The Development and Regulation of Cryptoassets: Hong Kong Experiences and a Comparative Analysis

Abstract

Cryptoassets have emerged as a new category of financial products in recent years and have attracted a great deal of attention from market participants and regulators. While the characteristics of cryptoassets, such as anonymity and disintermediation in transactions, bring significant benefits, they come with a range of significant risks concerning investor protection and market integrity. Due to the difficulties in regulating cryptoassets under the traditional framework, Hong Kong has set up its first comprehensive regulatory regime on cryptoassets in November 2018, imposing new standards on cryptoasset fund managers, distributors and platform operators. By means of a comparison with four major jurisdictions overseas, including Mainland China, the US, the UK, and Singapore, the strengths and potential concerns of Hong Kong’s new regime are analysed. Overall, the new regulatory regime for cryptoassets in Hong Kong is a significant development, addressing the issues of regulatory gaps and regulatory arbitrage that existed under the previous framework as well as introducing enhanced regulatory standards. This has the effect of improving investor protection, but there are some remaining concerns. Chief amongst them are the problems with regulatory scope, the application of traditional regulatory standards to cryptoassets that do not fall within the definition of securities or futures, problems with the sandbox mechanism, and ultimately as a matter of regulatory philosophy, the need for a better balance between investor protection and market development.

Keywords: Cryptoassets, Fintech, Blockchain, Financial innovation, Investor protection, Hong Kong

JEL Classification: G32, K22