Navigating crypto regulations in Hong Kong: A conversation with VDX COO Donald Day [Q&A]

On this TechNode World Q&A, Donald Day, the Chief Working Officer of VDX, a Hong Kong-based digital asset platform, shares his views on the evolution of the crypto market in Hong Kong and the trade’s position in it. The Hong Kong Securities and Futures Fee’s (SFC) proactive and complete strategy to regulating digital belongings, specializing in investor safety, initially confronted resistance from the crypto market attributable to its complexity. Nevertheless, the need of such a regulatory regime turned obvious following situations of fraud and chapter in jurisdictions with much less stringent rules. This panorama has pushed curiosity from companies towards Hong Kong, a worldwide chief offering stability and predictability within the crypto area.

Day emphasizes the significance of complete regulation for establishing and working companies within the digital asset area. A strong regulatory setting permits for a broad spectrum of entities and people inside the monetary providers sector to coalesce and create a robust capital market. Day’s involvement within the non-profit CFAAR, which focuses on mitigating crypto fraud, underlines the significance of those organizations in enhancing the market’s integrity and resilience.

Relating to securing operational licenses in Hong Kong, Day’s recommendation displays his experience from his time on the SFC. Understanding the necessities and expectations of regulators, working with skilled advisors, and fostering a compliance-oriented organizational tradition are vital for fulfillment. The distinctive place of VDX as a guide and an energetic market participant permits it to supply helpful help in navigating the appliance course of for operational licenses in Hong Kong.

Are you able to elaborate on the steps that Hong Kong regulators have taken this 12 months to facilitate the expansion of Web3? How does this align with VDX’s mission of bridging conventional and digital finance?

In late 2018 the SFC launched a complete framework to license Digital Asset Buying and selling Platform Operators, which targeted on investor safety and solely allowed the onboarding {of professional} buyers. Opposite to the regulatory strategy in different jurisdictions, which selected a light-touch strategy to look extra crypto-friendly, the SFC selected a holistic strategy, and included all kinds of things, together with secure custody of belongings, robust AML/KYC processes, sturdy cybersecurity safety, deep market surveillance operate and institutional governance guidelines, to call only a few. Since its inception, this framework has confirmed itself to be steady, dependable, and resilient, particularly within the face of the occasions of the previous 18 months. In distinction to different jurisdictions, Hong Kong has succeeded in attracting high-quality {and professional} people and entities, who’re captivated with constructing the digital asset class in a accountable and institutional method.

With the current updates, clarifications, and particularly the up to date steerage from June 1st of this 12 months, the SFC appears to now be taking steps to develop the attain of the regulatory framework, and one step is the inclusion of retail buyers. It was at all times clear that having the ability to provide the safety of SFC-licensed buying and selling platforms licensed to retail buyers can be an awesome step to safeguard buyers’ belongings. This comes with the apparent caveat that any retail investor would want to own the expertise and data to make an knowledgeable resolution of whether or not to spend money on a digital asset or not, in a really related approach as investing in different asset courses. This may assist Hong Kong prolong its world lead in turning into the institutional digital asset middle of selection. Future developments may embrace extra normal danger administration instruments utilized by institutional buyers to hedge market and idiosyncratic danger.

The SFC and HKMA have from April to June collectively issued circulars, and hosted roundtables, to deal with issues across the opening of financial institution accounts of licensed corporations within the digital asset area in Hong Kong. It’s definitely very encouraging to see regulators in Hong Kong listening to the market and dealing collectively to deal with and take away among the hurdles individuals face in working their companies. This supportive and proactive strategy, flanked by constructive and inspiring bulletins by authorities officers, signifies that there’s a tremendous alternative for Hong Kong to not solely stay forward in regulatory high quality within the digital asset area but in addition to develop into the main worldwide middle for institutional digital belongings. For this reason VDX has chosen to ascertain its enterprise and headquarters right here in Hong Kong.

The SFC strategy to regulation, subsequent specs, and additional developments, very a lot helped pave the best way for institutional adoption. The imaginative and prescient of VDX is to be the most well-liked and trusted accomplice within the digital asset area, which is totally aligned with the SFC strategy. Our purpose is to construct a bridge between conventional finance and digital belongings and thus to facilitate the seamless providing of services for market individuals in any of the areas of finance, whether or not conventional or new/digital.

To ship on this promise requires a really deep understanding of how conventional finance operates (and why it does so), and a robust grasp on what blockchain expertise can actually provide. VDX focuses on a B2B mannequin, onboarding and partnering with main institutional intermediaries and counterparties. The institutional licensing framework helps set up belief and accountability – certainly many native and worldwide counterparties from conventional finance have signaled that they’re very appreciative of the licensing framework, which offers them with a stage of belief corresponding to what they’re used to in different asset courses.

VDX is aspiring to create a number one regulated digital asset trade. Might you share your imaginative and prescient for VDX on this context and the way you anticipate this aspiration to materialize over the subsequent 12 months?

VDX is dedicated to bringing secure, compliant, dependable, and honest digital asset providers to skilled buyers and establishments worldwide. Shopper belongings custodied by VDX are totally segregated and insured, and often audited by a Huge 4 Accounting Agency. This, we imagine, makes VDX essentially the most trusted gateway for conventional monetary corporations to enter the digital belongings area.

The digital asset markets each in Hong Kong in addition to globally stay fragmented and closely retail-dominated. The opening up of the SFC regulatory framework to retail buyers is a really welcome improvement that gives the identical stage of safety to retail buyers as to skilled buyers.

Having mentioned that, institutional buyers have but to allocate belongings to this asset class in a major approach – regardless of many media articles and bulletins from so-called specialists, stating the other over the previous years, this has not but occurred. The explanations are diversified, the principle elements together with a scarcity of clear regulatory steerage, lack of reliable counterparties, lack of dependable custody, lack of correct AML/KYC procedures, and lack of infrastructure.

Previously few years, the regulatory panorama has cleared up and there’s a dependable and constant framework obtainable in Hong Kong, which has confirmed itself to be sturdy and resilient. The necessity now’s for reliable counterparties, who actually perceive the institutional enterprise, to enter this subject. At VDX we’ve assembled a really robust crew with deep expertise in funding banking, administration and expertise consulting, hedge funds, legislation corporations, and regulators. We perceive on a elementary stage the way to handle the wants and necessities of our shopper, and the way to work along with them to determine new alternatives. We imagine the expertise of our crew, our distinctive firm tradition and our laser deal with shopper satisfaction on all ranges actually units us aside.

After all, the digital asset market provides many extra alternatives than merely buying and selling in cryptocurrencies. We’re assured that we’ll achieve success in leveraging our, and our purchasers’, expertise to capitalize on these alternatives.

We’ll at all times retain a excessive diploma of flexibility in our group and resist any restrictive paperwork frequent to giant organizations, particularly if they’ve been working for a few years. This flexibility, along with a extremely skilled and motivated crew, and energetic dialogue with our purchasers, will permit us to shortly pivot and make use of alternatives once they current themselves. Or, even higher, we might try to create these alternatives within the first place.

Leveraging your regulatory background, how are you addressing the distinctive challenges and complexities of guaranteeing compliance within the digital belongings area?

Working on the SFC has given me a novel perception into how a regulatory group operates, types opinions, and makes choices. Individuals who work on the regulator, particularly in Hong Kong, are very sensible and hard-working. For entities and other people making use of for a license, there are not any shortcuts, no methods to fast-track, and no one can “choose up the cellphone and put strain on them” (regardless of what some folks available in the market opine). However in fact, there are methods to make the appliance course of smoother. This contains being totally conscious of the expectations of the regulator, delivering constant and high-quality submissions, answering questions totally and straight, understanding the background of regulatory feedback, and addressing them.

Compliance in digital belongings shouldn’t be dissimilar to compliance in different asset courses. After all, there are variations ensuing from the precise traits of blockchain expertise, however typically, compliance is a mindset. Introducing compliance ex-post, nearly as an afterthought, like some firms within the crypto area try, shouldn’t be one thing that’s easy, and most frequently shouldn’t be going to achieve success. Our crew quite the opposite has intensive expertise being licensed and controlled. We use this compliance mindset to drive all our design choices. For us, compliance shouldn’t be an afterthought, however a key a part of our cloth.

Our deal with governance doesn’t cease at utilizing the gold normal of vendor methods. It contains, for instance, organising sturdy processes which always mandate 4-eye rules, and a very powerful transactions require 5 or extra people. There’ll at all times be a number of staff concerned, and all actions are audit trailed. These are only a few of the various alternative ways we handle potential collusion dangers and conflicts of curiosity. That is all very a lot frequent sense, and really established in conventional finance, however thus far has not been largely adopted within the digital asset area. We’ll assist deliver compliance self-discipline into the digital asset markets.

How do you understand Hong Kong’s position and aggressive edge in turning into Asia’s predominant crypto hub? What shifts have you ever noticed since final 12 months?

In 2018/2019 when considering its strategy to digital asset regulation in Hong Kong, the SFC determined to deal with investor asset safety. This led to the great framework that was issued in 2019 and has been in place ever since (not too long ago up to date and expanded). Within the first years, there was loads of push-back from the crypto market, claiming that the framework was too “advanced” or “onerous”, and that different jurisdictions had been extra “crypto-friendly.” Notably, this push-back didn’t come from individuals with a background in conventional finance or expertise in professionally managing shopper belongings.

The unlucky incidents over the previous 12-18 months have signified the significance of being licensed and controlled in a complete method. A lot of the instances of chapter and fraud occurred in jurisdictions with a light-touch strategy to regulating digital belongings, usually prompting these regulators to considerably tighten up their licensing regimes, and thus in impact taking part in catch-up with the superior regulatory regime in Hong Kong. This in flip has resulted in companies having to relocate, as their technique was now not possible.

In distinction, the strategy taken in Hong Kong has confirmed to achieve success, steady, and sturdy. As the necessities haven’t basically modified, companies working beneath this framework are provided stability and predictability in organising and working their operations. This places Hong Kong within the enviable place of main world efforts to supply the required constructing blocks to allow institutional adoption.

This pivot to an elevated deal with regulation within the world digital belongings area has now led to renewed curiosity in establishing companies in digital belongings in Hong Kong. Now we have had many conversations with potential future companions and purchasers over the previous 6 months, and it’s immensely encouraging to see seasoned professionals getting into Hong Kong and organising enterprises throughout the entire worth chain of digital monetary providers. Clearly, it’s not sufficient to solely have fund managers and buying and selling platforms function in Hong Kong. There are much more entities and other people throughout your complete spectrum of monetary providers who in conjunction make up a robust, and deep, capital market.

For instance, I’m a co-founding member of the Hong Kong chapter of CFAAR, a not-for-profit specializing in the way to deal with instances of crypto fraud and asset restoration. Consisting of primarily authorized professionals, our purpose is to assist with educating the market as to finest practices to forestall fraud, particularly crypto-specific fraud, and what to do in case it already has occurred. Initiatives equivalent to this actually assist construct the ecosystem in Hong Kong and transfer Hong Kong ahead because it turns into the dominant world digital asset middle.

What recommendation would you provide to different crypto firms searching for to safe operational licenses in Hong Kong, primarily based in your expertise in each regulatory and digital asset domains?

It actually is dependent upon which sort of enterprise mannequin they need to acquire a license for. Examples embrace being a dealer/seller of digital belongings, a fund supervisor investing in digital belongings, or a digital asset buying and selling platform/service supplier. The applying processes for the primary two are fairly completely different from the latter.

On the whole, I’d suggest totally understanding the licensing necessities and expectations of the regulator. Moreover, it will make sense to work with an advisor or guide who has gone by such an software course of themselves to information the creation and evaluation of paperwork, assist with the completely different levels of the method, keep away from expensive errors and delays, and guarantee a clean course of.

Above all, the correct mindset is the deciding issue. All staff, processes, methods, paperwork, in addition to organizational setup and decision-making processes, should be aligned with the necessities of being licensed and controlled.

We truly do accomplice with chosen candidates and assist them with their purposes. Our distinctive promoting level is that not solely are we competent advisors, however we’re additionally energetic market practitioners. Opposite to consultants obtainable available in the market, or authorized advisors, we’ve been within the trenches and gone by this course of ourselves and thus can add actual worth and assist make the appliance course of clean.

As VDX delivers personalized options in areas together with compliance, buying and selling, regulatory, monetary, and danger reporting, may you delve into a selected use case that highlights VDX’s strategy and capabilities?

As a buying and selling platform, it’s in fact of significant significance to supply deep liquidity and best-in-class merchandise, other than excellent safety and security.

A technique we differentiate ourselves from our rivals is the robust deal with shopper providers. We actually perceive their trade, their enterprise, and their operations. This permits us to develop tailored options that handle their necessities and wishes and assist them not solely onboard seamlessly, but in addition function with ease. This permits our principally institutional purchasers to supply entry to digital belongings to their purchasers in a really related approach as to different asset courses – ideally, our purchasers (and their purchasers) can commerce digital belongings as they commerce shares or bonds, for instance.

One other differentiating issue is the best way we assist our purchasers on their regulatory journey. Some purchasers are already licensed and must “improve” their current license to incorporate digital belongings. Others are solely initially of the journey to get licensed and might need by no means earlier than interacted with a regulator. Now we have created a novel strategy to assist our purchasers, primarily based on my earlier consulting expertise along with our personal deep experiences of going by this journey. We needed to get our “palms soiled” and nonetheless do, and are capable of share our actual expertise with our purchasers. On this approach, we assist them keep away from expensive rework and delays, clean unbiased evaluation and evaluations, and environment friendly interplay with the regulator.

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