Hong Kong Regulators Reveal Plan to Regulate Crypto Exchanges

The Securities and Futures Commission (SFC) of Hong Kong announced Thursday new guidelines as well as a plan to regulate crypto asset operators in the country. The regulator revealed this in a statement published on its website.

The SFC statement read:

“In order to address these risks [associated with unlicensed trading platform operators], the SFC is issuing guidance on the regulatory standards expected of virtual asset portfolio managers and fund distributors. The SFC is also exploring a conceptual framework for the potential regulation of virtual asset trading platform operators.”

Hong Kong, A haven for Crypto Operations

The SFC acknowledge the increasing interest in cryptocurrency investments but unlike Japan which has strict regulatory guidelines, Hong Kong allowed crypto exchanges to operate without licenses. The securities watchdog in its statement labeled this as “risky” thereby raising the need for a licensing process for institutional investors as well as cryptocurrency trading platforms.

Crypto Regulations in Hong Kong

The current regulations in Hong Kong only cover crypto assets that qualify as securities in which case the SFC has jurisdiction. The same rules that apply to conventional exchanges apply to them. The regulators, however, noted that most of the existing crypto exchanges in don’t fall under the current regulatory framework. It explained that many investors in virtual assets are left unprotected by the conventional approach where financial products are classified as “securities” or “futures contracts”.

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Risks Associated with Unregulated Crypto Activities

According to the statement, although an unregulated crypto assets market did not pose a material risk to financial stability, it posed risks to investors due to the nature of cryptocurrency themselves as well as the operations of crypto exchanges and fund managers. It highlighted some major areas of risk with cryptos to include: Valuation, volatility and liquidity; Accounting and auditing; Cybersecurity and safe custody of assets; Market integrity; Risk of money laundering and terrorist financing; Conflicts of interest; and Fraud.

The New Crypto Regulatory Framework

The SFC said that it has decided to adopt a new system which will bring a significant portion of virtual asset portfolio management activities into its regulatory net. In a guideline accompanying the statement, the SFC mandated a compulsory licensing of any Institution that intends to invest up to 10 percent of its portfolio in virtual assets. It stated that the Fund must provide custodial services and risk management amongst other requirements.

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On the part of cryptocurrency exchanges, the SFC noted it was exploring the best approach towards regulation. It recommended trading platforms that serve only professional investors to join a regulatory sandbox program to freely experiment expected requirements like the anti-money laundering and counter-financing of terrorism (AML/CFT) guidelines.  SFC also published a conceptual regulatory framework for crypto operators where it spelt out the proposed licensing conditions for the trading platforms.

The consequences of New Crypto Regulations in Hong Kong

Responses have begun to trail the SFC’s announcement. Urszula McCormack, the Hong Kong-based partner at King & Wood Mallesons, a law firm that has advised ICO projects, referred to the regulations as “a smart move”. In her words, “Realistically there are two possible ways forward — regulate or ban — and it’s a smart move that Hong Kong has chosen to regulate.”

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As Smartereum reported, Japan’s Financial Service Agency (FSA) announced that most “pseudo” crypto operators in have withdrawn their applications following its tight regulations. Notwithstanding, it said that over 100 operators have indicated interest to enter the country. One of this operators is U.S.-based exchange Coinbase which recently said it was confident it will get the license to operate in the Asian country.

Do you think Hong Kong is making the right decision by Regulation Crypto exchanges and Fund Managers?  


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