How Are Hong Kongers Protecting Their Identity With Cryptocurrencies?

News | October 8, 2019 By:

The 21st century is the era of modern technologies and new opportunities. There are worldwide challenges and changes in order to keep up with the changes and adapting to them. One of the biggest and trendy subjects is virtual funds and cryptocurrencies. This is a topic that the whole world is hyped about. More and more currencies appear every day and it seems like we are slightly transferring to the virtual world. The changes and innovations are not on the individual level but on the companies’ and country levels. 

World virtual means that there is no physical validation for this, but it does not mean that there is no physical liability for that. The virtual world is still full of risk factors and insecurities. We would like to highlight the last term. While cryptocurrencies are a virtual fund, it is real capital. Being secure with your capital is of the highest priority in the modern world. 

New technologies and initiatives increase proportionally with the new hacking and scam opportunities, which needs regulations and legislations for security. 

On the leading positions 

One of the leading countries according to the number of registered digital currency exchanges is, Hong Kong. Hong Kong has established itself as one of the most progressive jurisdictions for cryptocurrencies and blockchain.

Despite being on the leading positions, the country still has security and privacy issues. In order to keep Hong Kongers safe and sound, there have been implemented certain regulations and amendments have been made in the code of conduct. 

Hong Kong’s securities regulator, the Security and Futures Commission (SFC) has issued official guidance on security token offerings (STOs). The statement was published on March 28th. 

The guidance aims to clarify the legal and regulatory requirements for parties engaging in STO-related activities. The document opens with a proposed working definition of a security token sales, further noting:

“STOs typically refer to specific offerings which are structured to have features of traditional securities offerings, and involve Security Tokens which are digital representations of ownership of assets (eg, gold or real estate) or economic rights (eg, a share of profits or revenue) utilizing blockchain technology.”

According to the SFC, security tokens are to be securities under Hong Kong’s SFC and thus fall under existing security laws. 

Unless an exemption applies, this, therefore, means that any Hong Kong-based STO — or STO targeting Hong Kong investors — must acquire a specific license and register for dealing in securities under the provisions of the ordinance.

License means Security 

In Hong Kong engaging in securities dealing without a license is a criminal offense, is noted by SFC. All of the bodies that intend to market or even operate an STO are required to comply with the existing Code of Conduct for entities that are licensed or registered within the securities regulator. 

The statement also noted that security tokens are considered to be the “complex products”, for which there are applied additional investor protection measures. The SFC also stated that every prospective STO operations are required to observe the guidance has previously outlined in a November 2018 circular for crypto exchanges and intermediaries engaged in the distribution of virtual asset funds.

In the guidance, there are three major points to focus on. Observing the above-mentioned registration requirements, as well as an explicit restriction of STO sales to professional investors only. 

Not only investors are involved, but intermediates are also required to conduct due diligence in order to develop an understanding of the STO. Intermediates have to make sure that every information that is transferred to the investors is true and not misleading. 

The third point is transparency. It is required that investors have to be provided with transparent information. This includes giving out warning and risk factor highlights associated with virtual capital and investments. 

“Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets”

“Proforma terms and conditions for licensed corporations which manage portfolios that invest in virtual assets” is the document published by SFC. The document provides terms and conditions for corporations managing portfolios that invest in virtual assets. 

According to the documents, Hong Konger virtual fund managers should constantly maintain liquid capital, the minimum wage of which consists of 3 million Hong Kong dollars.

Managers were advised to have sufficient supplies of all the resources including human and technical for the efficient performance of duties as well as adopt risk management and compliance policies, which is vital for security matters. 

The very useful policy in this case that should be necessarily taken into consideration is Anti-Money Laundering and Combating the Financing of Terrorism. This regime is essential for keeping the stability and integrity of markets and the global financial framework, as they help to diminish the factors that fascinate financial machinations. 

In order to make a virtual asset more secure and, comprehensive SFC requires crypto fund managers to appoint a certain functionally independent custodian. The main obligation is ensuring funds being segregated from its own assets, as well as assets of other clients unless they are held in an omnibus client account. 

The Structure 

What to do to ensure the safety of the fund assets. Should the manager receives authorized currency on behalf of the fund, one or several bank accounts should be set up for holding clients’ money. Bank accounts themselves should be established and maintained with authorized financial institutions withing Hong Kong or bank in a jurisdiction recognized by the SFC. 

The very important note is the proper awareness and knowledge of the managers. They should evaluate the features of diverse custodial arrangements, including almost all of the tools, such as har and software infrastructure, security controls over key generations, storage, management and transaction and process of handling blockchain. 

Many countries and cryptocurrency figures and lawmakers have called on the country’s securities regulator to provide specific and more sophisticated and efficient regulatory clarity for the blockchain-based token. 

As the sphere is increasing the popularity, many more regulations and amendments have been implemented. More and more people become involved and more virtual money assets appear. Although security and privacy still stay as an issue, certain actions have already been made and steps are taken. 

Hong Kong on its behalf maintains the leading position and as it seems the security of the investors and brokers is one of the top priorities.