Hong Kong Issues New Rules to Regulate Cryptocurrency Funds and Exchanges

Hong Kong’s securities regulator issued a statement setting out guidelines for funds dealing with cryptocurrency Thursday, Nov. 1, saying it could move to formally regulate exchanges.

In what it called “guidance on regulatory standards,” the autonomous Chinese territory’s Securities and Futures Commission (SFC) set in motion a series of steps that chief Ashley Alder hinted would culminate in a formal regulatory environment.

Hong Kong differs significantly in its approach to cryptocurrency from mainland China, with cryptoasset exchange and related activities legal, though formal regulation is pending.

“The market for virtual assets is still very young and trading rules may not be transparent and fair,” Bloomberg quoted Alder as saying during a fintech forum Thursday:

“Outages are not uncommon as is market manipulation and abuse. And there are also, I am afraid, outright scandals and frauds.”

The latest proposals pertain to any fund managers investing more than 10 percent of their holdings in cryptocurrency, with entities serving exclusively professional traders able to join a sandbox scheme designed to give more room to develop new products and services.

For others, a licensing process will require entities to inform the SFC about their business practices.

The statement reads:

“In order to afford better protection to investors, the SFC considers that all licensed portfolio managers intending to invest in virtual assets should observe essentially the same regulatory requirements even if the portfolios (or portions of portfolios) under their management invest solely or partially in virtual assets, irrespective of whether these virtual assets amount to ‘securities’ or ‘futures contracts.’”

Cryptocurrency exchanges could also fall under the the SFC’s supervision more directly in future.

“…It is proposed that the standards of conduct regulation for virtual asset trading platform operators should be comparable to those applicable to existing licensed providers of automated trading services,” it adds.

Hong Kong’s sharpening of its regulatory oversight comes while more and more jurisdictions move to do the same, as Bitcoin and major altcoin markets stabilize and a general acceptance of their longevity begins to crystalize.

Last week, Taiwan announced it would release dedicated rules governing Initial Coin Offerings (ICOs) by June next year, having previously chosen not to regulate the sector.

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China Issues First Tax Authority-Approved Invoice on Blockchain

China’s first digital invoice on the blockchain has been issued in the southeastern city of Shenzhen, local news platform EEO reports August 10.

This is the first implementation of a pilot blockchain ecosystem for invoices that has been developed by Tencent — the developer of the 1 billion-user social media platform WeChat — together with the Shenzhen Municipal Taxation Bureau.

It is the only such pilot to have received the official approval of the State Administration of Taxation, and has been designed for comprehensive use by consumers, merchants and tax authorities, according to EEO. In China, official invoices are dubbed “fapiao,” indicating that they have been issued by the Chinese Tax Bureau for goods and services purchased in the country.

EEO reports that the debut invoice was issued August 10 by a local Shenzhen restaurant. Several other local merchants have already been given access to the system, including a parking lot, auto repair shop, and cafe.

The system allowed for a consumer payment via WeChat to generate an invoice that would be eligible for inspection and management by tax authorities. Cai Yunge, general manager of blockchain at Tencent, is quoted by EEO as saying that the new system achieves a frictionless link between consumer scenarios and tax services.

In the traditional scenario, processing an invoice entails multiple and somewhat cumbersome steps, EEO notes. When a consumer completes a given transaction, they must wait for the merchant to generate the invoice, file it away safely, complete a returns form in the Finance Department, wait for the return to be processed, and then receive their returns.

Using a blockchain-enabled electronic invoice means that the consumer can manage all these steps using one click on the WeChat app after checkout, and is then able to track their reimbursement status in real time, EEO writes.

As EEO notes, blockchain’s cornerstone innovation of providing an immutable and transparent record-keeping system is highly consistent with the invoice supervision process, as it effectively traces the source, authenticity, and accounting of invoices, thereby solving the problems of over-reporting, false-reporting, and other true-false inconsistencies in the process of invoice circulation.

The technology also has the advantage of improving data privacy through encryption methods and providing an overall cost-effective streamlining of processes.

Cointelegraph has previously reported on Tencent’s ongoing cooperation with the Shenzhen Municipal Office of the State Administration of Taxation to establish an “Intelligent Tax” Innovation Laboratory focused on tax management modernization and fighting fraudulent “fapaio” with blockchain technology.

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US Treasury Releases Fintech Report, Discusses Issues Relevant to Cryptocurrency

The U.S. Treasury Department released its highly anticipated report that examines the current monetary system, discusses cryptocurrency, and proposes sweeping changes that would cut regulatory inefficiency and incubate new technologies.

The report, which is titled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” was drafted under Treasury Secretary Steve Mnuchin and addressed to President Donald Trump.  The report does not directly provide any recommendations or conclusions on cryptocurrencies, but the technologies are mentioned.

Cryptocurrency-Related Issues

The report covers a broad range of issues, many of which are highly relevant to the cryptocurrency industry. The Treasury Department acknowledges the escalation of cryptocurrency and blockchain technologies, noting the rapidly progressing nature of the economy.

In a section titled “Digitization of Finance and the Economy,” they note that parallel to the rise of mobile and digital banking, complimenting technologies like cryptocurrencies and distributed ledger technologies are “poised to impact innovations in financial services.” They elaborate on this, saying:

“Technology developments that are poised to impact innovation in financial services include advances in cryptography and distributed ledger technologies, giving rise to blockchain-based networks.”

The Treasury also notes that blockchain and distributed ledger technologies are being examined by the Financial Stability Oversight Council, which was founded after the 2008 financial crises with the goal of guiding federal regulators on important issues.

Importantly, the Treasury makes it clear that the government wants to support new innovations, and to develop regulations that incubate growth within emerging industries, saying:

“Support of innovation is critical across the regulatory system — both at the federal and state levels…Treasury supports encouraging the launch of new business models … to pursue innovative technologies to lower costs, improve customer outcomes, and improve access to credit and other services.”

A do no harm approach by the government is critical for cryptocurrencies and will ultimately lead to greater success and adoption. The report acknowledges that current regulatory frameworks may be outdated and updates to it are necessary in order to allow solutions that offer benefits to consumers, saying:

“The financial regulatory framework is not always optimally suited to address new business models and products that continue to evolve in financial services … Financial regulation should be modernized to more appropriately address the evolving characteristics of financial services of today and in the future.”

Regulatory Efficiency

The U.S. Treasury discusses technologies that could streamline payment systems, and importantly mentions the development of regulatory sandboxes that allow for innovation in order for the U.S. to stay competitive with places like the U.K., Singapore, and Hong Kong.

The sandbox method, which entails the government keeping a watchful eye on emerging industries, but not harming them with regulation, is popular in many countries, and most people see it as the best way to regulate the cryptocurrency industry.

Arizona has been on the forefront of cryptocurrency adoption and was the first state in the United States to offer a sandbox environment for fintech companies, which will allow companies to test their products and services for up to two years with as many as 10,000 customers before needing to apply for licensing.

This allows cryptocurrency and blockchain companies to actively develop and test products without working around regulatory requirements.

The report recommends creating a sandbox regulatory environment in the U.S., stating:

“Internationally, many countries have established ‘innovation facilitators’ and various regulatory ‘sandboxes’ — testing grounds for innovation…While replicating this approach in the United States is complicated by the fragmentation of our financial regulatory system, Treasury is committed to working with federal and state financial regulators to establish a unified solution that accomplishes these objectives — in essence, a regulatory sandbox.”

The Treasury report concludes that the United States must “stay abreast of developments in technology and to properly tailor regulations in a manner that does not constrain innovation.” And that U.S. regulators “must be more agile than in the past in order to fulfill their statutory responsibilities without creating unnecessary barriers to innovation.”

Featured image by Shutterstock.

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China: World’s Third-Largest Bank Issues Farmland Mortgage Loan on a Blockchain


In a significant breakthrough to deepen the reform of mortgage loans, the Agricultural Bank of China (ABC) revealed that it has issued a farmland loan worth $300,000 on the blockchain in a trial.

The bank, as reported by a local news source, used a segment of agriculture land as collateral to issue the mortgage loan in one of its Guizhou province branches. It also distributed the details of the loan across other node partners, including various commercial banks, Guizhou’s Land and Resources Bureau, and – surprisingly – the local branch of the People’s Bank of China.

In a broader sense, ABC’s new blockchain solution – reportedly called E-Blockchain Loan – will be ideal to resolve the complexity of the loan process. The bank recognized that the current loan approval process involves intermediaries at every step. Most institutional banks still take weeks, or even months, before approving a potential borrower. Disintermediation could save thousands of dollars for ABC and other involved parties by eliminating costs incurred from legal fees to underwriting costs.

The bank stated that their E-Blockchain Loan system would also make it easier to streamline borrowers’ data across the banking system. It will allow the lending institutions to verify their potential borrowers, individually to check if they use the same portion of land to receive loans from different banks.

Another benefit of sharing data across multiple node partners is tamper-proofing. As each server hosts a copy of mortgage data, it would be difficult for hackers to find a single point of failure and organize an attack.

As for the borrowers, especially the farmers in China, E-Blockchain Loan system would offer quick and easy access to farmland mortgage loans. The farmers would be able to access the loaning facilities online while avoiding long queues at brick-and-mortar bank branches.

ABC confirmed that it would expand its blockchain solution to other branches after testing the output of the initial test runs. Furthermore, the banking giant plans to incorporate other loanable assets, including real estate, soon.

At the same time, the real challenge would lie in making technologically advanced systems like blockchain simpler to adopt and understand at users’ end.

HyperChain’s Involvement in ABC’s Blockchain System

HyperChain, a Hangzhou-based blockchain startup, is reported to have actively provided technical support to ABC’s blockchain project. Since June, the company has been announcing a partnership with ABC on various fronts, including a consortium blockchain system that features state-complied smart contracts, nodes’ modification and data restoration as crucial modules.

AgBank image from Shutterstock.

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