19 July 2021
Hong Kong's Securities and Futures Commission (SFC) has issued a new regulatory framework for virtual asset trading platforms designed to promote transparency, safe custody and increase consumer confidence.
The new framework will determine how licences for centralised virtual asset trading platforms are granted, placing a strong emphasis on protecting the virtual assets of investors. Any virtual asset exchange operator that wants to be licensed by the SFC will be required to meet all of the requirements for alternative trading systems and stockbrokers.
The commission has decided to set out a voluntary, opt-in approach, allowing operators to determine whether they want to apply for a licence. While this may seem less stringent than making licensing compulsory, it will give those who opt to be licensed a competitive advantage to attract investors.
Cryptocurrency platforms, often known as ‘exchanges’, that agree to be regulated and supervised are likely to become more attractive in a sector that has a reputation for risk.
The new regulatory framework reinforces the safe custody of a user’s cryptocurrency assets and strengthens cybersecurity. In the past, there have been numerous instances of different platforms being hacked, with serious losses being recorded by investors. The new framework addresses the lack of transparency around trading rules, making cryptocurrency markets fairer and less vulnerable to manipulation.
The new framework takes key steps to address ongoing regulatory concerns. These include the safe custody of assets, know-your-client requirements, market manipulation, accounting and auditing, conflicts of interest and acceptance of virtual assets for trading.
Regulated platforms are more likely to find it easier to establish mutually beneficial banking ties. For instance, this may facilitate conversion between fiat money and cryptocurrency. This should, in turn, reduce the risk of collapse, as happened in the case in April of Gatecoin.
Despite being one of the best known and longest established virtual exchanges in Hong Kong, several banks refused to deal with its money flow due to compliance concerns.
Under Hong Kong law, the SFC is only able to regulate futures and securities products. This means that any platform seeking a licence will need to offer at least one product that’s structured like traditional securities.
Any platform that only provides a pure peer-to-peer marketplace for transactions rather than safe custody services will not be able to apply for licensing. Instead, the SFC will regulate platforms that offer global clearing and settlement services for virtual assets and retain control over investors’ assets.
Platform operators will be expected to ban retail investors from trading. They will also need to ensure they have adequate insurance cover and a range of other safeguards to ensure the safe custody of customers’ virtual assets.
Although the licensing framework is voluntary at present, it’s predicted that all digital asset platforms operating in the territory will need to become regulated if they are to remain competitive. The new framework should accelerate the acceptance of digital assets as a viable class of financial instruments in Hong Kong and across the region.
The new measures look set to shake up the digital assets market in the region considerably in what is a rapidly evolving regulatory environment.
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