A few years ago, Hong Kong was regarded as the friendliest jurisdiction for digital asset businesses. However, a $200 million local exchange scam forced regulators to become more stringent, and now, it’s gradually licensing exchanges as it balances investor protection and promoting innovation. The city’s regulator says it’s set to issue licenses for nearly a dozen virtual asset service providers (VASPs) by the end of the year.
Elsewhere in East Asia, South Korea is reviewing its stablecoin laws and is consulting with other jurisdictions, including the European Union and Japan.
Hong Kong to license 11 VASPs
When JPEX collapsed with HK$1.6 billion (US$225 million) in investor funds a year ago, the Securities and Futures Commission (SFC) came under fire for failing to protect Hong Kong investors. This led to an overhaul in its treatment of digital assets, starting with a public listing of VASP license applicants “in light of public demand.”
It also revised its licensing regime for VASPs, requiring them to obtain a new permit to serve Hong Kong investors. Haskey and OSL became the first two exchanges under the new regime to acquire this license, and a week ago, HKVAX joined them.
The SFC intends to license over ten more exchanges by the end of the year, CEO Julia Leung revealed in a recent interview with local media outlet HK01.
Leung revealed that the watchdog had conducted on-site visits and reviews of 11 applicants, and she expects to issue them licenses this year. While she didn’t reveal the applicants’ identities, the SFC website shows they include Hong Kong Digital Asset EX Limited, Whalefin Markets, Panthertrade Limited and DFX Labs Limited. Bullish, the exchange launched by EOS parent company Block.one in 2021, is also among the applicants.
Curiously, none of the global exchanges is on the list despite Hong Kong being one of their biggest target markets in Asia. Some, like Binance, OKX, Gate.io and HTX—all were founded in China—withdrew their license applications earlier this year. Local outlets claimed that the withdrawals were due to a stipulation by the SFC that they couldn’t serve Chinese customers under the new regime.
“Applicants who do not meet the requirements will lose their qualifications for licensing, while applicants who meet the requirements will be granted a license conditionally,” Leung stated.
Despite cultivating the image of a digital asset hub, Hong Kong is quite restrictive on retail traders. Before August, retailers worth less than $1 million could only buy and sell BTC and ETH, but their options have broadened slightly to four tokens. Professional investors have a much bigger selection of tokens.
South Korea to tighten stablecoin rules
Meanwhile, South Korea is tightening its laws on stablecoins to plug any crime loopholes in cross-border funds transfers.
The country’s Ministry of Economy and Finance (MoEF) revealed that it was reviewing proposals to extend the stringent foreign exchange regulations to transactions involving fiat-pegged stablecoins.
The Financial Services Commission (FSS), the government agency that oversees the day-to-day supervision and enforcement of regulations, is leading the review. FSS aims to prioritize stablecoins in the next phase of the country’s Virtual Asset User Protection Act, a framework that took effect in May last year and covers anti-money laundering (AML), consumer protection, licensing and disclosure agreements for VASPs.
The FSS will initially focus on stablecoins pegged to the country’s won before extending to those pegged to the U.S. dollar and other foreign currencies. In South Korea, most local exchanges offer their own stablecoins tied to the won, but these are limited to the exchange ecosystem. However, some companies have issued broader won-pegged stablecoins with limited success.
Like in most other countries, stablecoins are gaining traction for cross-border fund transfers, creating a challenge for the government as they are harder to track than traditional means.
“International trades in stablecoins are not reflected in official statistics, which could create a loophole in the government’s policies,” says Hwang Suk Jin, a professor at Dongguk University in Seoul.
Jin joins many other Korean economic experts—including Bank of Korea (BOK) Governor Rhee Chang-yong—who fear that in times of economic crises, capital could flee the country as investors convert their won-based assets to foreign currency-pegged stablecoins.
The FSS intends to consult other jurisdictions before settling its stablecoin rules, including the European Union and neighboring Japan. The latter is strict with stablecoins and only allows banks, trust companies and fund transfer services to issue these tokens.
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