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China is giving Hong Kong behind-the-scenes approval to become a crypto hub

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(Kitco News) - Authorities in Hong Kong have been actively pushing to develop the country’s blockchain ecosystem ever since it was first revealed last October that the special administrative region of China was considering the legalization of crypto trading for retail traders.

Last week, rumors began to circulate that the government of Hong Kong was preparing crypto legislation to be enacted this year, and Monday, the Securities and Futures Commission (SFC) launched a public consultation on the “requirements for operators of virtual asset trading platforms” ahead of the new licensing regime scheduled to take effect on June 1, 2023.

One of the major questions in the minds of investors as all this unfolds is how China would respond to these developments. The crypto ecosystem got the answer to that question on Tuesday as Bloomberg reported that signs have begun to emerge that Beijing has given behind-the-scenes backing for Hong Kong’s blockchain aspirations.

According to people familiar with the matter who declined to be identified, representatives from China’s Liaison Office and other officials have been regular attendees at Hong Kong’s crypto gatherings over the past months. They have been actively networking by swapping business cards and WeChat details. The representatives have adopted a friendly approach to working with companies by checking on developments, asking for reports, and in some instances, making follow-up calls.

Crypto operators in Hong Kong have taken the presence of these officials as tacit approval from Beijing for the region's efforts to become a crypto hub, and it looks as though China is using the city as a testing ground for digital assets while keeping a tight grip on crypto-related activities on the mainland.

This perceived openness has led to an influx of crypto firms from the mainland and overseas who are now pushing to register their businesses and return to the Chinese territory more than 15 months after Beijing banned the industry, forcing many to establish their businesses abroad.

“As long as one doesn’t violate the bottom line, to not threaten financial stability in China, Hong Kong is free to explore its own pursuit under ‘One Country, Two Systems,’” said Nick Chan, a National People’s Congress member and a lawyer who advises on cyber-security and digital assets.

Under the new licensing regime announced on Monday and scheduled to take effect on June 1, all centralized crypto trading platforms that conduct business in Hong Kong or actively market to Hong Kong investors will need to be licensed by the SFC.

According to the SFC, the proposed regulatory requirements for virtual asset trading platforms are based on those of the existing Securities and Futures Ordinance regime “and are comparable to those for licensed securities brokers and automated trading venues.”

Hong Kong issues tokenized green bond, will allow citizens to trade crypto June 1

The SFC is especially interested in obtaining the public’s input on whether licensed platform operators should be allowed to serve retail investors, and if so, what measures to implement to help better protect these investors.

“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle,” said Julia Leung, Chief Executive Officer of the SFC. “In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed.”

The SFC said that operators of new and pre-existing virtual asset trading platforms who plan to apply for a license “should begin to review and revise their systems and controls to prepare for the new regime,” while those who do not plan to apply for a license “should start preparing for an orderly closure of their business in Hong Kong.”

The regulator intends to publish lists on their website to “inform the public of the different regulatory statuses” of the various trading platforms, and they plan to continue working with the Investor and Financial Education Council to educate the Hong Kong public about virtual assets. Parties interested in sharing their views and expertise on the regulator’s requirements have until March 31, 2023.

Under the new regime, exchanges licensed by the SFC will be allowed to offer trading services for larger coins to individual investors as long as they provide safeguards such as knowledge tests, risk profiles, and enforce reasonable limits on allowable exposure.

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