Hong Kong’s Securities and Futures Commission (SFC) has announced that it will commence accepting applications for licenses from crypto trading platforms beginning June 1. This move comes as part of the regulator’s efforts to establish a regulated framework for the crypto sector while ensuring investor protection. The SFC’s decision allows licensed virtual asset providers to serve retail investors, subject to operators adequately assessing the risks involved.
The SFC’s consultation on policy recommendations, which was open to public feedback since February, highlights several key provisions. The regulator proposes that stablecoins, which are cryptocurrencies pegged to the value of other assets, should not be available for retail trading until the planned regulations for this asset class are implemented. Additionally, the guidelines explicitly prohibit the offering of crypto “gifts” aimed at incentivizing retail customers to invest, including airdrops.
The revised guidelines place the responsibility on platform operators to conduct thorough due diligence. The minimum requirement for listing tokens for trading on regulated exchanges is to be included in two acceptable indices. Crypto exchanges will be required to maintain a minimum capital of HKD 5,000,000 ($640,000) at all times and submit monthly reports to the SFC, including available and required liquid capital, a summary of bank loans, advances, credit facilities, as well as a profit and loss analysis. Tokens approved for trading on regulated exchanges will need to demonstrate a 12-month track record.
Furthermore, the guidelines emphasize the importance of due diligence procedures for token listing. Even if a token is listed on another platform, it must go through the same evaluation process before being listed on a regulated exchange. Smart contract audits by independent assessors are mandatory. While platform operators are not required to appoint independent external members to token review committees, they must effectively address conflicts of interests.
To safeguard investor assets, the SFC allows platforms to segregate client and platform assets through an escrow arrangement or by setting funds aside. Client virtual assets should be fully covered by each platform’s compensation arrangement. The SFC rejects the engagement of third-party custodians for safekeeping client assets, citing the absence of a regulatory regime for virtual asset custodians as a hindrance to supervision and enforcement.
The SFC plans to conduct a separate review on allowing derivatives, acknowledging their significance to institutional investors. Additionally, the implementation of the Financial Action Task Force’s travel rule for sharing information on crypto transactions between financial institutions will be accepted by the SFC until January 1, 2024, even if the required information cannot be immediately submitted.
With the revised guidelines set to take effect on June 1, the SFC’s efforts aim to establish a regulated and secure environment for the crypto sector in Hong Kong. By allowing licensed virtual asset providers to cater to retail investors while imposing stringent due diligence requirements, the SFC seeks to strike a balance between encouraging innovation and protecting investors. These measures contribute to the ongoing global conversation surrounding the regulation of cryptocurrencies and their associated risks.