The author is located in Hong Kong, where all regulatory issues are also based. It is a series, starting with the concept.
Conceptual issues
The definition of cryptocurrency and virtual currency
In the consultation document of the regulatory regulations of the Securities and Futures Commission on February 20, 2023, it said: “Virtual assets mostly have no real value and are susceptible to large fluctuations and market manipulation. “
There are two problems here:
1. If there is no value, it should not be traded. Trading something worthless is a Ponzi scheme. The SFC’s statement is not rigorous enough.
2. What is the actual value? Value is subjective. Many meme coins correspond to emotional value. Can you say that there is no value? It is a matter of opinion, so there is trading.
The term virtual currency is inappropriate. It gives people the feeling that it is false and fake, which is inconsistent with the reality of cryptocurrency development.
The concept of cryptocurrency was affirmed in the discussion between Satoshi Nakamoto and his group members. “Crypto” represents technical methods, and “currency” represents financial attributes. Satoshi Nakamoto’s views have withstood the test of time and gradually gained consensus in the industry. As the SFC, we must abandon the concept of virtual currency from the idea. In the early days, no one understood it enough to use it. It seems outdated to use it today.
What is equity securities and its original definition
I have read the consultation documents of the SFC and VASP licensing documents, and neither clearly defines securities. The conventional definitions of securities are similar. Choose a definition from Baidu Encyclopedia: “Securities mainly include capital, monetary, and commodity securities. Securities in a narrow sense mainly refer to securities products in the securities market, including property market products such as stocks, debt market products such as bonds, and derivative market products such as stock futures, options, interest rate futures, etc.” According to this definition, all cryptocurrencies are securities. The FSC should regulate the definition of narrow securities.
How can one distinguish whether a cryptocurrency is a security? The United States has given the Howey test. It is from 1932 and was used to test cryptocurrencies, causing a massive backlash in the industry. The evaluation of this US Securities and Exchange Commission chairman is very low, probably due to improper regulation of cryptocurrencies.
The original regulations should be changed for things inconsistent with practice rather than cutting the feet to fit the shoes. Determining it requires returning to the origin of the concept. The securities of the SFC are compared with cryptocurrencies as equity securities.
What are the attributes of equity securities? Ownership, control, and income rights.
It is a simple definition of equity. Compare:
Are Bitcoin and Ethereum equity securities?
The beneficiaries of the Bitcoin system are the computing power parties, and they do not have control over Bitcoin. Part of the control lies with programmers because they are checked and balanced by the computing power parties. So, it is not an absolute “controlling” party. No party has complete control. From the securities perspective, the Bitcoin system should belong to the holders. Still, the holders do not have a form of ownership of the Bitcoin system. The Bitcoin system does not belong to anyone, so Bitcoin is not an equity security.
From the perspective of future development, the SFC should urge Bitcoin to establish a holder foundation from the perspective of protecting investors. But this is something it cannot do.
The beneficiaries of the Ethereum system are the mortgage parties, and they have no control over Ethereum. Ethereum holders cannot restrict the Ethereum Foundation, and the Ethereum Foundation has obtained complete control over the Ethereum system after POS. The Ethereum Foundation does not own the Ethereum system. Still, it has limited rights to income, and it is not a full-fledged equity.
However, it is a risk if the control power is not checked and balanced. Similarly, Ethereum also needs a foundation with the participation of coin holders to obtain ownership of the Ethereum system. If there is a risk, it requires supervision. In other words, the Ethereum system must be supervised regardless of whether the foundation owns Ethereum.
Is meme coin an equity security?
The meme coin system generally has no controlling party, and the project has no obviousIt is the sequelae of Gary Gensler’s poor governance. The current cryptocurrency regulatory framework cannot be used to manage cryptocurrencies because you cannot manage meme coins. Doesn’t meme coins need supervision? Who is responsible for supervision? It is not the Securities Regulatory Commission but someone else. I think it is the exchange. Because exchanges are global, it is not easy to supervise transactions. However, the Securities Regulatory Commission can formulate a claim policy for Hong Kong residents.
The current cryptocurrency regulatory framework cannot handle this matter. It is obviously unrealistic to regulate according to dogma, and it seems outdated. This system is scientific, imitating the new stock issuance system of the stock market. Without institutional innovation and reference, no one will come to Hong Kong to trade.
Whether the vast majority of cryptocurrencies are equity securities depends on the formulation of laws
Only with the above definition can the debate on equity tokens be ended.
If the definition of cryptocurrency is based on the perspective of control, most cryptocurrency tokens are securities. It is Gary Gensler’s current view. As a result, most cryptocurrencies are banned, and meme coins that are not restricted by equity are popular. It proves that it is a failed regulation.
Most cryptocurrencies are not securities if they are based on complete ownership, control, and income rights. A new framework is needed for this. The SFC’s trick of shifting responsibility for cryptocurrency identification to lawyers is a ploy to shirk responsibility.
The principle of “same business, same risks, same rules” is difficult to implement
This statement is perfect and applicable everywhere. However, the policies issued are not targeted enough.
First of all, the business of cryptocurrency and the stock market look the same on the surface—both are transactions—but the business models are completely different, and the existing crypto regulatory policies cannot control their evil deeds at all.
It is a mutually restrictive system architecture. When China opened the stock market in the early years, users deposited money with brokers, and brokers were found to have misappropriated customer service deposits. Human nature is the same. We cannot expect cryptocurrency exchanges to be all good men and women.
In addition to trading functions, cryptocurrency exchanges also have the functions of brokers, central settlements, and banks, and users also belong to them. In the stock system, users belong to brokers.
In Web3, you control your own money. The regulatory authorities must consider how to design these five factors, what to encourage, and what to suppress.
The regulatory authorities equate the business of crypto exchanges with the supervision of stock exchanges, forgetting that their structures are completely different. Due to cryptocurrency exchanges’ integrated structure, the current regulatory framework is inappropriate. This sentence, “same business, same risks, same rules,” is perfect, but it should be added that “same structure, same business, same risks, same rules,” is reasonable.
Why have the first-class crypto exchanges withdrawn from the application for Hong Kong licenses?
Simply put, it does not conform to the reality of crypto exchanges.
For example:
“The SFC requires VASPs to implement the -transfer rules- requirements, that is, VASPs should record the identities of those who send virtual assets to their customers and receive virtual assets from their customers, and exchange customer information with VASPs in other jurisdictions.” Crypto exchanges cannot do this.
Crypto exchanges have developed from anonymity, and there is no face-to-face account opening at banks. The above exchange policy is correct for banks. It is incorrect for online account opening. Because the face of the ID card can be forged, it can be guaranteed to be a real person, but the validity of the ID card cannot be guaranteed. Determining the actual person’s ownership is impossible based solely on the IP, ID card, and face. An authoritative unit must issue real-person data.
“VASPs shall not provide or trade virtual asset futures contracts or derivatives.” Without the contract, the exchange cannot see the customer’s bottom card. How can customers be harvested? We see that the phenomenon of crypto exchanges plugging in is far greater than the stock market.
“VASPs will conduct due diligence before listing, and the criteria they consider include the token project team’s background, the token’s regulatory status, liquidity, security infrastructure, etc. However, retail investors can only invest in “large market value” virtual assets (mainly limited to the top 3 or top 5 tokens).” Few trading varieties are safe, but the custody and audit costs are high. Who would want not to make money? According to a well-known Hong Kong crypto lawyer: “Any token that wants to be traded by retail users must have a liquidity history of at least 12 months. This is a basic requirement that ensures the stability and reliability of the token. Secondly, the token needs to be listed on at least two indexes, and these indexes cannot be limited to the field of virtual currencies, but also need to include some traditional indexes, such as Bloomberg.” The characteristics of cryptocurrency are early listing, high risk, and high profit. It is the purpose of Hong Kong’s opening of the Growth Enterprise Market. When the investment of funds was restricted, this policy made the Growth Enterprise Market half-dead.
“Any act of actively promoting services to the Hong Kong public will be regarded as providing virtual asset services, regardless of the location of the service or whether the service provider is in Hong Kong.” What is active promotion? It is not clear. Does attending the Web3 conference count? Does YouTube video count? As a result, all the major crypto exchanges added, “You are a Hong Kong resident and cannot provide services.” Users still use it, but it’s a lie. The policy is not practical.
When two armies meet, the brave one wins. The king bomb of cryptocurrency is Chinese, and the top three crypto exchanges are all Chinese. If one of them went to Hong Kong, Hong Kong’s cryptocurrency would not be what it is today. It’s okay that they can’t beat the United States but can’t even beat Dubai. Is there something wrong with the policy?
