Hong Kong’s cryptocurrency regulations currently allow retail investors to buy and sell Bitcoin and other crypto-assets. However, the set of comprehensive rules is changing. Here we take a look at exchanges, taxes, mining and AML/CFT laws.
As a global financial hub, Hong Kong has been seeking to attract financial technology (FinTech) innovation – the city hosts a BIS Innovation Hub – whilst managing the potential risks that it brings.
Hong Kong Cryptocurrency Regulations Key Takeaways;
Hong Kong’s Monetary Authority or ‘HKMA’, the Special Administrative Region’s central banks, defines Bitcoin and other decentralized cryptocurrencies as ‘virtual commodities’, and not as legal tender. The city hosts 58 Bitcoin ATMs.
Currently, individuals in Hong Kong can purchase Bitcoin and other cryptocurrencies from Bitcoin ATMs, exchanges and other individuals.
The SFC (Securities and Futures Commission) is bringing in a new regulatory regime (consultation ending in Jan 31, 2021) around cryptocurrency exchanges and their offerings to retail traders. If the proposed regulatory regime is made law, retail investors will no longer be allowed to buy Bitcoin in Hong Kong from cryptocurrency exchanges and other points of sale of the “virtual commodity”, such as Bitcoin ATMs.
In Hong Kong, there is no such thing as Capital Gain Tax, therefore, investors who buy and sell financial investments and net a profit need not pay tax on the sale of said assets.
However, frequent trading of crypto assets in the “normal course of business” is treated as income and thus applicable for income tax in Hong Kong (17% cap) if an individual and profits/income taxes in the cases of legal business entities.
For taxes in relation to ICOs (Initial Coin Offerings), tax is paid depending on whether the ICO is viewed also as a securities offering (such as investors being given voting rights) or if the ICO is deemed as more of a futures or exchange of service/goods contract (for contracts where buyers are promised a future benefit).
The Inland Revenue Department of Hong Kong (IRD) is responsible for tax collection in the jurisdiction. Applicable taxes differ depending on the activities and nature of the cryptocurrency. The IRD notes the classes of crypto assets as Payment, Security or Utility Tokens.
Hong Kong’s cryptocurrency regulations for exchanges are soon set to change. In November of 2020, the Securities and Futures Commission (SFC) announced a consultation period for a new, far more stringent, regulatory regime for cryptocurrency exchanges. This consultation period ends on January 31, 2021.
The new regime will mean that all exchanges operating in Hong Kong must apply for a licence with the SFC and only accept accredited professional investors (investors with more than 8 million HKD (~760,000 GBP)) as clients. The SFC noted that the purpose of the law change is to safeguard investors, however, legislators may also be seeking to constrict illegal cross-border remittances from the People’s Republic of China.
Prior to this, only exchanges selling Security Tokens (crypto assets viewed as similar in the eyes of the SFC to financial securities) or futures products needed to apply for a licence.
The “Anti Money Laundering and Counter-Terrorist Financing Ordinance”, or ‘ALMO’ is Hong Kong’s chief AML/CFT law. Hong Kong is a FATF (Financial Action Task Force) member and tends to closely follow the global compliance watchdog’s recommendations.
As a global financial hub, the laws around Hong Kong’s Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT) of the financial sector are stringent.
Under the AMLO, all individuals and businesses have a statutory duty to report any suspicious activity under a number of legal statutes, such as the Organized and Serious Crimes Ordinance, Drug Trafficking Ordinance, and the United Nations Ordinance.
For exchanges, custodians and other obliged entities based, servicing clients or passing funds through Hong Kong’s jurisdiction – they must comply with these AML/CFT reporting requirements.
Failure to submit SARs (Suspicious Activity Reports) to the JFIU (Joint Financial Intelligence Unit) in regards to a transaction can result in a 3-month prison sentence and a 50,000 HKD (~4,700 GBP) fine (not to mention the adverse media damages from said penalty).
Cryptocurrency mining in Hong Kong is not an illegal activity, but may rather be regulated under data centre laws if the activity is conducted on a large scale.
Because land in Hong Kong is scarce (land prices in Hong Kong are some of the most expensive in the world), there are various land use rights around running data centres, and any who are set on operating a cryptocurrency mining centre should bear these in mind (unless they are running a smaller-scale operation).
To operate a large or industrial-scale, miners must ensure that the building they are operating in is in compliance with the Buildings Energy Efficiency Ordinance, a legal statute passed in respect to intensive electric power needs (cryptocurrency mining is typically conducted by ASIC computers). The oversight of the data centre ordinance in HK falls under the supervision of the Office of the Government Chief Information Officer.