Hong Kong Regulator Says DeFi Projects Could Face Regulatory Requirements

Decentralized finance (DeFi) projects could be subject to licensing requirements and regulation, a Hong Kong regulator said on Wednesday.

Keith Choy, interim head of intermediaries at Hong Kong’s Securities and Futures Commission (SFC), said that as long as DeFi activity falls within the scope of the Securities and Futures Ordinance (SFO) it will be subject to the same regulatory requirements as traditional financial activity.

Choy made the comments during a speech at the Web3 Festival in Hong Kong. The U.S. and France also published reports on DeFi regulation recently. The SFC had previously highlighted DeFi as an area in need of regulation but had not laid out its stance.

"Providing automated trading services is a regulated activity under the SFO," Choy said. "If a decentralized platform allows trading in virtual assets, which constitutes securities or futures as defined under the SFO, the platform and operators are required to have a Type 7 license," he added.

Offering a collective investment scheme to the public in Hong Kong is subject to authorization requirements, Choy noted.

DeFi presents regulators with issues of financial stability and limited transparency due to lack of data and unregulated firms and activities, Choy said, while also highlighting market integrity issues such as price oracle manipulation, front-running transactions and investor protection concerns.

The SFC issued a statement in December 2022 warning investors of the risks associated with virtual asset platforms. Hong Kong's new licensing regime for virtual asset trading platforms takes effect in June 2023, though there is a grandfathering period.

Read more: U.S. Treasury Warns DeFi Is Used by North Korea, Scammers to Launder Dirty Money