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Hong Kong took an important step forward last week as it prepares to roll out its new licensing framework for virtual asset service providers (VASPs) on June 1.
Hong Kong’s Securities and Futures Commission (SFC) announced on May 23 that it has completed its consultation on the regulation of virtual asset trading platforms (VATPs). The consultation – which ran from 20 February – received more than 150 responses from the private sector (you can read Elliptic’s response to the consultation here).
According to the SFC, responses to the consultation included overwhelming support for its proposal to allow licensed VATPs to offer retail trading services. However, in its review of the consultation response, the SFC was careful to emphasize that it will impose strict requirements on VATPs around tokens that can be accepted on retail platforms.
VATPs will also be required to perform due diligence on the tokens they list, including an assessment of any potential financial crime risks from those tokens. Retail investors will not be allowed to trade stablecoins under the new regime until the Hong Kong Monetary Authority (HKMA) finalizes its regulatory framework for stablecoins – expected to be introduced sometime in 2024.
In responses to the consultation, some private sector respondents argued that the SFC should allow VATPs a grace period to implement the travel rules – the requirement that VATPs must obtain and transmit information about payers and payees.
The SFC has indicated that it considers the Travel Rule too important an anti-money laundering and countering the financing of terrorism (AML/CFT) measure to consider delaying its introduction. As a result, VATP will offer a six-month period until 1 January 2024 where they can, if necessary, transfer data to their counterparties under the Travel Rule as soon as reasonably practicable, rather than immediately at the time of transfer if they face any practical limitations therein.
In response to private sector feedback, the SFC has also included additional detail in its AML/CFT Guidance for VATPs on how to identify and manage the risks associated with non-hosted wallets.
After considering the responses to the consultation, on 25 May the SFC published its finalized guidelines on virtual assets, as well as the licensing forms that applicants will need to apply from 1 June – putting Hong Kong firmly on track to roll out its framework for licensing that day.
The SFC’s rapid progress in rolling out its regulatory framework for virtual assets has fueled the perception among crypto industry participants that Hong Kong could serve as an important regional hub for crypto innovation. On May 24, a day after the SFC concluded its consultation, crypto exchange Gate.io announced its plans to open a trade in Hong Kong and operate from there – citing the regulatory clarity offered by the SFC as a key reason for the move.
To learn more about current developments in Hong Kong, watch our recent webinar: Hong Kong’s Crypto Hub Ambitions.
OFAC Targets North Korea’s Crypto Activity… Again
For the second time in the past month, the US Treasury Department has taken aim at North Korea’s crypto-asset activities – bringing to light more information about how the heavily sanctioned country uses crypto to circumvent financial and economic restrictions and support its cyber malignancy. activities.
On May 23, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against four entities and one individual involved in North Korea’s efforts to deploy IT workers to technology companies — including cryptocurrency ones — around the world.
As part of the crackdown, OFAC targeted Kim Sang Man, who is an employee of Jinyong IT Cooperation Company, a North Korean IT firm that OFAC also sanctioned as part of the crackdown. According to OFAC, Kim is based out of Vladivostok, Russia and played an integral role in facilitating the cryptocurrency activities of North Korean IT workers.
According to OFAC: “Kim was involved in the sale and transfer of IT equipment to the DPRK and, as recently as 2021, received transfers of cryptocurrency funds from IT teams located in China and Russia worth more than $2 million.
OFAC also included on the Specially Designated Nationals and Blocked Persons List (SDN List) five cryptoasset addresses controlled by Kim. Addresses placed on the SDN list by OFAC are in Bitcoin, Ether, Tether and USDC.
As a result, US persons – including crypto exchanges – are prohibited from transacting with this and any other crypto addresses associated with Kim. At Elliptic, we worked urgently to get these new addresses flagged in our solutions immediately after OFAC announced the action, to enable our clients to ensure comprehensive compliance with the new sanctions.
Read our full analysis of OFAC’s action here.
IOSCO calls for strengthening crypto rules
The International Organization of Securities Commissions (IOSCO) has put forward a series of proposals to address investor protection and market integrity issues related to cryptocurrencies. On May 23, IOSCO – which sets standards for the regulation of securities markets globally – issued 18 proposed policy recommendations as part of a public consultation. The proposals cover six key areas on which securities regulators around the world are increasingly focusing. they are:
- Conflicts of interest arising from the vertical integration of activities and functions.
- Market manipulation, insider trading and fraud.
- Cross-border risks and regulatory cooperation.
- Custody and protection of clients’ assets.
- Operational and technological risk.
- Retail access, suitability and distribution.
Among the specific recommendations made by IOSCO are calls to ensure that cryptoasset service providers (CASPs) disclose information to investors about potential conflicts of interest and their positions for listing cryptoassets for trading, and that CASPs must disclose market abuse. IOSCO also calls on regulators to take enforcement action when they identify cases of market abuse in the crypto space.
IOSCO’s public consultation on proposed global standards for the regulation of crypto-asset securities runs until July 31.
The first crypto broker-dealer authorized in the US
Speaking of securities regulation, on May 23 the Financial Industry Regulatory Authority (FINRA) – the self-regulatory body that oversees US securities dealers – revealed that it had approved Prometheum Ember Capitol LLC as the first US broker-dealer permitted to hold crypto-asset securities. The approval will also allow Prometheum to operate as an Alternative Trading System (ATS) for crypto-asset trading.
The approval of Prometheum as the first cryptoasset broker-dealer in the US to be allowed to hold cryptocurrencies marks an important milestone. The crypto industry has been vocal and critical of the US Securities and Exchange Commission’s (SEC) enforcement approach to crypto markets, arguing that the regulator has failed to provide a path to registration for firms seeking to operate in crypto markets.
By pursuing aggressive enforcement without approving registration firms, the industry argues, the SEC has created a Catch-22 where companies in the space can’t get clarity from regulators about what activity is permitted while leaving them vulnerable to fines.
However, by approving Prometheum’s broker-dealer application, FINRA—which was created by the SEC and oversees broker-dealers under the SEC’s jurisdiction—appears to have offered a path for crypto-businesses to obtain approval to trade cryptoassets that represent securities with regulatory approval.
Japan will continue to implement the Travel Rules
Lawmakers in Japan have pushed through measures to tighten AML/CFT requirements for the country’s crypto exchanges.
From June 1, crypto exchanges in Japan will face requirements to comply with the Travel Rules – aligning the country’s regulatory standards with those of other jurisdictions, such as Singapore and the US, which already require crypto firms to comply with the Travel Rules.
EU focuses on financial stability risks from cryptocurrencies
European financial sector watchdogs are paying more attention to the potential for cryptocurrencies and related innovations in decentralized finance (DeFi) to create instability in financial markets.
On May 25, the European Systemic Risk Board (ESRB) – chaired by European Central Bank President Christine Lagarde – published a report: Crypto-assets and decentralized finance: systemic implications and policy options.
The report aims to identify all the risks to European and global financial markets arising from the crypto space – especially in the wake of the market turmoil that culminated last November with the collapse of the FTX crypto exchange.
The ESRB found that the lack of many direct links between crypto and traditional financial markets means that to date, turmoil in crypto markets has generally not affected broader financial market stability. The report warns, however, that this could change quickly if crypto markets become intertwined with the traditional financial sector.
According to the report: “These risks could materialize if, for example, interconnection with the traditional financial system increases over time, new connections are not immediately identified, or if similar innovations – such as distributed ledger technology – are also widely adopted in traditional finance .”
The report suggests that, in order to monitor the emergence of these risks, the EU should require traditional financial institutions and investment funds to report the extent of their exposure to cryptoassets, and that CASPs and stablecoin issuers should also face greater disclosure requirements. Regarding this last point, the report indicates that the upcoming EU Regulation on Markets in Crypto-assets (MiCA) will help improve transparency and oversight of participants in the crypto space.
South Africa to introduce crypto regulatory framework
From June 1, crypto exchanges and other service providers in South Africa will have to register with the Financial Sector Conduct Authority (FSCA) or risk fines and penalties.
Last October, the FSCA introduced its planned regulatory framework, which will require CASPs to obtain an FSCA license to operate in the country. Within this framework, CASPs must ensure compliance with AML/CFT measures and must also take steps to implement consumer protection measures and avoid conflicts of interest.
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