Is the Hong Kong Securities and Futures Commission (SFC) cracking down on the cryptocurrency industry like the US Securities and Exchange Commission (SEC)?

0xLoki

23-06-12 11:31

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Original author: 0xLoki

Previously, Space discussed a topic: Will the Hong Kong SFC follow the footsteps of the US SEC and aggressively define securities for regulation, investigation, and fines? The key to this question is not just how they say it (organizational goals), but also how they act (actual behavior). There is a simple way to answer this question: understand the business and personnel composition of the SEC and SFC.

SEC (U.S. Securities and Exchange Commission)

First, let's take a look at the architecture of the SEC. At the top is a committee consisting of the chairman and four commissioners, with six departments, one inspector general's office, and eleven offices below. In addition, there are eleven regional offices that need to report to both the Enforcement and Examinations divisions.

From the organizational structure, we can see that the Enforcement and Examinations departments seem to be the most important among all departments. In the descriptions of various departments later on, we can also see that the Enforcement and Examinations departments are ranked first and second.

In addition, there is even more persuasive data: financial situation. The funding sources of SEC are roughly composed of three parts:

1) Fiscal budget;

2) Securities trading fees and application fees;

3) Confiscated income.

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A. If compensation is required for the victim, the confiscated income will compensate the victim and be injected into the General Fund of the United States Department of the Treasury.

B. If no compensation is required for the victim, the confiscated income will be allocated to the Investor Protection Fund, whistleblowers (providers of investigation clues), and the Office of the Supervisory Chief for support and investigation.

Next, let's take a look at the balance sheet of SEC. According to the 2022 annual report, SEC's total assets increased from 12.2 billion to 14.1 billion US dollars, an increase of 1.9 billion US dollars. The investment item increased by 400 million US dollars, and accounts receivable increased by 1.5 billion US dollars, most of which were composed of confiscated income. The investment item has also deducted expenses incurred during the regulatory process.

In addition to fines and forfeitures, the reserve budget granted to SEC by OMB in 2022 is $50 million, and the budget for the Investor Protection Fund is $390 million. SEC transaction fees are approximately $1.8 billion, and application fees are $640 million. It can be seen that fines and forfeitures have become a "pillar income".

After looking at the income, let's take a look at the expenses. It can be seen that the net expenses of the Enforcement Division and the Inspection Division are the highest, totaling $1.75 billion, accounting for 65% of the total expenses. These expenses ultimately translate into enforcement actions: according to another public article by the SEC, the SEC initiated a total of 760 enforcement actions in the 2022 fiscal year, an increase of 9% from the previous year. This includes 462 new or "independent" enforcement actions.

These law enforcement actions have brought in substantial revenue: the total amount ordered to be paid is $6.439 billion, including civil fines, confiscated proceeds, and pre-judgment interest, which is the highest in SEC history, surpassing $3.852 billion in the 2021 fiscal year. Of the total amount issued, civil fines were $419.4 million, also a historic high.

Under this system, the SEC has provided generous rewards to whistleblowers. In the 2022 fiscal year, the SEC issued approximately $229 million in rewards for 103 cases, ranking second in history in terms of both amount and number of rewards. At the same time, the number of whistleblower reports in the 2022 fiscal year also reached a historical high, with the SEC receiving a total of 12,300 reports. Gensler requested resources for the SEC at the hearing, and the demand to increase its staff from 4,685 to 5,139 employees also became reasonable.

In summary, the SEC's behavior path is not difficult to understand. This is a kind of retrospective law enforcement. First, let as many people as possible come in and make their own actions, and then investigate and collect evidence, prosecute and punish as much as possible. Therefore, it is not difficult to understand the statement that SEC regards everything except BTC as securities. Expanding the enforcement target is the first step, and of course, whether to choose law enforcement and whether the prosecution is established depends on many factors.

Securities and Futures Commission (SFC) of Hong Kong

After discussing SEC, let's take a look at SFC. The architecture of SFC has significant differences from SEC, and may only involve market inspection departments and intermediary supervision departments under the intermediary institutions. In addition, there is also a "licensing department" under the intermediary institutions, which is closely related to the familiar licensing system.

According to the SFC 2021-2022 Annual Work Summary, SFC conducted a total of 220 case investigations, initiated 168 civil lawsuits, and fined licensed institutions and individuals a total of HKD 410.1 million. In addition to law enforcement, another important data point is that SFC received 7,163 license applications and processed over 38,000 license information reviews through WING in that year.

In specific enforcement categories, although SFC mentioned that "we will take decisive enforcement actions against unlicensed platform operators in appropriate circumstances," from enforcement cases, it still mainly focuses on traditional illegal behaviors in the financial field such as insider trading and market manipulation, corporate fraud and misconduct, intermediary negligence, and inadequate internal controls.

In terms of income and expenses, the composition of SFC is very simple. The total income of SFC for 2021-2022 is HKD 2.247 billion, of which "transaction levies" account for 95.3%, and other income is 6.7% (mainly collected from market participants). Confiscated income does not appear in SFC's income sharing. In terms of expenses, 75.7% is personnel expenses. According to the annual report data, as of 2022, SFC has a total of 913 employees.

In addition, based on this data, the statement that SFC earns money by issuing licenses is not accurate. Market trading contributes the vast majority of SFC's revenue. According to the licensed person's application fee/annual fee of HKD 0.47-12.97 per activity, and the licensed representative's application fee of HKD 1790-5370 per activity, the 3231 licensed institutions and over 40,000 licensed personnel do not contribute much revenue.

From past data, SFC does not have the same motivation as SFC. On the other hand, SFC does not have the enforcement capabilities of SFC. SFC only has 903 employees who also need to deal with the complex business of the Stock Exchange and Futures Exchange, handle a large number of license applications, maintenance and inspections, and even go to "promote kindness and make the world a better place", making it difficult to allocate more manpower and resources for proactive law enforcement.

Based on the above data, it can be seen that SFC does not have the same policy inclination as SEC, and SFC/SEC essentially operate on the principle of "same business, same principle, same risk". SEC has a very strong regulatory inclination towards cryptocurrencies, but it also has the same inclination towards other financial institutions. It is highly likely that SFC will not treat cryptocurrencies differently.

In summary, I believe that the likelihood of SFC enforcing regulations on a large scale, similar to SEC, is very low. For entrepreneurs, as long as they do not explicitly violate current Hong Kong laws and regulations, they do not need to worry about regulatory pressure. However, I do not think that "Hong Kong market" and "active licensing" are suitable for every project party, as applying for and maintaining them also require considerable costs. Even without a license, there are still many other Web3-related activities that can be done in Hong Kong.

Although there is no need to worry about regulatory pressure like SEC, I still want to say here that every eager participant should calmly ask themselves a question - do we really need a license?