4/17/23, 1:03 PM Web3 hub race: Hong Kong vs Singapore | IFLR https://www.iflr.com/article/2bjh50cdoitcc4pbcf8cg/web3-hub-race-hong-kong-vs-singapore 1/4 Web3 hub race: Hong Kong vs Singapore By Nancy Ping April 17, 2023 Hong Kong is catching up to Singapore in regulating virtual assets but a lack of clarity remains as it transitions to a new framework The race is on between Hong Kong and Singapore to be an international hub for Web3 investment. While Singapore is re-examining its digital payment token services (DPTS) regime to reduce risks for consumers, Hong Kong is in full swing building the jurisdiction’s reputation for Web3 development. However, industry sources said that as Hong Kong transitions to its new virtual asset regulatory framework in June 2023, questions remain on what activities will be in-scope and whether they can continue to operate until the end of May 2024. 4/17/23, 1:03 PM Web3 hub race: Hong Kong vs Singapore | IFLR https://www.iflr.com/article/2bjh50cdoitcc4pbcf8cg/web3-hub-race-hong-kong-vs-singapore 2/4 In February, Hong Kong’s Securities and Futures Commission (SFC) released a consultation paper proposing regulatory requirements for virtual asset (VA) trading platform operators licensed by the SFC, suggesting the possibility for licensed operators to provide service for retail investors and derivatives trading. The new licensing regime for centralised VA trading platforms trading non-security tokens will come into effect on June 1. Ahead of Hong Kong, Singapore's Monetary Authority of Singapore (MAS) began issuing licences for digital payment token services (DPTS) under the Payment Services Act in January 2020. The country has been luring companies and investors with its welcoming attitude and relatively relaxed regulations, including allowing crypto firms to extend credit or leverage to retail customers. However, MAS is considering tightening its regime in a push for consumer protection. In October 2022, MAS released a consultation paper on regulatory measures for DPTS, addressing the risk of cryptocurrency trading activities for consumers and targeting the speculative nature of digital tokens and advertising methods. More clarity needed in transition period Johnathan Gill, senior legal counsel at digital asset financial services company HashKey Group, who was speaking at the Web3 Festival in Hong Kong, said the jurisdiction is making a good move in regulating VA exchange platforms now. “SFC is the securities regulator, but cryptocurrencies are not securities, and the Hong Kong Monetary Authority has said they are not money and hasn’t regulated them either,” he said. “That’s why there has always been this gap and that’s why there are unlicensed entities operating which is obviously not good for investor protection.” Isabella Wong, financial services and regulatory partner at Deacons, said that some industry players in Hong Kong remain uncertain as to whether their business activities will become regulated on June 1, and if so, what activities will be in-scope and whether they can avail themselves of the transitional arrangements to continue to operate until the end of May 2024. “Some overseas players may be rushing to set up operations in Hong Kong before June 2023 in the hope of getting a fast pass for licensing under the transitional arrangements,” she said. While the eligibility criteria for the transitional arrangements are set out in the SFC’s February consultation paper, the entitlement of transitional arrangements is not automatic and needs to be determined by the SFC with reference to a number of factors. “For VA service providers (VASPs) who have presence in Hong Kong on June 1 2023 and want to migrate into the new licensing regime, if they do not actively confirm their status with the SFC, they may be at risk of operating in a grey area,” said Wong. 4/17/23, 1:03 PM Web3 hub race: Hong Kong vs Singapore | IFLR https://www.iflr.com/article/2bjh50cdoitcc4pbcf8cg/web3-hub-race-hong-kong-vs-singapore 3/4 Based on the current drafting of the amended Anti-Money Laundering and Counter-Terrorist Financing Bill (AMLO) and the Guidelines for Virtual Asset Trading Platform Operations, the legislative intent is to divide VAs into two main categories: VAs that are securities (i.e. security tokens), which are regulated under the Securities and Futures Ordinance (SFO), and VAs that are not securities (e.g. USDT, Bitcoin and Ether). For VAs that are not securities, Wong said that although the amended AMLO includes a broad definition for “virtual asset” which makes the trading platform operators of this type of VA subject to the SFC’s regulation, the guidelines in connection with them are still new and may not squarely fit the operations of all (non-security) VAs. “It will be difficult to categorise VAs into different sub-types because of their different nature, structures and underlying assets, and some of them are hybrid,” said Wong. “Designing a sub-set of guidelines for each type of VA is therefore challenging.” Choosing between Hong Kong and Singapore Industry sources have told IFLR that in deciding between setting up Hong Kong and Singapore, the attitude of regulators is crucial. Adrian Lai, founder and managing partner at Hong Kong-based venture capital Newman Capital, said the firm chose to be based in Hong Kong instead of Singapore mainly for its bigger market size and local advantages. He added that the preference for local entities by Singaporean authorities was one of the considerations. “They are branding themselves as a leading regulator in the region, but we see for a fact that companies like Binance were basically expelled from Singapore, even before the FTX incident,” he said. “If you’re a Singaporean working in Singapore, MAS and other government-related entities will favour you more than foreigners.” However, he also said that this attitude he experienced from Singaporean authorities is understandable due to the risk management concerns over foreigners operating web vehicles. Lai said the concern on the shifting of authorities’ attitudes for companies seeking the right market is not specific to Hong Kong or Singapore due to the nature of the industry. “Honestly, I don't think Singapore should progress with the attitude they had over the past two years,” he said. “They’re stepping back after FTX but it doesn't mean Singapore is not going to advance in two or three years later.” He also believed the market will push forward again even if Hong Kong’s regulator would proceed with the same attitude when “something bad happens”. Lennix Lai, managing director of global institutional business of Seychelles-based cryptocurrency and derivatives exchange OKX, said that Singapore and Hong Kong each has its own characteristics when it comes to VASP licences and cannot be directly compared. “They are both regulating the crypto industry 4/17/23, 1:03 PM Web3 hub race: Hong Kong vs Singapore | IFLR https://www.iflr.com/article/2bjh50cdoitcc4pbcf8cg/web3-hub-race-hong-kong-vs-singapore 4/4 but representing two different licensing regimes,” he said. “The regulation posed by Hong Kong’s SFC towards crypto exchange platform licences is highly similar to regulations towards traditional securities firms. Therefore, it can be predicted that the preparation and compliance costs for obtaining and maintaining the Hong Kong VASP license will be higher - as such, there may be a smaller number of qualified licensing applicants in Hong Kong compared to those eligible to apply for the licence in Singapore.” Henry Zhang, founder and CEO at Singapore-based digital asset exchange DigiFT, said that jurisdictions categorise tokens in different ways. DigiFT is currently discussing with the SFC about their business functions and considering the different regulatory frameworks provided. “I’m seeing pretty good competition between Hong Kong’s SFC and Singapore’s MAS,” he said. “Both are taking a similar and well-posed approach.” Going into the future, Zhang would like to see authorities relax the limit on digital assets in individual or corporate wealth accounts. “We do welcome the MAS’ consultation paper to include digital assets as part of the personal wealth or company wealth calculations,” he said. “However, we would prefer there not to be a limit for these calculations.” TAGS DIGITAL FINANCE HONG KONG SAR SINGAPORE CRYPTOCURRENCY DEACONS NP Nancy Ping FINANCIAL JOURNALIST