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Hong Kong leads the way: SFC’s consultation paper shapes future of virtual assets trading

byAnkur Mishra
May 24, 2023
The Financial Services Commission (FSC) of South Korea has requested a more precise definition of digital assets and virtual assets. The FSC stated to the unicameral legislature of South Korea that it wants to make a distinction between digital assets and virtual assets. According to News 1, the FSC does not consider non-fungible tokens and virtual currencies to be digital assets. The commission hopes that the country's upcoming Digital Asset Act will make the distinction. The FSC is based its argument on the idea that virtual currencies and central bank digital currencies (CBDC) should not be used interchangeably because "digital assets" encompasses both. The regulator also cited a subcategory that was similar to one that was mentioned in the executive order that US President Joe Biden issued in March. In that order, Biden urged parliament to make sure that South Korea's laws are in line with those of other major jurisdictions. FSC stated, "It is ambiguous whether this is a phrase with a confirmatory meaning that NFTs that meet the definition of virtual assets are virtual assets or a phrase in the real sense that all NFTs are included in virtual assets." With the introduction of the Special Financial Transactions Act in 2021, the term "digital assets" was made official by the South Korean parliament. The legislation will change the name of virtual currencies like Bitcoin and Ethereum to "Digital Asset," instead of "cryptocurrencies." Upbit chose to refer to itself as a digital asset exchange as a result of the change in terminology, whereas a joint consultative body comprised of the five largest exchanges was referred to as the "Digital Asset Exchange Joint Consultative Body." In the wake of FTX and Terra's demise, there have been calls to significantly alter South Korea's Digital Assets Act. Legislators are pushing for "mandatory separation of deposits" in addition to changes to the definitions of terms to give regulators more authority over projects in the space. Different names, different jurisdictions Financial hubs around the world have used different terms to classify assets in the ecosystem. Any valuable item represented in computerized or digital form is a digital asset, according to the Monetary Authority of Singapore (MAS).It is referred to as "crypto assets" when it is implemented on distributed ledgers. Similar to MAS, the Securities and Futures Commission (SFC) of Hong Kong asserts that virtual assets include all digital representations of value, including virtual currencies and tokens. Fabian Astic, head of Advanced Resources at Moody's Financial backers Administration, explained that "crypto money and digital forms of money are not equivalent to more extensive computerized finance."Astic said that distributed ledger technology (DLT) powers only a subset of digital finance.

On May 23, the Securities and Futures Commission (SFC) of Hong Kong released a conclusion on consultation of virtual assets trading platforms. According to reports, the SFC asked for consultations from various stakeholders like market participants, licensed corporations, and consultancy firms. 

The Securities and Futures Commission released a consultation paper and requested suggestions on proposed regulatory requirements for the licensing registration of virtual assets trading platform operators. On 20 Feb 2023, the SFC issued this consultation paper to manage virtual assets trading platforms. The consultation paper requires several measures like guidelines on virtual assets trading, anti-money laundering (AML), and counter-finance terrorism (CFT) for licensed corporations and SFC-licensed virtual asset service providers. Additionally, the conclusion report of the SFC on consultation paper said that it has received 152 written suggestions from industry and professional associations. For those who are not aware, the SFC ended the consultation process on March 31. 

According to the report, respondents generally supported the licensing registration process for virtual assets trading platforms. Many of them asked for clarification on the technical aspects and implementation process of the licensing regime. Also, most of the respondents have commented related to retail access to licensed virtual assets platforms, the criteria for token admission, and compensation for risk related to funds of clients. 

The SFC carefully reviewed the feedback before making any necessary revisions to the proposed regulatory requirements. On the nature of digital assets comparison with traditional finance system, the SFC said that the Commission is aware that digital assets are not regulated at a product level and are traded on numerous platforms. 

Hong Kong has been very active in developing itself as a global fintech hub. After the ban on crypto platforms, several companies from Mainland China started moving toward Hong Kong to perform their businesses. Also, Hong Kong has decided to allocate additional funds worth HK$ 50 million  (US$6.37 million) to provide the necessary infrastructure to facilitate these investments. Additionally, the country has distinguished itself from mainland China in terms of managing cryptocurrency trading and decided to explore the possibilities of success in this sector.

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