HKSFPA's Stance on CARF
The Hong Kong Securities & Futures Professionals Association (HKSFPA) has largely voiced its support for Hong Kong's proposed Crypto Asset Reporting Framework (CARF) law. However, the association has presented specific grievances regarding certain aspects of the proposal in an advocacy paper published on Monday. HKSFPA stated that some proposed laws could create operational constraints and legal exposure for market participants.
In its response to the amendments made to the Organisation for Economic Co-operation and Development’s Crypto Asset Reporting Framework (CARF), the association has asked authorities to be flexible on record-keeping requirements.
CARF, initially proposed in December 2024, aims to facilitate the exchange of tax information for crypto asset holders across borders by 2028, according to the OECD.
Record-Keeping Rules for Dissolved Companies
HKSFPA's advocacy paper highlighted concerns about record-keeping rules, particularly for dissolved companies. The association generally agrees with the proposed six-year record retention period, aligning it with existing Inland Revenue Department and CRS standards. However, the group expressed apprehension about extending record-keeping obligations to entities after they have been officially dissolved.
The association stated, "We generally agree with the six-year retention period to align with existing inland revenue and CRS standards, but we have concerns regarding the obligations placed on individuals post-dissolution."
HKSFPA argues that compelling directors or principal officers to maintain records after a company ceases operations could expose them to indefinite liabilities and hinder their ability to comply with regulations. To address this, the association recommended that the government restrict access for former officers to storage facilities, funding, or any legal firms authorized to retain client data. Citing issues raised by PwC and the Financial Services Treasury Bureau, HKSFPA proposed the appointment of an independent third-party custodian, such as a liquidator or a licensed corporate service provider, to assume record-keeping responsibilities.
Proportional Registration Requirements
Regarding the mandatory registration for Crypto Asset Service Providers (RCASPs) with any reporting nexus to Hong Kong, HKSFPA believes it would foster fair competition and prevent compliant firms from being disadvantaged by unregulated operators. The association acknowledged that mandatory registration would assist the Inland Revenue Department in identifying all RCASPs operating in or connected to the city.
However, HKSFPA cautioned that a one-size-fits-all approach might be overly burdensome for firms that anticipate filing "nil returns." The group suggested, "We recommend a lite registration or a simplified annual declaration process for RCASPs that anticipate filing Nil Returns, to reduce administrative costs while still satisfying the IRD’s oversight requirements."
HKSFPA also pointed out that many private investment entities fall into this category and could face unnecessary administrative layers under the current proposal. They suggested that entities already registered under CARF or holding a business registration number should be able to activate CRS registration through a straightforward portal selection.
On the matter of penalties for companies that violate the law, HKSFPA agreed that administrative penalties are preferable to criminal prosecution. This approach, according to the advocates, could help resolve non-compliance issues and reduce legal costs for both regulators and the industry.
Nevertheless, the association advised against implementing a "per account" penalty, such as "$1,000 per account/user," similar to rules in the United Kingdom. HKSFPA warned that such a system could lead to disproportionate penalties, where a minor software issue could result in significant fines even in the absence of intent to evade taxes. The group emphasized the need for a clearly codified "reasonable excuse defense" for cases where Reporting Financial Institutions (RFIs) relied on valid self-certifications that later proved to be false, provided the RFI had performed standard due diligence.
Electronic Filing Systems for CARF Submissions
When discussing the filing system for CARF submissions by crypto asset service providers, HKSFPA expressed enthusiasm for electronic filing. The association encouraged the government to move beyond manual upload processes.
To enhance efficiency, particularly for larger institutions with complex systems, HKSFPA suggested implementing Application Programming Interface (API) and XML file submissions. Direct API connectivity would enable the automation of reporting processes, thereby reducing filing errors and improving data consistency.
Manual uploads through an online portal, according to HKSFPA, decrease the efficiency for firms managing high transaction volumes. The association stressed that both manual and electronic options must be fully supported. They also recommended that detailed XML specifications and testing environments be made available at least a year before the system's go-live date.