May 24, 2023
By Tsering Namgyal
In a big bang for crypto regulations, Hong Kong’s securities watchdog the Securities and Futures Commission (SFC) said on Tuesday it will allow retail investors to trade in large-cap tokens such as Bitcoin and Ethereum on regulated exchanges.
The move comes after the consultation on the same topic that began in February and was finally announced on Tuesday, marking an epoch-making step in the city state’s bold approach towards refashioning itself as a hub for the Web3 industry. The regulator has received 152 written submissions from the industry.
After the latest move, some experts believe Hong Kong will likely be a testing ground for future crypto adoption in China. It also brings crypto assets squarely under the remit of the securities regulator, thus clarifying a long-held confusion about which body should regulate crypto assets.
The SFC has said that it had feared that not letting retail investors to trade in cryptocurrencies – in compliant with consumer protection, anti-money laundering and counter-terrorist financing rules – would risk driving investors onto unregulated crypto exchanges.
The SFC stated that it will implement a “number of robust measures” to protect retail investors including good governance, suitability during the onboarding process and heightened token due diligence, amongst others.
The securities watchdog is yet to approve any virtual asset trading platform to provide services to retail investors and most virtual asset trading platforms currently accessible by the public are not regulated by the SFC, the 380-page consultation paper stated.
Though this is a landmark development, the Hong Kong authorities have said the latest regime is “not a light touch regulation” and the exchange operators and investors will have to comply by its stringent regulations.
The revised proposed regulatory guidelines will become effective on June 1.
“Operators of virtual asset trading platforms who are prepared to comply with the SFC’s standards are welcome to apply for a licence. Those who do not plan to do so should proceed to an orderly closure of their business in Hong Kong,” the SFC stated.
Once you apply for a virtual asset service provider (VASP) licence you should get approved (if successful) within 3 months.
The regulator has agreed to allow licensed virtual asset providers to serve retail investors, provided that operators assess understanding of the risks involved. The regulator also proposed stablecoins, which are crypto pegged to the value of other assets, as well as interest-bearing crypto assets, should not be admitted for retail trading.
The new rules also bans crypto “gifts” designed to incentivize retail customers to invest, including airdrops.
Under the rules, crypto exchanges are to maintain at all times no less than 5,000,000 Hong Kong dollars ($640,000) in capital, and at the end of each month, submit the platform’s available and required liquid capital, a summary of bank loans, advances, credit facilities as well as a profit and loss analysis to the SFC.
Approved tokens on regulated exchanges need a 12 month track record, according to the rules.
One crypto investment manager called the SFC’s consultation paper “hotly anticipated and long awaited.”
“Retail trading will be allowed albeit with a high-hurdle of suitability and education requirements. After actively contributing to the public consultation – yet another step in the short history of the new and emerging alternative digital asset class,” he added.
Analysts believe that the Hong Kong’s latest move will put it ahead of rival Singapore – where regulations governing cryptocurrencies remain relatively stringent – and likely to attract more crypto and Web3 firms to its Greater China counterpart.
For instance, Greenland Financial Technology Group, a wholly-owned subsidiary of China’s state property giant Greenland Holdings, is planning to apply for a license to open a crypto business in Hong Kong to trade in cryptocurrencies and NFTs, amongst others.
A crypto derivative exchange Bitget also said it is planning to apply for a VASP license in Hong Kong to trade crypto in compliant with regulations governing anti-money laundering and counter-terrorist financing rules.
Indeed, the race to regulate crypto assets is heating up around the world, though some regulators such as those in the United States remain sceptical at best.
But this has not deterred global regulatory bodies to pay close attention to crypto assets, despite their speculative nature that has manifested in the implosion of the likes of FTX, Three Arrows Capital and Terra Luna.
On Tuesday, the International Organization of Securities Commissions (IOSCO), which has 130 members around the world regulating more than 95% of the world’s securities markets and the global standard setter for securities markets, also issued a consultation to jurisdictions across the globe for recommendations on how to regulate crypto assets.
Recently, the European Parliament has approved the Markets in Crypto Assets (MiCA) regulation, the world’s first comprehensive set of rules that aims to bring largely unregulated cryptocurrency markets under government regulation.
The regulation will come into force after formal approval by member states.
More regulatory clarity for cryptos in some European countries are proving effective in attracting companies and Web3 talent. OKX, the world’s second largest crypto exchange, said on Tuesday said it is applying for regulatory approval in France and will likely expand its team to 100 within the next few years.
About the author
Tsering Namgyal is the chief content officer of NFTMetta.com.
