The centralization forces at play are at odds with the founding ethos of peer-to-peer trustless crypto systems

Hong Kong’s Legislative Council passed broad crypto asset legislation earlier this week that will require any entity dealing in “virtual assets services” to register and be licensed by the Securities and Futures Commission by April 2023.

The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 adopts language specifically aimed at supporting wider uses of crypto services in the city. It also opens a path for Hong Kong to issue its own digital dollar and become the only place in China where consumers and institutions can engage in crypto-asset and blockchain-related trading and finance.

Changes to the Hong Kong regulatory regime position the city as a crypto asset and fintech rival to Singapore, as well as Korea and Japan, which have all made recent moves to regulate virtual assets. It also puts Hong Kong well ahead of the U.S. Securities and Exchange Commission, which has yet to put into place a wide-scale crypto regulatory regime.

Starting April 2023, it will be illegal for any company or individual in Hong Kong to operate a virtual asset exchange service or advertise services without having registered with the Securities and Futures Commission. Subsequently, approved financial services companies and individuals will need to submit to audits and annual fees to maintain their licenses.

Read more: Singapore Regulator to Drive Tokenized Asset Adoption at Institutional Financial Firms to Spur Adoption

The AML bill does not go into extreme detail, but it defines what constitutes a token and states that a token’s position as “a digital representation of value” is not part of the definition of virtual assets if it’s a limited purpose digital token, if it “constitutes a securities or futures contract” or if the token is issued by a Central Bank. 

This suggests that Hong Kong is paving the way for the public to engage in crypto asset trading on vetted exchanges in the territory. It could also mean brands will be able to continue issuing tokens, as well as for Hong Kong’s three largest banks – which serve as the de facto central bank of the territory – to launch a Central Bank Digital Currency for the Hong Kong dollar. The contents of the bill mainly lay out a regulatory regime that is about vetting and monitoring the “fitness” of trading intermediaries. This flies somewhat in the face of the underlying ideology of decentralized assets and finance related to blockchain, as the purpose of blockchain and crypto is to remove money operations from control by centralized authority.

The SFC didn’t respond to a request for comment.

All of this seems to confirm Hong Kong’s position in China that it alone will offer regulated virtual assets exchanges and services, substantiating a rumor floating around since October, after the SFC’s deputy director had introduced a memorandum about the authority’s revisitation of its crypto regulatory regime.

Defining crypto

The bill defines crypto tokens as “limited purpose digital token(s),” which many companies and brands like Nike have used to airdrop to holders and loyal customers, and to link to the purchase of real-world assets like shoes, jewelry or event experiences. It was unclear if NFTs fall under this category.

Other regulators like the U.S. SEC have labeled tokens that consumers can use to stake or generate yield as securities and prohibited U.S. consumers from buying or trading them if they aren’t registered with the agency.

There has been much discussion about this due to oversight that has begun to limit participation in so-called staking coins by some jurisdictions. For example, Hong Kong- based Animoca Brands, the largest crypto assets provider in the world, is linked to a company called Horizen Labs, which created APE Coin, a token that was airdropped to all  holders of Bored Ape Yacht Club NFTs. However, APE coin is geofenced so that American citizens cannot stake the coin when staking began in early December.

The Hong Kong AML bill defines such tokens as similar to a loyalty coupon or reward, leaving the possibility that in Hong Kong Animoca Brands and Yuga could still be involved in the staking of APE coin.

Animoca Brands did not return a request for confirmation if it was planning to register with the SFC to provide such services in the future.

The biggest unanswered question in the bill is whether residents of Hong Kong will be able to engage in decentralized exchanges, which don’t have human operators. Instead, they are run by smart contracts that enable permissionless trading of virtual coins without any human oversight. In Hong Kong, all of the firms that publicly trade crypto assets are managed funds, like Pando Finance, which launched two cryptocurrency ETFs on the Hong Kong Exchange on Thursday.

More broadly, in the regional race for market share, Singapore commanded the lion’s share of the reported $21 billion in crypto entrepreneurship investing in 2021 and its stake in the industry is set to rise further in 2022.