Nearly one year has passed since the implementation of the licensing regime for Virtual Asset Trading Platforms (‘VATP’) by the Securities and Futures Commission (the ‘SFC’), which formally came into effect on 1 June 2023 (the ‘VATP Regime’). Since its implementation, the SFC and other monetary and financial authorities have sought to keep Hong Kong in line with international standards by proposing further regulations to expand its regulatory scope over various types and forms of virtual assets trading.
As of this date, there are only two licensed VATPs – OSL Digital Securities Limited and Hash Blockchain Limited. VATPs had until 29 February 2024 to submit applications to the SFC in order to continue operating in Hong Kong, and any service providers who did not apply to the SFC will have to cease operations by 31 May 2024. Further, in February 2024, the SFC issued a circular on disciplinary proceedings under the VATP Regime, setting out guidelines on disciplinary action that the SFC can take against regulated persons only (ie licensed persons). Disciplinary action includes partial or full suspension and/or revocation of licenses and registration, prohibition from applying for licenses and registration, fines, public remand, and the commencement of civil or criminal proceedings, which brings VATPs into the same scope of disciplinary processes as other SFC-regulated entities (such as those holding SFO licenses).
Separately, the SFC has also set its sights on regulating over-the-counter (‘OTC’) cryptocurrency exchanges. The increase in crypto-fraud facilitated by Hong Kong’s many bricks-and-mortar OTC cryptocurrency shops was noted to have played a material role in crypto-fraud cases over the last year by Christopher Hui, the Secretary for Financial Services & the Treasury Bureau (the ‘FSTB’), in a blog post on 2 February 2024. In light of this, on 8 February 2024, the FSTB issued a public consultation on the regulation of virtual asset OTC services preparatory to considering further licensing and regulation. Public consultation for this regime ended on 12 April 2024.
In December 2023, the FSTB and Hong Kong Monetary Authority also proposed a regulatory regime for issuers of fiat-referenced stablecoins, encouraging protections for users such as a requirement to maintain high-quality high-liquidity reserve assets as stabilisation mechanisms to ensure that users can exchange issued stablecoins for fiat currency in any circumstances. These proposals are particularly relevant given recent cryptocurrency and virtual asset disputes arising from outage issues on trading platforms, resulting in users being unable to deal with their virtual assets and leading to disputes with VATPs when trying to realise collateral and profits, or to unwind losses caused by an outage.
According to the Hong Kong Police Force, cryptocurrency related crimes have tripled in recent years, with over 5000 cases handled in 2023 . We have experienced a noticeable uptick in the involvement of cryptocurrencies and virtual assets in disputes, as well as an increase in disputes against cryptocurrency exchanges and VATPs. In a world where crypto-fraud becomes progressively more prevalent, the Hong Kong Government’s attempts to exert more regulatory pressure across virtual assets, cryptocurrencies, and stablecoins is warmly welcomed.
When dealing with disputes concerning virtual assets, an extremely important consideration is the contractual dispute resolution mechanism. We first explored some issues specifically related to settlement of crypto derivatives in March 2023 and we remain involved in advising in that space. We at Hill Dickinson Hong Kong are experienced in negotiating with cryptocurrency platforms of various sizes, from globally renowned enterprises to small-scale regional exchanges.
For further details on our dispute resolution law services, please contact us or a member of our dispute resolution team.
