Hong Kong’s securities watchdog is to treat cryptocurrency trading platforms like traditional brokers if they offer security tokens, according to its second round of regulatory guidance for the industry.
The Securities and Futures Commission (SFC) released its position paper on virtual asset exchanges Wednesday, announcing a new licensing scheme that it said is not dissimilar from the one applied to Hong Kong's security brokers and automated trading venues.
Any virtual asset firm trading at least one security token falls under the regulator’s purview. Applications for peer-to-peer (P2P) exchanges – such as decentralized exchanges (DEX) or non-custodial trade platforms – will not be reviewed by the SFC.
Under the new licensing conditions, regulated crypto exchanges can only offer products to “professional investors” as defined by the SFC. Firms may also only alter products or services following approval by the regulator and must have an existing relationship with an independent auditing firm, filing annual reports on exchange activities. Exchanges must further file monthly reports to the commission.
Hot wallets – crypto storage with live connections to the internet – may not hold more than 2 percent of an exchange’s total funds. While exchanges are mandated to have insurance for all assets in the event of a breach or hack, the SFC states.
Anti-money laundering (AML) and know-your-customer (KYC) procedures are cited as a chief concern, with the SFC saying exchanges must take 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.”
Upon the granting of a license, firms enter into the SFC Regulatory Sandbox which the regulator says brings more exacting reporting and monitoring standards.
The regulator also issued a warning Wednesday to providers of cryptocurrency-based futures products targeting Hong Kong citizens without the proper paperwork. The SFC said it “has not licensed or authorised any person in Hong Kong to offer or trade virtual asset futures contracts” to date and remains “unlikely to grant a licence or authorisation to carry on a business in such contracts.”
Passed in November 2018 and updated this October, the SFC's first crypto licensing scheme, concerning funds that invest 10 percent or more of their portfolios in crypto, has only given the green light to one fund in the past year.
Hong Kong image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is an award-winning media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. In November 2023, CoinDesk was acquired by Bullish, a cryptocurrency exchange, which in turn is owned by Block.one, a firm with interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets including bitcoin and EOS. CoinDesk operates as an independent subsidiary, and an editorial committee, chaired by a former editor-in-chief of The Wall Street Journal, is being formed to support journalistic integrity.