- The Consumer Council (the Council) is pleased to submit its views concerning crypto-assets and stablecoins as set out in a discussion paper (the Discussion Paper) issued by the Hong Kong Monetary Authority (HKMA). The Council elaborates below its point of views and suggestions for protection of consumer interests.
Overview
- The Council in general welcomes the HKMA’s plan to set-up a new regulatory framework for payment-related stablecoins no later than 2023/24. Crypto-assets and stablecoins are highly volatile as compared with some other common investment products and their developments are fast-evolving. It is very important to anticipate the change in the market and adopt adequate monitoring for crypto-assets and stablecoins, to ensure the regulatory framework stays intact with the rapid development of the market, and to cover the growing risks that fall outside the current regulatory scope.
- In view of their relatively high risk nature, the Council considers appropriate regulatory measures, such as risk assessment for cryptocurrencies, would be necessary. This is not only concerned whether cryptocurrencies is suitable for retail investors as an investment, but also concerned the protection of individual consumers, especially as cryptocurrencies might become increasingly popular payment methods for daily commercial activities in Hong Kong in the future.[1] Besides using cryptocurrencies for payment, cryptocurrencies would be used for other proposes in the near future, which might affect consumers, thus taking proactive action is considered essential.
- Currently, the number of scams related to crypto-assets is on the rise. According to the Hong Kong Police Force’s statistics, there were over 853 cases of cryptocurrency scams for the first nine months of 2021, involving a total loss of at least HK$370 million.[2] Compared to the 494 cases recorded in the whole year of 2020, the increase is already up to 73%. It was further reported that USDT, Bitcoin and Ether were the top three cryptocurrencies involved in these scams, while scams with Filecoin and Dogecoin were also common. Yet, the law enforcement has brought challenges to the police due to the anonymous trading and cross-border transactions issues. These indicate that while there are more consumers interested in using in crypto-assets, related consumer protection is completely insufficient.
- As mentioned in Section 3.3 of the Discussion Paper, several jurisdictions have considered plans to regulate crypto-assets; possible policy options include risk-based regime focusing on specific crypto-assets related activities, catch-all regime covering all crypto-related activities, or completely prohibiting cryptocurrencies on offer to retail investors. It is also seen from current updates that the UK government will soon reveal its plans for regulating the crypto industry, which focus on stablecoins.[3] It was proposed that stablecoins which could be reliably used for retail or wholesale payment transactions be subject to minimum requirements and protections as part of a UK authorisation regime, but details are still being finalised.[4] Where in the EU, the proposed regulation on Markets in Cryptoassets (MiCA) introduced a regulatory regime to be applied to a wide set of issuers and service providers. MiCA laid out some standard requirements for both prospective and established stablecoin issuers.[5] Meanwhile, the US Congress is also working on specific regulations for stablecoins over potential risks these private cryptocurrencies may pose to financial stability. The US President’s Working Group on Financial Markets recommended the US Congress to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis.[6]
- Given the global nature of crypto-assets and stablecoins, Hong Kong, as an international financial centre, must take prompt action and align with international regulators when considering an optimal regulatory model for crypto-assets and stablecoins. The Council hopes to see appropriate consumer protection safeguards in place, including but not limited to require firms that actively market stablecoins to Hong Kong consumers be incorporated and authorised in Hong Kong for effective regulatory control, as well as to assess the suitability of crypto-currencies for sale to lay consumers.
- The Council puts forward some suggestions below for the protection of consumer interests for the consideration of the HKMA.
Enhancing information transparency
- As mentioned in Section 5.1 (iv) of the Discussion Paper, users require sufficient and understandable information and disclosures about the nature of crypto-assets, rights and risks associated with them before making an informed decision of participating into cryptocurrencies-related activities. Deeming that information transparency is a fundamental element for crypto-asset issuers, the Council supports the HKMA’s views to make reference to the international high-level regulatory requirements, and to consider financial reporting and disclosure as the requirements when designing the new licensing regime. The Council expects with the regulation, consumers could have more reliable information to understand and assess the cryptocurrencies and their issuers in terms of financial background, authorisation status, risk factors, redemption arrangements, consumer rights, etc., before they decide to engage into crypto-assets. Meanwhile, effective enforcement is crucial to ensure issuers fully implement such disclosures.
- In response to the types of stablecoin-related activities under the regulatory ambit (referred to Question 2), the Council suggests the HKMA to explore if any measures could be implemented to regulate the advertisements and sales tactics related to crypto-assets to mitigate risks faced by consumers due to their lack of related knowledge or incapability, disinformation disseminated by issuers or other improper sales tactics. Furthermore, extra safeguards should be required for the vulnerable groups such as the youngsters and the elderly to fall into sales traps that could lead to significant financial losses. Across the globe, various countries have already implemented or planned to implement policies to govern such promotional activities for protection of their citizens, from which the HKMA might take references.
- In Singapore, any promotional activities related to cryptocurrencies are banned in public areas or through any other media directed at the public. The providers could only promote their services on their corporate websites, mobile applications or official social media accounts without engaging any third parties such as social media influencers.[7]
- In Spain, any advertiser with more than 100,000 followers who would like to promote crypto-asset needs to notify the National Securities Market commission at least 10 business days before any campaign. The regulation also requires all crypto advertisements to indicate the risk of crypto trading.[8]
- In the UK, the government proposed in January 2022 to amend existing laws on financial advertising to include crypto-assets given the increasing advertisements in public areas. The proposed legislation is to require firms to be authorised by regulators if they want to promote investment in crypto-assets.[9]
- In India, the Advertising Standards Council of India (ASCI) issued a set of guidelines in February 2022 that will come into effect in April 2022. One of the requirements is for issuers to display a disclaimer on advertisements and promotions related to crypto-assets in specific font size and at a normal speaking pace: “Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.”[10]
Establishing complaint mechanisms
- As stated in Section 5.1 (iv) of the Discussion Paper, users might suffer losses from operation disruptions or failures of a stablecoin arrangement with no or limited recourse. Meanwhile, transactions related to crypto-assets might take place across borders as well, which might increase the difficulty in consumer redress when they encounter frauds. The Council thereby recommends the HKMA to consider including a proper complaint mechanism as one of the requirements to be complied by issuers under the new licensing regime. Authorised issuers might review the complaints they received and report to the HKMA regularly for any necessary follow-up actions. Besides, noticing the HKMA, Securities and Futures Commission and related government bureau/departments have established a Financial Dispute Resolution Centre to aid consumers in resolving monetary disputes, the Council suggests the HKMA to explore the possibility of building platforms as such with other jurisdictions to handle issues related to crypto-assets and stablecoins when they become more prevalent as means of payment in the future.
Ensuring market stability
- At the same time, most crypto-assets are high-volatile investments and the trading market is unstable. To take “Squid Game Coin” as an example, the price of the coin surged 310,000% within 3 days and suddenly decreased by 99.9%.[11] Although stablecoins are considered more stable in the market, the Council still recommends the HKMA to consider monitoring the stability of the stablecoin market and take action as necessary to minimise the risks of consumers using stablecoins for day-to-day transactions.
Ensuring data privacy and cybersecurity
- As with any new technology innovation, data privacy and cybersecurity are undoubtedly crucial in increasing consumers’ confidence in using stablecoins or investing in other crypto-assets. The Council appreciates the HKMA considers safety, efficiency, and security as the regulatory requirements to further protect consumers. As reference, in South Korea, all cryptocurrency exchanges require an Information Security Management System (ISMS) certification which is proof of meeting certain information protection standards in terms of risk management, access control, system and service security management, and prevention of and responses to unexpected incidents, etc.[12] These rules not only can provide a safe and secure platform for consumers, but also prevent money laundering. The HKMA may explore if any of the requirements in ISMS can be incorporated into the new licensing regime for stablecoins.
Enhancing consumer education and support
- Taking as a whole, the Council considers consumer education necessary for consumers to learn about crypto-assets and stablecoins before participating in related activities. For example, at first glance, stablecoins as the name called may appear to be low risk; yet this is considered low-risk only in comparison to popular cryptocurrencies. Stablecoins still present some typical crypto risks where consumer should notice. The Council understands different parties, such as the Investor and Financial Education Council, have related educational resources accessible by the public. The Council appreciates if the HKMA could communicate and work hand-in-hand with other related parties including the Council, to publish consumer alerts and educate consumers regularly in various channels about the risks of crypto-assets and stablecoins, the complaint mechanism, and measures individuals should take to prevent scams.
Conclusion
- At last, the Council hopes the HKMA will take into consideration the above views as well as the suggestions responding to the Discussion Paper to ensure that the interests of consumers can be safeguarded. As crypto-assets develop, new and unforeseen vulnerabilities may emerge. Early and appropriate governance on crypto-assets is crucial for Hong Kong to continue to lead as a global financial centre. In order to provide effective safeguards to consumers, regulations on crypto-assets and stablecoins should be synchronised between various regulators in Hong Kong to oversee the development of crypto-assets holistically and to reduce any possible regulatory arbitrage both locally and internationally.
[1] For instance, Pricerite has become the first retail chain which accepts payment by Bitcoin, Ether and Litecoin since 2019. https://www.pricerite.com.hk/hk/zh/news/Store_Renewal.html
[2]https://hd.stheadline.com/news/realtime/hk/2273579/%E5%8D%B3%E6%99%82-%E6%B8%AF%E8%81%9E-%E9%A6%969%E5%80%8B%E6%9C%88%E8%99%9B%E6%93%AC%E8%B2%A8%E5%B9%A3%E9%A8%99%E6%A1%88%E9%81%94853%E5%AE%97-%E6%90%8D%E5%A4%B1%E9%80%BE3-7%E5%84%84
[3]https://www.cnbc.com/2022/03/27/crypto-britain-to-reveal-stablecoin-regulation-plans-sources-say.html
[7]https://www.mas.gov.sg/-/media/MAS-Media-Library/regulation/guidelines/PSO/ps-g02-guidelines-on-provision-of-digital-payment-token-services-to-the-public/Guidelines-on-Provision-of-Digital-Payment-Token-Services-to-the-Public-PS-G02.pdf
[10]https://www.business-standard.com/article/markets/asci-frames-guidelines-for-crypto-nft-related-advertising-promotion-122022300357_1.html
