Cryptocurrency firms that are looking to establish in Hong Kong need to act quickly as there may be a backlog in applications reviews when the new licensing regime comes into play, Angelina Kwan, chief executive officer of financial services firm Stratford Finance and a former regulator of the Hong Kong Securities and Futures Commission (SFC), told Forkast.
Kwan, who helped write laws for the city’s crypto industry, said the new licensing program, set to take effect in June, is almost identical to that for traditional financial institutions. “The new introductions are: the listing committee of tokens that you’re going to offer to your clients, the walleting system and an external advisor.”
With the new licensing regime for virtual asset trading platforms, the SFC plans to require exchanges to apply for licenses that would allow retail investors to trade certain large-capitalization tokens. However, non-fungible tokens (NFT) will not be included in this specific license and there may likely be another consultation paper about tokenization, according to Kwan.
The following Q&A has been edited for clarity and length.
Timmy Shen: The city’s official said earlier this week that over 80 foreign and mainland China companies have expressed their interest in establishing Web 3.0 companies in Hong Kong ahead of new crypto regulations. Is this something you’ve noticed in Hong Kong?
Angelina Kwan: Yes, that’s the statistic they’ve been given. It’s very, very exciting because now there’s clarity. I think we have the clearest licensing regime [globally].
I love Singapore but they’ve got a line of 200 applications. It’s about 160 or 170 now but they’ve really slowed down partially because they don’t have enough resources in the Monetary Authority of Singapore (MAS) to go through all the licenses. In Hong Kong, it’s very clear it takes a little while [to get your license] but at least you’ll be told [if you don’t get it].
Shen: So there’s a growing demand now for licenses. Do you think there will be a backlog?
Kwan: Absolutely, there’ll be a backlog. But if you read the consultation paper, the SFC has actually done something that’s extremely smart.
That is to get potential licensees to use an external firm as a part of the licensing process. That external firm will have to sign off on controls and the different areas in the consultation paper. And the [external] firm will be doing a lot of the heavy lifting for the SFC and it’ll be the company that will be responsible. That should make it slightly easier for the SFC so that they don’t have to do it themselves.
But in my experience as an ex-regulator, we can work with [external regulators] and they can teach us these things. So these are all permutations that hopefully will expedite the licensing process.
Shen: Is it going to be expensive for crypto firms to be compliant? How much more budget do companies need to set aside to meet the new regulatory requirements for a license?
Kwan: I’ve talked to a number of those potential companies and it depends on how much you have. The standard review can be X and then if you need them to be remediated, then it’s going to be X plus a summation of whatever else needs to be remediated. But for those that already have a system in place – like some are international firms coming to Hong Kong. If they’ve already got international standards and they’re regulated somewhere else, it’s going to be very easy.
But what this will cut down is those firms that just rock up and go, “I want to get a license.” It’s going to cut that down because they’ll make sure that there are internal controls. They’ll make sure of their procedures and security.
Shen: What are the key things these crypto firms should pay attention to when they apply for the license?
Kwan: Controls are the main thing by putting it in policies and procedures that they actually follow. Security is key, and so is the walleting system. They’re requiring digital asset firms to have their own walleting system in place. That has to be as a part of the whole process now instead of separating it, unless you have a really good system in place.
It’s very much exactly what a traditional financial services firm needs to do. Many of the staff come from traditional firms. If you’ve come from a traditional brokerage firm, none of this is a surprise. If you’re a crypto OG (original gangster, often referred to early-day crypto investors), then it’d be a surprise because they’ve never had to think about these things.
Now with the SFC poised to allow retail, it’s going to be very key for the firm to understand how to protect customer assets. Nobody wants another FTX. The rules are in place to protect people from [another] FTX.
The most important thing is integrity. I don’t know what happened to Sam [Bankman-Fried]. But obviously the fact that [FTX] could take deposits and use them as their own is a major and grave concern in terms of integrity. That’s why all of these rules are in place, to avoid this happening.
Shen: What are the major concerns now from crypto firms looking to get a license?
Kwan: There is a concern in terms of how much is enough and what to be putting in place.
If you had to prioritize and had a limited budget, you’d do the main points – security, custody and things that would affect clients.
Do you need a beautiful office? No. But do you need really good security? Yes. If you’re going to take customer deposits, then do you have segregated accounts? You [need to] have protocols in place for encryption and moving funds around. Do you have a cold wallet or hot wallet? How is your wallet held? All of that stuff is very important and I would prioritize that as number one as opposed to a beautiful office.
The other thing that you would have to prioritize is minimum capital. It’s not a lot of money, but it protects the firm and it makes sure that they have liquid assets that they can handle themselves in a situation where there were runs or things like that. And by all means it doesn’t cover that, but at least it’s something.
Shen: Is the new licensing regime stricter than that for traditional financial services firms?
Kwan: It’s identical. There are only a few things that are more different or are new introductions. One, the listing committee of tokens that you’re going to offer to your clients. Two, the other different thing is the walleting system. Number three is this external advisor.
Shen: You hosted a webinar last week with Elizabeth Wong, Director of Licensing and Head of Fintech Unit, Intermediaries of the SFC. What are the main takeaways?
Kwan: I specifically asked her about what the SFC would do with people just coming in or trying to market in here. Wong said they are going to publish a list on their website of what firms are not licensed and what firms are licensed. So there is going to be a name-and-shame.
There was also a question about the admissions committee. Every firm must have an admissions committee that will approve of all the coins and tokens that will be traded on that exchange.
The one thing that struck me was that she explained why the SEC has to take this. She said, “because basically we don’t know where these coins came from. We didn’t approve them.” And I went, “That’s true. Satoshi Nakamoto did it. And I just trust the white paper and I just trust everybody else.” And it’s right. She shouldn’t be approving them. It’s the company that has to be satisfied with Satoshi Nakamoto and its white paper or other coins such as Solana or Dogecoin.
Shen: One topic people are talking about is the influence from China, which banned crypto transactions. Do people need to worry?
Kwan: No. No fear or favor. That’s something that has always been the case at the SFC and we’ve been under extreme pressure under various cases. The worst pressure was during the Lehman minibonds, and the then head of enforcement would not drop the case against Bank of China. He went all the way through and got restitution for everybody. That moral compass and that ethical stance has really helped Hong Kong all these years. The SFC is a hallmark.
Shen: Do you have any advice for firms that want to relocate to Hong Kong? What do they need to act on right now?
Kwan: They need to act now and very quickly to get some operations up.
People need to work quickly because you can’t just have it remote. It has to be located here. So at least a copy of your software and your exchange will have to be located here.
The regulatory ambit is that the SFC has to have you here. That’s going to be very, very important that they have to be here so that there is a presence that’s established and that’s why all brokerage firms have to be here and responsible officers who sign off on those brokerage firms’ trades have to be in Hong Kong. There are examples of exemptions, but largely at least, you have to have some operations.
Shen: Could you share more about insurance? You mentioned before our interview you were talking to people about insurance for firms.
Kwan: The most common complaint is “I can’t get insurance” and one of the requirements is insurance. So the Financial Services Development Council, led by Winnie Wong, has been addressing the insurance side and working with the insurance authority and the industry to offer insurance policies to crypto firms that are specific to their business.
It’s been a long path for the insurance companies because they don’t understand it and the regulators may not have time to understand it. And so that’s been one of the hurdles for the industry.
Elizabeth Wong said they’ve made some dispensations in the consultation paper on insurance specifically. So they’ve already addressed it and have made special dispensation.
The other hurdle is about banking and bank accounts. If you’re licensed, you can get bank accounts. But many of the firms, especially the ones setting up, are not licensed yet and they need accounts. That’s why you have this issue of contagion with a lot of crypto firms going to single banks that will take you. If the regulators could allow for more banks and you’re going to have less of a contagion and less of a concentration risk.