Hong Kong Publishes Regulatory Framework for Cryptocurrency Exchanges

Hong Kong’s financial regulator — the Securities and Futures Commission (SFC) —  has published a new set of rules on Wednesday that would allow cryptocurrency exchanges to receive an operating license, a step intended to improve regulation standards and help prevent fraud.

Initially, the announcement was made by Chief Executive Ashley Alder at a local fintech event on November 6th. Speaking at a fintech conference on Wednesday in Hong Kong, Alder explained:

“The framework will enable virtual asset trading platforms to be regulated by the SFC, a major development which builds on a way forward I outlined at the same time last year.”

The new rules, under which exchanges can apply to be regulated from Wednesday, draw on the standards the SFC expects for conventional securities brokers.

According to Alder, the new regulatory framework will focus on how exchanges must approach custody and compliance, particularly with regards to Know Your Customer (KYC) and Anti-Money Laundering rules.

“A platform operator should comply with the KYC requirements which are applicable to a licensed corporation. It should take all reasonable steps to establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience and investment objectives.”

Additionally, it is stipulated that an exchange that wants to be licensed must provide services to professional investors only, have an insurance policy to protect clients in case assets are lost or stolen, and will be required to file a monthly report to the Commission.

On top of that, exchanges must have an independent auditor and only alter existing products or offer new products with the regulator’s approval.  Adler further noted that cryptocurrency exchanges do not need an SFC license to operate as long as they do not trade any products defined as a security.

The SFC adds that non-custodial exchanges will not be considered for licensing, stating:

“The SFC will not accept licensing applications from platforms which only provide a direct peer-to-peer marketplace for transactions by investors who typically retain control over their own assets (be they fiat currencies or virtual assets).”

Last year, the SFC published a license last year that provided fund managers of virtual assets permission to sell digital products to potential investors. However, very few have been able to meet the regulator’s requirements.

Now, the new regulatory framework was developed following consultation with the operators of several crypto-asset trading platforms, which led the SFC to conclude that a credible regulatory framework could allow it to regulate at least some digital asset exchange platforms.

That being said, Singapore-based cryptocurrency exchange Huobi could become first licensed exchange in Hong Kong. The exchange is reportedly planning a backdoor initial public offering (IPO) in Hong Kong. In addition to that, the exchange recently teased a possible push into the securities market, which could tie in with its potential listing on the Hong Kong Stock Exchange (HKEX).

DX.Exchange Platform Shuts Down Less Than A Year From Launch

DX.Exchange, a Nasdaq-powered cryptocurrency and tokenized securities trading platform, has announced its closure just 9 months after its launch in January. According to the announcement, the company cited financial hardships as the main reason for its decision.

On November 3rd, the Estonia-based platform announced via a blog post about its imminent shutdown. However, the blog post notes that the shutdown is only temporary, as the remaining members are looking for an acquisition or a merger to continue running.

The blog post reads the following:

“We must inform the community that the board of directors of DX.Exchange has decided to temporarily close the exchange as we pursue a merger or outright sell of the company. […] The costs of providing the required level of security, support and technology is not economically feasible on our own.”

Upon the announcement, the exchange suspended trading on the platform as well as blocked all deposits. In addition to that, all open orders had been canceled at 12:00 GMT on Sunday. The exchange further asked users to withdraw their funds by November 15th in order to allow a merger/sale to proceed.

For the withdrawal process, the exchange requires that users email its support team with a copy of their government ID used for the initial signup, the wallet address and the amount for each asset they are withdrawing, as well as a selfie with a paper with the date and the words DX Exchange. Users are required to use the same email they set up the account with.

Meanwhile, if a merger or acquisition does not happen soon enough, then the exchange will stop operations permanently, according to the announcement. However, the exchange remains hopeful as it wants to achieve “success for its shareholders and compete in this challenging market.”

With the shutdown announcement, it remains unclear what will happen to the platform’s staff, which ranges between 51-200 employees, according to LinkedIn. The firm has yet to comment on the matter.

DX.Exchange launched its platform in January of this year, and offered trading in cryptocurrencies as well as tokenized securities such as stocks of Tesla and Apple and exchange-traded funds or ETFs like Invesco QQQ and SPDR S&P 500.

Noteworthy, DX.Exchange was the first cryptocurrency trading platform to be built with Nasdaq trading technology in combination with the exchange’s in-house tech, making it a potential powerhouse.

Swiss Crypto Bank Sygnum Receives License in Singapore

Swiss-based cryptocurrency bank Sygnum has been granted capital markets services (CMS) license from the Monetary Authority of Singapore (MAS), allowing it to provide digital asset investment strategies to accredited and institutional investors in Singapore. Prior to this, Sygnum was the first bank to get a banking license from Swiss regulators back in August.

Announced through a blog post on Thursday, Sygnum announced that it had been granted a capital markets services (CMS) license from the Monetary Authority of Singapore (MAS) and given the green light to provide a range of digital asset management services including Bitcoin (BTC), digitized shares and various other financial products to institutional investors and qualified private investors in Singapore.

Stefan Mueller – Sygnum’s Head of Asset Management – stated in the press release:

“The CMS license is an important milestone for establishing our asset management arm, leveraging the vibrant financial environment in Singapore. This is complementary to our banking services in Switzerland and will also benefit our Swiss institutional and private qualified investor clients.”

According to the press release, the first product that the crypto-bank would be offering to Singaporean investors is the multi-manager fund which allocates investments across a portfolio of managers who tap into different and uncorrelated investment strategies for different digital assets. The same product will be launched in Switzerland later this year.

Notably, Mueller stated that he believed that the bank’s multi-manager product approach was a compelling way for professional investors to gain exposure to this emerging new asset class.

 “We want to help our clients construct broader, diversified portfolios with reduced risk and institutional-grade trust,” he further added.

The Swiss bank further noted that the CMS was received by the Singapore-registered entity of the bank and cannot be overlapped with its Swiss entity.

Meanwhile, Singapore has retained its position as a friendly environment for cryptocurrency as well blockchain technology. In addition to that, both Switzerland and Singapore share close financial ties, especially in the emerging Fintech industry and digital assets where much of Swiss-led private banking has made its way to Singapore.

Now with licensing in two financial hubs – Switzerland and Singapore – the company is strengthening its team as well as its ties to each other.

Mathias Imbach – Sygnum’s Co-Founder and CEO of its Singapore oentity – has stated upon the recent acquisition of a CMS license, saying:

“Our dual location – in Singapore and Switzerland – is one of the cornerstones of our strategy. This is reflected across team, advisory council, board of directors as well as investor base. All have been instrumental in our achievements so far across both countries.”

Sygnum is also planning to expand its services to other markets as well, with a high demand for digital assets and management services in regions like Hong Kong, Britain, Italy, Germany, France, Austria, Portugal, and the Netherlands.

China’s Central Bank Will Start Certifying Blockchain Platforms

The People’s Bank of China – the country’s central bank – has announced the launch of a new process for certifying blockchain platforms.

The new verification system, named the ‘Certification of Fintech Products’,  will certify 11 types of financial technology hardware and software that are widely used for digital payment and blockchain services.

On October 26th, the central bank released the first list which includes fintech products that could be used in both front-end and bank-end development for digital payment services. Currently, the new certification system covers all the products that could be involved in digital payment technologies, including point-of-sale mobile terminals, embedded application software, user front-end software, as well as security carriers and chips.

Notably, a specific fintech item included on the list of 11 products is trusted execution environment (TEE), which is a technology that can assist in the establishment of a “consortium blockchain network and verifying blockchain transactions in financial transactions use cases,” according to the filing.

For reference, giant tech company Microsoft filed for two patents in August 2018 to use similar type of technologies with the goal to improve the security and capacity of its blockchain services offerings.

Furthermore, blockchain platforms will be granted a Certification of Fintech Product (CFP) by the central bank only if their products meet the required checks to pass such as prototype examination and on-site checks. In addition to that, the certificate will be reviewed and renewed every three years.

Respectively, during the three year period, the authorities in charge will conduct random inspections on any step of the production process to ensure compliance. Additionally, institutions will be allowed to stamp the certifications on their logo. However, it is not allowed to use the certification as a means to directly promote products or for advertising itself.

The news follows China’s recent praise of blockchain and cryptocurrencies as a whole, with the President Xi Jinping urging the country to accelerate blockchain adoption, noting that it can and will be a big part of any upcoming technical revolutions.

 “[Blockchain will play] an important role in the next round of technological innovation and industrial transformation. Greater effort should be made to strengthen basic research and boost innovation capacity to help China gain an edge in the theoretical, innovative, and industrial aspects of this emerging field,” stated President Xi Jinping.

The central bank is currently working on developing the country’s own digital currency, which will launch soon. The bank forsees the national digital currency boosting the digital payment industry, touting its own coin’s security features and off-line transaction ability as superior to commercial products offered by China’s Alipay and WeChat Pay.

Crypto Capital Executive Indicted in NY Court

Crypto Capital executive Oz Yosef has been indicted on three criminal counts by the U.S. Attorney’s Office of the Southern District of New York.

Citing court documents from October 23rd, Oz Yosef has been indicted by the U.S. authorities on three criminal counts, which are conspiracy to commit bank fraud, bank fraud and conspiracy to operate an unlicensed money transmitting business.

It appears that the filing confirmed allegations from cryptocurrency exchange Bitfinex, which has recently claimed to have been a victim of fraud regarding Crypto Capital — its former payments processor. Bitfinex has issued a statement on the matter, saying that it was not involved in money laundering and that it has been lied to by Crypto Capital representatives including its former president and Oz Yosef.

Accordingly, Crypto Capital spread the firm’s funds across multiple bank accounts in several countries, making it difficult to access. The crypto exchange further added that Crypto Capital provided false reassurances regarding its reputation, expertise and operations, which lead to the disappearance of $880 million.

Bitfinex presented itself as the victim of Crypto Capital following the latter’s president arrest by Polish authorities due to money laundering scandals involving the Columbian Cartel. On Thursday, Crypto Capital president Ivan Manuel Molina Lee was extradited by Polish authorities on charges of money laundering, subsequently charged with laundering 1.5 billion zloty ($390 million).

Upon Lee’s arrest, Stuart Hoegner – Bitfinex’s general counsel – released a statement last Friday, on behalf of the exchange, maintaining its claim to be a victim of fraud and will pursue the company in retrieving its lost funds.

Following investigations conducted over this past spring by multiple international authorities, including U.S. authorities, Crypto Capital’s funds have been frozen, out of which $880 million belonged to crypto exchange Bitfinex.

Meanwhile, there have been doubts circulating about both the company’s heads stem from the losses of the $880 million. Previous reports revealed that Tether – a cryptocurrency governed by Bitfinex – had previously stated that the lost funds weren’t actually lost but had been “seized and safeguarded.”

The lost funds triggered an investigation by the New York Attorney’s Office into the relationship between Bitfinex and sister firm Tether. The New York General Attorney has been investigating this case since last year and found damning messages exchanged between a senior Bitfinex executive and a representative of Crypto Capital.

The exchanged messages were centered around the $880 million funds, with the Bitfinex exec urging Crypto Capital to release the money but was told it was seized by the U.S. and Polish authorities. Bitfinex didn’t buy the excuse and said that it fears that Crypto Capital is engaged in fraud, speculation that ultimately landed Lee behind bars.