Hong Kong’s Securities and Futures Commission (SFC) seeks public feedback on the proposed cryptocurrency exchange licensing regime expected to take effect in June this year. The key issue is whether regulated exchanges can service retail investors nationwide and what investor protection measures should be established.
On Feb. 20, the SFC began a consultation process to require all centralised cryptocurrency trading platforms in Hong Kong to be regulated.
The SFC’s proposed regulations are based on current rules for registered securities brokers and automated trading platforms, but some have been modified.
SFC CEO Julia Leung cited the recent upheaval in the crypto sector and the failure of industry leaders like FTX as a need for explicit investor protection regulations.
“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle.”
It’s required for any person or business providing crypto-related services to be licensed from the SFC. Some requirements for cryptocurrency exchanges are secure asset storage, Know Your Customer, conflicts of interest, cybersecurity, accounting and auditing, risk management, AML/CFT, and market misbehaviour prevention.
The SFC said that under the new licensing regime, which will take effect on June 1, 2023, all centralized virtual asset trading platforms that operate in Hong Kong or actively promote themselves to Hong Kong investors will need to be licensed by the SFC.
— 常为希 ｜🔸香港Hk Alpha 🇨🇳🇭🇰 (@CryptoYunqi) February 20, 2023
Businesses that want to keep operating and seek a licence should assess and update their systems and procedures to comply with the new regulatory regime. Exchanges and service providers that do not apply for a licence must prepare to shut down business operations in Hong Kong.
Hong Kong’s SFC plans to publish and update a list of regulated cryptocurrency exchanges and service providers to educate the public.
The 361-page paper details the proposed license requirements, AML controls, and other industry duties. Remarkably, the part on retail access to regulated bitcoin trading platforms is most relevant. From 2018, SFO-licensed platforms could only serve professional investors.
Presently, only two trading platforms are licensed under the SFO, and the SFC’s crypto-focused rules have allowed retail investing in limited crypto-asset exposure.
The SFC allowed cryptocurrency futures exchange-traded funds in October 2022, offering individual investors indirect access to these markets. Meanwhile, some sell crypto-related services to investors under the SFC’s supervision. This justifies why the SFC enabled all investors to buy cryptocurrency via approved platforms in June 2023.
With a December 2022 update to the Anti-Money Laundering and Counter-Terrorist Financing Law, Hong Kong financial sector businesses started to enquire about licensing requirements.