I INTRODUCTION TO THE LEGAL AND REGULATORY FRAMEWORK
Increasingly, start-ups and established companies alike have sought to raise funds in Hong Kong by offering digital tokens. These are often styled as plain vanilla or utility digital tokens. However, if such tokens have the attributes of a virtual currency, or if they can be used as a store of value or a medium of exchange, various legal and regulatory issues arise.
While it is part of China, Hong Kong maintains its own domestic legal system by virtue of its status as a special administrative region. Chinese laws do not apply in Hong Kong, save as expressly listed in Annex III of the Basic Law. Accordingly, while China has moved towards an outright ban on offerings of digital tokens and virtual currencies, the position in Hong Kong is a little more nuanced.
At the time of writing, no new legislation has been introduced in Hong Kong to specifically target digital tokens or virtual currencies. Rather, reliance has been placed on existing laws, notably the Securities and Futures Ordinance (SFO),2 to police this nascent area. At the same time, the Hong Kong authorities are keeping a watchful eye on developments. While digital tokens and virtual currencies are not legal tender in Hong Kong, an increase in their adoption as a de facto medium of exchange could well force the hand of the regulators in the near future.3
II SECURITIES AND INVESTMENT LAWS
The primary legislation used to regulate digital tokens in Hong Kong is the SFO. The provisions of the SFO are enforced by the Hong Kong Securities and Futures Commission (SFC), an independent statutory body that has led policing in this area.
On 5 September 2017,4 against a background of media coverage of the stratospheric rise of Bitcoin prices and a surge in general interest in digital tokens, the SFC issued an official statement urging the public to exercise caution in their dealings with digital tokens. The SFC also indicated that these products could constitute securities subject to regulation under the SFO.5
As a rule, if a digital token represents an ownership stake in its issuer's assets, or provides rights to dividends or similar payments, it could be regarded as a security in the form of a share. Similarly, if a digital token creates or evidences a debt payable to its holder, it could constitute a security in the form of a debenture. Most importantly, as a number of initial coin offerings (ICOs) in Hong Kong have previously purported to do, if a person is entitled to a share of economic returns from investments funded by the proceeds of a digital token, then that token could well represent an investment in a collective investment scheme, yet another type of security.6 The SFC has emphasised that digital tokens that utilise blockchain technology (security tokens) are likely to be considered 'complex products' possessing a higher investment risk profile, and in turn, activities that involve advising, dealing or managing them are likely to be subject to licensing requirements.7 To the extent a digital token constitutes a security, the conduct of various activities relating to it (including dealing in, advising on or managing them as assets) could constitute regulated activities under Schedule 5 to the SFO, for which a licence would generally be required.8 Under the SFO, regulated activities that must be carried out with a licence are:
- Type 1: dealing in securities;
- Type 2: dealing in futures contracts;
- Type 3: leveraged foreign exchange trading;
- Type 4: advising on securities;
- Type 5: advising on futures contracts;
- Type 6: advising on corporate finance;
- Type 7: providing automated trading services;
- Type 8: securities margin financing;
- Type 9: asset management;
- Type 10: providing credit rating services;
- Type 11: dealing in over-the-counter (OTC) derivative products or advising on OTC derivative products; and
- Type 12: providing client clearing services for OTC derivative transactions.
A person who carries on business in a regulated activity (or who holds himself or herself out as doing so) without an appropriate licence is liable to a fine of up to HK$5 million and to imprisonment for up to seven years.9 As a practical matter, it is relatively easy to establish whether or not a person is appropriately licensed as the SFC maintains a public register of licensed persons on its website.10
While many variables are involved, if a digital token has the attributes of a security, it is generally thought that any person engaging in activities relating to that digital token could be required to obtain a Type 1 (dealing in securities), Type 4 (advising on securities) or Type 9 (asset management) licence (or more than one). Depending on the facts of each case, other types of licences could also be required. For instance, investment products tied to virtual currencies could constitute futures contracts, and activities in relation to them could be prohibited without the requisite Type 2 (dealing in futures contracts) or Type 5 (advising on futures contracts) licence.11
If a person, without prior authorisation from the SFC, issues an advertisement, invitation or document that is or contains an invitation to the Hong Kong public to acquire digital tokens that are, in fact, securities, he or she could be committing an offence under the SFO. This offence would be punishable by a fine of up to HK$500,000 and to imprisonment for up to three years.12 In this regard, there are certain exemptions if the target audience is made up of professional investors pursuant to the Securities and Futures (Professional Investor) Rules13 who satisfy certain criteria, as briefly outlined in the following table.14
|Individuals||This includes any individual:
|Financial institutions||As defined in Section 1 of Part 1 of Schedule 1 to the SFO, this includes:
* Chapter 155 of the Laws of Hong Kong.
† Chapter 41 of the Laws of Hong Kong.
Reliance on the professional investor exemption requires the exercise of due diligence into the background of the relevant investor. In addition, while not an absolute defence in itself, it would be prudent for a person intending to rely on this exemption to incorporate into the relevant legal documents appropriate representations, acknowledgements and disclaimers from subscribers purporting to be professional investors under the SFO.
Even if a person is licensed under the SFO, there remains an obligation to comply with specific directives and notification requirements given by the SFC from time to time. For example, the SFC has recently indicated that when providing order execution, distribution or advisory services in respect of security tokens15 via an online platform, a licensed person must ensure that the platform provides sufficient information on the key nature, features and risks of the tokens to clients.16 The licensed person should also comply with the notification requirements under the Securities and Futures (Licensing and Registration) (Information) Rules, and have discussions with the SFC before engaging in the regulated activities.17 The SFC also provides guidance on the expected standards and practices in relation to virtual asset funds, regardless of whether the underlying virtual asset constitutes a security or a security token.18
III BANKING AND MONEY TRANSMISSION
In Hong Kong, the issuance of legal tender currency is regulated by the Legal Tender Notes Issue Ordinance.19 Digital tokens and virtual currencies are not legal tender in Hong Kong, and form no part of the traditional banking system. Moreover, they are not transmitted via the traditional banking system. The Hong Kong Monetary Authority has consistently emphasised that digital tokens and virtual currencies such as Bitcoin are merely a type of virtual commodity20 rather than fiat currencies backed by government authorities, echoing the position of the Basel Committee on Banking Supervision.21
In Hong Kong, a vendor is not obliged to accept a digital token as payment for goods and services rendered by him or her, as digital tokens are not legal tender. However, if he or she voluntarily accepts a digital taken as payment, it could be enforceable based on principles of Hong Kong contract law, absent any public policy issues.22 In this regard, if the use of a digital token in this manner becomes sufficiently widespread, the Hong Kong Monetary Authority could designate it as a medium of exchange,23 thereby requiring its issuer or operator to obtain a licence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.24
IV ANTI-MONEY LAUNDERING
Like other global financial centres, Hong Kong has a keen interest in combating money laundering and terrorist financing. Its formidable arsenal of anti-money laundering laws include:
- the Anti-Money Laundering and Counter-Terrorist Financing Ordinance;
- the Organised and Serious Crimes Ordinance;25
- the Drug Trafficking (Recovery of Proceeds) Ordinance;26 and
- the United Nations (Anti-Terrorism Measures) Ordinance.27
At the time of writing, no new legislation has been introduced in Hong Kong to specifically target the use of digital tokens as a means of laundering money. However, given the anonymous and decentralised nature of virtual currencies such as Bitcoin, the Hong Kong authorities are acutely aware of recourse to virtual currencies by criminal elements, particularly if a virtual currency can be used as a store of value or can be readily exchanged into actual legal tender currency without a paper trail.28
For the moment, the existing framework of anti-money laundering laws would appear to be broad enough to capture the use of digital tokens. For instance, it is an offence under the Organised and Serious Crimes Ordinance if a person knows, or has reasonable grounds to believe, that any property29 represents the direct or indirect proceeds of an indictable offence and deals with that property. Such an offence is punishable by a fine of up to HK$5 million and imprisonment for up to 14 years.30
V REGULATION OF EXCHANGES
Any platform through which digital tokens as virtual currencies can be traded in a way similar to stocks or futures is likely to be regulated under the SFO as an automated trading service. As noted in Section II, the operation of an automated trading service (ATS) is a regulated activity under the SFO that requires a Type 7 licence. An ATS is defined to cover trading services provided by electronic means where offers to sell or buy securities are regularly made or accepted in a way that results in a binding transaction.31 An ATS provider with a Type 7 licence has to comply with rigorous requirements relating to:
- the maintenance of financial capital;
- the keeping of books and records;
- the conducting of audits;
- the safeguarding of client assets; and
- compliance with relevant codes of business conduct.
If these requirements are not met, the SFC has the right to revoke the licence of an ATS provider. A public register of licensed ATS providers is available on the SFC website.32
In recent times, virtual currency exchanges operating in Hong Kong have usually done so without obtaining proper authorisation. On 9 February 2018, the SFC announced that following a crackdown, at least seven virtual currency exchanges had been placed under investigation for potentially providing trading services in securities without a licence.33 These exchanges, while not publicly identified, are understood to have subsequently confirmed to the SFC that they had ceased trading in securities, or that they had taken immediate rectification measures such as blocking access to Hong Kong residents.
VI REGULATION OF MINERS
Decentralised virtual currencies such as Bitcoin rely on mining to ensure the validity of transactions and the integrity of the underlying blockchain. Mining is known to be a difficult and laborious undertaking that would be unprofitable without powerful and specialised mining computers and access to cheap electricity. In themselves, mining activities are generally not thought of as unlawful in Hong Kong as long as they do not involve unlawful access to computer systems or sources of electricity with which to power them.
VII REGULATION OF ISSUERS AND SPONSORS
For a fuller discussion of the rules applicable to issuers or sponsors of digital tokens that constitute securities under the SFO, see Section II.
In addition, it is worth noting the specific regulatory actions taken by the SFC in Hong Kong against Black Cell Technology Limited (Black Cell).34 Black Cell had previously advertised the uses of its digital token (known as KROPS) on its website with the pitch that the proceeds would be used to fund the development of a mobile app. The website was generally accessible by members of the Hong Kong public. On 19 March 2018, the SFC disclosed that it had taken regulatory action against Black Cell over concerns it had engaged in unauthorised promotional activities and unlicensed regulated activities relating to securities. Following such regulatory action, Black Cell agreed to halt the sale of KROPS and to unwind all of its transactions with Hong Kong customers, even going so far as to place the following pop-up message on its website: 'The following token sale is not open for American citizens (and/or U.S. residents), Hong Kong citizens and any citizen or resident of a country that does not allow participation.'
VIII CRIMINAL AND CIVIL FRAUD AND ENFORCEMENT
For a fuller discussion of the penalties applicable to violations of laws relating to digital tokens that constitute securities under the SFO, see Section II.
If elements of deception, dishonesty or fraud are involved in the offering, sale or purchase of digital tokens, offences could also arise under the Crimes Ordinance35 and the Theft Ordinance.36 The relevant authorities with enforcement jurisdiction would include the Hong Kong Police Force, the Commercial Crime Bureau of the Hong Kong Police Force and the Joint Financial Intelligence Unit (a joint operation of the Hong Kong Police Force and the Hong Kong Customs and Excise Department).
While it is beyond the scope of this chapter to provide a detailed discussion of the subject, if a digital token constitutes a security, any investment income or capital gain arising from the holding of that token would generally be subject to the same taxation principles that would otherwise apply to investments in securities.
X LOOKING AHEAD
The Hong Kong authorities continue to monitor developments in the cryptocurrency space. To raise public awareness, the SFC issues periodic statements on the legality of various ICOs and virtual currencies, and has launched various campaigns to provide the public with a better understanding of the associated investment risks.37 The SFC also fosters communication with licensed persons to monitor potential products and services that would involve virtual currencies.38 While it is uncertain if specific laws on virtual currencies will be enacted in the near future, the Hong Kong authorities are likely to remain vigilant in monitoring and protecting the interests of local investors and ensuring Hong Kong's continued growth as a global financial hub.
1 Graham Lim is a partner and Sharon Yiu is a trainee solicitor at Jones Day.
2 Chapter 571 of the Laws of Hong Kong.
4 Statement on initial coin offerings issued by the SFC dated 5 September 2017. Available at https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-initial-coin-offerings.html
5 Securities (as defined in Schedule 1 to the SFO) include shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority, rights, options or interests, or interests in any collective investment scheme.
6 Collective investment schemes (as defined in Schedule 1 to the SFO) are composed of four elements: they involve arrangements in respect of any property; participants do not have day-to-day control over the management of the property; the property is managed as a whole by or on behalf of the person operating the arrangements, the contributions of the participants and the profits or income from which payments are made to them are pooled, or both; and the purpose or effect of acquiring the right and interest in the property is to enable participants to participate in or receive profits, income or other returns arising or likely to arise from the acquisition of the property.
7 Statement on Security Token Offerings issued by the SFC dated 28 March 2019. Available at https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-security-token-offerings.html
8 Section 114(1), SFO.
9 Section 114(8), SFO.
10 The public register of licensed persons and registered institutions is available at https://www.sfc.hk/web/EN/regulatory-functions/intermediaries/licensing/register-of-licensees-and-registered-institutions.html
11 Circular to Licensed Corporations and Registered Institutions on Bitcoin futures contracts and virtual currency-related investment products issued by the SFC dated 11 December 2017. Available at
12 Section 103(4), SFO.
13 Securities and Futures (Professional Investor) Rules (Chapter 571D of the Laws and Hong Kong).
14 Section 103(3)(k), SFO.
15 Non-complex and complex products issued by the SFC dated 12 June 2019. Available at https://www.sfc.hk/web/EN/rules-and-standards/suitability-requirement/non-complex-and-complex-products/
16 Guidelines on Online Distribution and Advisory Platforms issued by the SFC in July 2019. Available at https://www.sfc.hk/web/EN/assets/components/codes/files-current/web/guidelines/guidelines-on-online-distribution-and-advisory-platforms/guidelines-on-online-distribution-and-advisory-platforms.pdf
17 Circular to intermediaries on compliance with notification requirements issued by the SFC dated 1 June 2018. Available at https://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=18EC38
18 Circular to intermediaries on distribution of virtual asset funds issued by the SFC dated 1 November 2018. Available at https://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=18EC77
19 Chapter 65 of the Laws of Hong Kong.
20 See, for example, 'The Hong Kong Monetary Authority reminds the public to be aware of the risks associated with Bitcoin', released by the Hong Kong Monetary Authority dated 11 February 2015, available at https://www.hkma.gov.hk/eng/key-information/press-releases/2015/20150211-3.shtml
21 BCBS Statement on Crypto-Assets issued by the Hong Kong Monetary Authority dated 18 March 2019. Available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20190318e1.pdf
22 Consideration for a contract need only be sufficient, but not adequate in terms of economic value. See Chappell v. Nestle  AC 87.
23 Section 2C of the Payment Systems and Stored Value Facilities Ordinance (Chapter 584 of the Laws of Hong Kong) provides that the Monetary Authority may, by notice published in the Gazette, declare a thing to be a medium of exchange.
24 Chapter 615 of the Laws of Hong Kong.
25 Chapter 455 of the Laws of Hong Kong.
26 Chapter 405 of the Laws of Hong Kong.
27 Chapter 575 of the Laws of Hong Kong.
28 See the Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report, available at https://www.fstb.gov.hk/fsb/aml/en/doc/hk-risk-assessment-report_e.pdf
29 Property, as defined in the Interpretation and General Clauses Ordinance (Chapter 1 of the Laws of Hong Kong), is a broadly defined term that encompasses choses in action. Contractual rights relating to digital tokens or virtual currencies are likely to have the character of a chose in action.
30 Section 25, Organised and Serious Crimes Ordinance.
31 Part 2 of Schedule 5 to the SFO.
32 The public register of authorised ATS providers is available at https://www.sfc.hk/web/EN/regulatory-functions/market-infrastructure-and-trading/approved-or-authorized-entities/register-of-automated-trading-services-authorized-under-part-iii-of-the-sfo/
33 SFC warns of virtual currency risks issued by the SFC dated 9 February 2018. Available at https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=18PR13
34 SFC's regulatory action halts ICO to Hong Kong public issued by the SFC dated 19 March 2018. Available at https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=18PR29
35 Chapter 200 of the Laws of Hong Kong.
36 Chapter 210 of the Laws of Hong Kong.
37 Regulation for Quality Markets – Annual Report 2017-18 published by the SFC. Available at
38 Vigilant | Protective | Impartial – Annual Report 2018-19 published by the SFC. Available at