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Hong Kong reverses course on cryptocurrencies with retail ban

Proposal requires exchanges to be licensed and serve only professional investors

HONG KONG -- Hong Kong looks to stop retail investors from buying and selling cryptocurrencies, as well as require operators of exchanges for such trading to be licensed.

The city said the move would bring its rules targeting money laundering and terrorism financing in line with global standards.

But it marks a drastic change of course from a largely hands-off stance toward cryptocurrency that saw Hong Kong become one of the first cities to host crypto ATMs in 2014.

"This [move] will strike a balance between regulation and development for the virtual asset market," Christopher Hui, the city's secretary for financial services and the treasury, said Tuesday.

"It will help attract high-quality virtual asset dealers to settle in Hong Kong, strengthening Hong Kong's position as an international financial center," Hui added.

The proposal comes just weeks after an advertising campaign organized by the Bitcoin Association of Hong Kong. The campaign promoted awareness of Bitcoin via bus stop ads and billboards facing HSBC and Bank of China offices that suggested residents swap bank accounts for hardware wallets. Such wallets are used to store a Bitcoin user's private keys.

The government's plan "will only serve to push talent and companies out of Hong Kong," said Bryan Cheung, president of the association, which claims over 6,000 members. "A more suitable approach could have been through education and awareness initiatives."

The proposed rules would let exchange operators serve only professional investors, which Hong Kong defines as those with over 8 million Hong Kong dollars ($1.03 million) in assets.

Though China began cracking down on cryptocurrency exchanges and trading in 2017, few other Asian governments have gone so far as to curtail consumer activity. Singapore and Japan have set up exchange licensing regimes but do not restrict retail trading.

Last month, the U.K. Financial Conduct Authority moved to ban the sale of cryptocurrency derivatives to retail investors while the U.S. Department of Justice issued a report on prosecutions of those using cryptocurrency to facilitate or conceal criminal activity.

Among those charged recently were the founders of BitMEX, one of the world's largest cryptocurrency derivatives exchanges. They were accused of evading money laundering rules.

Alongside its crackdown on cryptocurrency, China has been testing a digital version of its yuan in three cities and a development area near Beijing. Officials have announced plans to extend the pilot program to 28 more cities, including Shanghai as well as Hong Kong and Macao.

Hong Kong published a consultation paper Tuesday evening covering the proposed rules, with public comment remaining open until Jan. 31.

Robust rules against money laundering and terrorism financing would help "prevent illicit activities and inspire confidence in investors that Hong Kong is a clean and safe place for doing business," the paper said.

Bitcoin is not considered legal tender by the Hong Kong Monetary Authority, but rather a virtual commodity.

Though several cryptocurrency exchanges operate in Hong Kong, the city's Securities and Futures Commission has yet to issue a full license to any exchange.

In August, the commission agreed in principle to issue a license to OSL Digital Securities, which is owned by Fidelity-backed BC Group. In Tuesday's paper, the commission, or SFC, left open the possibility of allowing retail trading to return at some point.

"The SFC will continue to monitor the market and reconsider its position as the market becomes more mature in the future," it said.

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