Hong Kong Regulators to Bring Licensing to Crypto Exchanges

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Hong Kong is stepping up its efforts to formally regulate cryptocurrency exchanges in the city. The Securities and Futures Commission (SFC) just released a newly drafted regulatory framework, which allows the securities watchdog to issue licenses to crypto trading platforms. Could this be a game-changer for the crypto industry? As a leading global financial hub, what does the new regime mean to the city?

A Comprehensive Framework

A year ago, the SFC announced a regulatory sandbox to provide a confined environment for fintech companies to advance regulatory innovation. After a year, at the latest HK FinTech Week, Ashley Alder, head of the SFC announced that the city’s securities watchdog has now established a new comprehensive set of regulations for cryptocurrency exchanges in Hong Kong.

Cryptocurrencies and virtual assets traded on an SFC-licensed platform will not be subject to the same kind of regulation that applies to traditional offerings of securities or investment funds.

Alder said the rules are tailor-made for the crypto industry, covering all the key investor protection concerns including the safe custody of assets, KYC requirements, anti-money laundering, and market manipulation. Concepts that don’t exist in traditional financial markets like hot and cold wallets, forks, airdrops are also included.

Additionally, all licensed platforms must have insurance covering the risk of virtual assets being lost or stolen.

He stressed that “Virtual assets have been moving further into conventional financial markets”, and highlighted stablecoins in particular, saying that some projects are “capable of being adopted extremely rapidly on a global scale” which has led to “serious concerns among politicians and central bankers and financial regulators.”

Exchange Licensing: An Opt-in Solution

The new regulatory framework allows the SFC to grant a license to exchange operators that wish to opt-in to regulation. In other words, it is not mandatory for crypto exchanges in the city to acquire a license to operate. Alder explained that the reason for choosing an opt-in solution is because the existing legislation was not designed with the crypto world in mind. He believes that markets can wait until new legislation covers the entire virtual assets sector, although no timeline is provided.

Given that many of the major crypto exchange operators have a presence in Hong Kong, we believe that there will be a handful of exchanges that will take the invitation to opt-in to SFC’s regulation plan, however, we do not expect to see a large number of exchanges rushing into the regulation net.

Professional Investors Only, No Retail

The new licensing program states that exchange operators can only provide services to professional investors, which means still no retail services can be provided. As defined under the Securities and Futures (Professional Investor) Rules (Cap. 571D), a “professional investor” means the following:

An individual having a portfolio of not less than HKD 8 million or its equivalent in any foreign currency at the relevant date or as ascertained by referring to any one or more of the following documents issued or submitted within 12 months before the relevant date.

A trust corporation having been entrusted under one or more trusts of which it acts as a trustee with total assets of not less than HKD 40 million or its equivalent in any foreign currency at the relevant date.

That’s only part of the definition, nevertheless, it doesn’t mean any retail investors will be involved. The new rules continue to make cryptocurrency trading in Hong Kong available to only a small group of investors and not the public. Alder stressed that the reason behind this is because virtual asset futures contracts, especially contracts with leverage, are volatile and could be “extremely risky”.

Bitcoin and Others: Not Securities

How the SFC sees the nature of Bitcoin and other crypto-assets is another highlight from the announcement. Alder clearly said,

“Bitcoin and the other, more familiar crypto assets are not securities.” 

He also stated that the SFC “only has the power to regulate a platform that trades virtual assets or tokens which are legal “securities” or “futures contracts”. SFC’s stance is largely in-line with other regulatory bodies in the world such as the Securities and Exchange Commission in the US.

Conclusion

The SFC crypto exchange regulation announcement came after China’s blockchain initiatives, and we can expect that China and, broadly speaking, Asia, will be front and center when it comes to blockchain-based crypto development. As crypto investment becomes more mainstream, and the everyday application and usage of virtual assets rapidly increased, there’s no doubt that a complete set of regulations for crypto assets is much needed. We believe that a well-regulated environment will benefit both investors and crypto industry stakeholders. The regulatory development in Hong Kong is considered a positive move for the overall crypto industry.

This post originally appeared on OKEx Blog. Read more.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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