Is Hong Kong's Liberal Crypto Regime Back Firing?

Not too long ago, we were praising Hong Kong for its warm, open approach to cryptocurrency. Hong Kong's mandatory virtual asset licensing regime, which came into effect on 1 June, was celebrated for its retail-friendly and supposedly safe framework.

Perhaps Hong Kong's Securities and Futures Commission (SFC) took too long to implement the new regime after announcing it in November 2021, or perhaps the regulator's general tone was too welcoming. Earlier this month, JPEX users were the first casualties to come to light.

At least 2,305 victims were swindled by the Hong Kong exchange, netting a loss of HK$1.43 billion. JPEX promoted itself through widespread advertising and influencers as a licensed crypto exchange with yields of 20%.

The SFC alleged that JPEX was operating as an unlicensed entity, triggering an investigation by the Hong Kong police. Eleven were arrested including influencer Joseph Lam Chok but the masterminds behind the project remain at large.

In response, the SFC is tightening its crypto policy, citing "recent public concerns about unregulated virtual asset trading platforms (VATPs)." As a further precaution, the SFC is imposing strict requirements on VATPs such as increased suitability checks, due diligence, and disclosures.

The SFC is also publishing a list of companies that have applied for crypto retail trading licenses, highlighting that applicants do not necessarily comply fully with SFC regulations at the time of application.

Just last week, the regulator expressed reluctance to publish the list of applicants in fear of creating a "false sense of security" by misleading people into believing the applicants were already fully compliant.

Security concerns are also being shared by Hong Kong crypto firms themselves, as well as users. Being regarded as the city's largest crypto heist of the year and the 10th biggest crypto theft of all time, approximately $200 million was stolen from Hong Kong crypto firm Mixin.

In an announcement, Mixin stated that the database of its cloud service provider was breached. Deposits and withdrawals have since been halted as Mixin works with Google and SlowMist to address the exploit.

Hong Kong might be extending the warmest welcome to crypto firms but it cannot elude the industry's seedy underbelly. Regional crypto hub rival Singapore has taken a tighter approach to the industry, which up until now has been seen in a negative light.

Could MAS have shielded Mixin from the exploit? No. Could MAS have nipped JPEX in the bud much earlier? Probably.

Elsewhere:

• Binance Reopens in Belgium: Binance is reopening services for its Belgian users, after a three-month suspension by Belgium's financial regulator. The world's largest crypto exchange had been accused of violating anti-money laundering and counter-terrorism financing laws. Belgian residents who accept Binance's new Terms of Use will now have access to the exchange's services. Binance also plans to delist stablecoins for the European market by June 2024, in compliance with upcoming EU regulations. Over in Asia, Binance and Orix Bank are considering issuing stablecoins in Japan. Orix aims to test yen and dollar-backed stablecoins in October on the Japan Open blockchain, with issuance in 2024. Binance plans to use Mitsubishi UFJ Trust and Banking's Progmat stablecoin platform.
• Bad boy BitBoy Gets Arrested: Crypto influencer Ben "BitBoy" Armstrong has been arrested. During the time of his arrest, Armstrong was livestreaming outside the home of former business associate Carlos Diaz, who allegedly had his Lamborghini. Armstrong also accused Diaz of wanting to harm him and of having connections with the Houston mafia. Police arrived 19 minutes into the stream and questioned Armstrong, booking him into the Gwinnett County, Georgia, Sheriff’s Office.

I’ll be going live soon from a very special location on YouTube so get ready this is going to be good

— Ben Armstrong (@BenArmstrongsX) September 25, 2023

• The US Federal Reserve has published a research paper on "Tokenization: Overview and Financial Stability Implications," which delves into the emerging realm of asset tokenization in the crypto market, where non-crypto assets are digitally represented as crypto tokens. While currently in its infancy, tokenization's potential to bridge the digital and traditional financial systems could offer benefits like enhanced market accessibility and liquidity. However, the paper also underscores potential risks, emphasizing that as tokenization grows, it might transmit volatility between the two financial realms, especially if there's a lack of transparency in linking reference assets to their tokenized counterparts.