirely in cryptocurrencies might not have a Type 9 license, as they don’t deal with traditional securities. Under the new regulations, these entities would need to secure a virtual asset management license, which drastically broadens the regulatory landscape.
“The initiative shows the balance Hong Kong must strike between fostering innovation and ensuring regulatory compliance,” a spokesperson from HKSFPA noted.
Despite these concerns, the association aligns with several government positions, supporting options for self-custody and qualified foreign custodians for funds targeting professional investors. These dialogues underscore the industry’s pursuit of growth while managing regulation as Hong Kong rolls out licensing systems for cryptocurrency exchanges and stablecoin providers.
Key Points of Concern:
- •Potential removal of “de minimis” threshold could restrict traditional managers.
- •Mandated custodianship by SFC could be impractical for early-stage investments.
- •Regulatory expansion might necessitate new licenses for existing cryptocurrency managers.
While the proposed changes have sparked debate, a consensus points to the need for careful calibration between fostering a vibrant crypto market and safeguarding investor interests. As Hong Kong eyes a leadership role in this sector, these discussions will shape the region’s approach to managing digital assets.