Hong Kong Regulators Issue Framework to License Crypto Exchanges

by
Ali Martinez
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• Hong Kong will regulate cryptocurrency exchanges.
• The Securities and Futures Commission developed a set of guidelines for exchanges to operate.
• Custody and cybersecurity are the top concerns among regulators.

Hong Kong’s Securities and Futures Commission (SFC) published a regulatory framework that enables cryptocurrency exchanges to be regulated. With the new set of rules, the nation is making a significant step towards the adoption of blockchain technology.

Licensing Cryptocurrency Exchanges

During the Hong Kong Fintech Week, the world’s first cross-border financial technology event, SFC CEO Ashley Alder announced the creation of new guidelines for licensing cryptocurrency exchanges.

The 61-page regulatory sandbox covers custody, know-your-customer rules and the storage of crypto assets, among other issues. According to the head of the SFC, cybersecurity and custody are the top concerns among regulators in a market that appears to be “vulnerable to manipulation.”

Alder said:

“Our new regulatory framework covers all of the key investor protection concerns. These include the safe custody of assets, know-your-client requirements, anti-money laundering, and market manipulation. And, it also zeros in on many of the new concepts we are getting used to, such as hot and cold wallets, forks, airdrops and the like. We will also set out the criteria for platforms to decide on the inclusion of a new virtual asset for trading.”

The SFC emphasized that it has no jurisdiction to license or supervise platforms that trade non-security digital assets. Thus, assets that are not considered securities or futures contracts do fall within the SFC’s new regulatory remit.

Critical Aspects of the Regulatory Framework

Under the new standards, cryptocurrency exchanges must provide their services to professional investors. The platforms must also request written approval before integrating new products or services. The Commission expects these firms to produce monthly reports regarding their business activities.

Additionally, the SFC requires custodial services platforms to be insured. The insurance policy needs to thoroughly cover the assets stored in hot and cold wallets. They must maintain 98% of the holdings in cold wallets.

These platforms must also be “associated entities” of the operator under the Securities and Futures Ordinance (SFO). And, they need to hold a “trust or company service provider license” under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

The SFC declared:

“This should assist in the safekeeping of client virtual assets and ensure that they are properly segregated from those of the platform.”

All cryptocurrency exchanges will have to comply with anti-money laundering (AML) and know-your-customer (KYC) procedures. They must establish the identity of each of their clients, as well as their financial situation, investment experience, and objectives.

Despite the positivism to regulate key players in the industry, many are not amused by the recent developments. Leo Weese, president of the Bitcoin Association of Hong Kong, is concerned that the new regulation would push investors out of the country. According to Weese, the new regulatory framework is “a cage that places unreasonable burdens on exchanges.”

Weese wrote in a blog post:

“While Hong Kong was a better place when it did not bother such platforms, it was inevitable this day would come. Exchanges will likely maintain parts of their teams in Hong Kong, but work harder to convince the public of a new narrative that places them outside the SAR.”