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Regulatory Sandbox and Hong Kong

September 27, 2016

see http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2016/20160906e1.pdf

A lot of my blog posts are the result of someone asking me a question.  So someone asked me on my thoughts on the HKMA’s regulatory sandbox.  Hong Kong is odd because the civil service does not like doing anything original and will only do something after its been done elsewhere, which leads to some odd things happening because HK has a regulatory structure that is vastly different from the UK and Singapore.

So in the Singapore and the UK, all financial services are regulated by a single body.  In the case of Singapore, it is the Monetary Authority of Singapore and in the case of the UK, its the Financial Conduct Authority.  In Hong Kong, regulation is fragmented between the HKMA, the Securities Futures Commission, Customs and Excise, and the Hong Kong Police.  Each body regulates a specific part of the financial system, and if you doing fall into a specific category, you are unregulated.

This creates a weird problem.  It turns out that with new technology, you are in fact usually not regulated, but there is no one that tells you that you are unregulated.  One big problem with Hong Kong, is that people come here expecting a system like that of the US and the UK in which you need permission to do certain things, so people look for the government to give them permission to do something, when in fact you don’t need permission to do it, and so there’s no mechanism for giving you permission.  Hong Kong really doesn’t need a regulatory sandbox, but it does need someone to tell people that they don’t need a sandbox.

The announcement on 6 September 2016 says that HKMA is open to allowing banks to experiment in fintech.  The reason that this is limited to banks is that HKMA does not have the authority to regulate things other than banks and e-wallets, and if you aren’t a bank or e-wallet, you don’t want HKMA’s permission to do something, because for them to give you permission implies that they can withdraw that permission.  However, by telling banks that they can experiment with fintech, what the HKMA (and the HK government) is saying is that “we love fintech” and you can assume that since HKMA wants banks to do fintech, they don’t have any objections if anyone else does it.

Right now the big problem in fintech is customs and excise since they are responsible for regulating money transfers.  The HKMA and SFC have “gotten the memo” that fintech is good, but Customs and Excise hasn’t.  However, Customs and Excise is in a funny situation.  Customs and Excise will absolutely not grant you a license if you are dealing with bitcoin or digital currency, but it turns out that you don’t need a license from anyone if you are dealing with bitcoin or digital currency.  What the standard business structure in Hong Kong is that you put your money transfer business in one HK company, your bitcoin operations in another part, and you ask for a license *ONLY* for the money transfer part.  When customs ask you if you are conducting bitcoin operations through your licensed company, you answer truthfully no.  Customs can’t and does not ask about bitcoin operations through associated companies, so as long as you run your money transfers through the licensed company, and then money transfers work through the banking system, its fine.

But that brings up the interesting thing about HK and financial regulation.  The problem with most fintech is that people think about regulation first and the business case separate.  One thing that is good is that the regulators in Hong Kong now are giving a signal that they don’t want you to do this.  What you should do is to come up with a business case first and figure out what it is that you want to do.  Once you have figured out what you want to do, the next step is to figure out how to fit the regulation.

 

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