HK fast-tracks digital assets licensing; S. Korea delays regulation

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Hong Kong’s Financial Services and the Treasury have issued a reply to the region’s Legislative Council on the state of BTC and other digital assets amid rising global interests.

The Legislative Council had previously sent a raft of questions to the financial regulator to ascertain Hong Kong’s strategy toward digital currencies in the face of impressive adoption rates and price spikes. The parliamentarians, led by Johnny Ng, sent four questions to the regulator to obtain a clear report on the government’s stance toward digital currencies.

The first one sought to verify whether the government would improve the legal regime for digital assets in Hong Kong—raising a key point if the country would “further expedite improvement to the relevant regulatory regime.”

The legislature sought clarification on the prospects of holding digital currencies in fiscal and strategic reserves and its implications on Hong Kong’s economy.

Joseph Chan, Acting Secretary for Financial Services and the Treasury, responded to the queries posed by the Legislative Council. Chan noted that the government is paying close attention to global trends surrounding Bitcoin and other digital currencies, noting that it has taken preemptive steps to regulate the asset class.

Chan opined that the government took the first step by ratifying the Financial Stability Board (FSB) recommendation for digital currency regulations into local rules. A policy statement released in October 2022 confirmed that Hong Kong will treat digital currencies as traditional financial instruments under the mantra of “same activities, same risks, same regulations.”

Chan disclosed that the government had amended the Anti-Money Laundering and Counter-Terrorist Financing Ordinance to remain ahead of the curve. The rules imply a new licensing regime for virtual asset service providers (VASPs) and clear guidelines for stablecoin operations.

The regulator noted that it will not be proceeding with a new authority to regulate digital assets in Hong Kong, citing the establishment of a Task Force in 2023 to spearhead adoption. Given the 2022 policy statement on the asset class, it appears that existing financial authorities will lead digital asset regulation in Hong Kong.

Adding digital assets to reserves

Hong Kong’s authorities are monitoring several jurisdictions’ intentions to add BTC to their balance sheets. Per Chan, the Exchange Fund has yet to turn its attention to digital assets but hinted at the possibility of BTC being a future target asset for Hong Kong.

“It cannot be ruled out that there may be investments involving crypto-assets during the investment operation of the external managers at different points of time, but the relevant proportion is minimal,” said Chan in his written response.

For now, Chan says Hong Kong will be throwing its weight behind the tokenization of assets, issuing circulars for ecosystem players looking to enter the space.

South Korea’s martial law slows down digital asset regulation 

South Korea’s pivot toward martial law has slowed the progress of critical digital asset reforms in the Asian country as regulators contend with a raft of economic issues.

According to a report, the steady progress made in legalizing securities token offerings (STOs) has taken a significant hit since the announcement of martial law in the country. In early December, impeached President Yoon Suk Yeol announced the imposition of a short-lived martial law, plunging South Korea into political and economic crises.

STOs have been gaining momentum in South Korea, with key players jostling for positions ahead of full approval from regulators. If approved by legislators, South Korean companies will be able to raise funds by issuing digital tokens that represent real-world assets.

Experts say the digital asset ecosystem will not see the green light for STOs until 2025, with uncertainty flooding the space.

Furthermore, the progress toward introducing real-name corporate digital asset accounts has been halted in its track since martial law came into operation. The incoming law will allow enterprises to trade digital assets under verifiable identities, a key step in the process of stifling fraud and other illicit financial practices in the space. 

Before full-scale implementation, authorities were expected to issue implementation guidelines for real-name corporate accounts in December. Regulators have relegated digital asset rules to the sidelines, opting to focus on stabilizing traditional markets that have taken a major hit since the start of martial law.

“The martial law crisis has taken all of the National Assembly’s attention. So it is hard to justify dealing with virtual assets now, even though there are many outstanding bills that need work,” read the report. 

South Korean legislators managed to pass a tax reform bill in early December before the imposition of martial law. Under the reform bill, digital asset taxation will not be enforced until 2027, providing clarity for digital asset service providers.

While digital asset taxation has obtained legislative clarity, STOs and real-name corporate digital asset accounts remain in limbo.

While Yoon’s administration has scored a series of wins with digital assets and Web3, the political crisis threatens to send South Korea a few paces back. Yoon accused the majority party in the National Assembly of carrying out “anti-state activities,” banning all legislative gatherings and suspending the free press.

The political quagmire and the impeachment of Yoon have left the digital asset ecosystem watching the landscape for a potential resolution.

“We should view this as an indefinite postponement,” read the report. 

Watch: Reggie Middleton on DeFi, booms/busts & crypto regulation