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).