Association 02/20 21:49
The Securities and Futures Commission of the Hong Kong Special Administrative Region Government (SFC) issued a press release on its official website stating that it will launch a consultation today on the proposed regulations applicable to operators of virtual asset trading platforms.
It is worth noting that under the new licensing system that will come into effect on June 1 this year, all central virtual asset trading platforms that operate businesses in Hong Kong or actively promote to Hong Kong investors will need to obtain a license from the Hong Kong Securities and Futures Commission.
In this consultation, the Hong Kong Securities and Futures Commission specifically consulted the market on whether licensed platform operators should be allowed to provide services to retail investors. This was interpreted by the market as Hong Kong's opening up of virtual asset trading to retail investors.
Virtual exchanges in Hong Kong must be licensed to operate
The press release pointed out that under the new licensing system "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022" (hereinafter referred to as the "Amendment Ordinance"), which will come into effect on June 1, 2023, all central virtual asset trading platforms that conduct business in Hong Kong or actively promote to Hong Kong investors will need to be licensed by the Hong Kong Securities and Futures Commission.
The Hong Kong Securities and Futures Commission stated that operators of virtual asset trading platforms (including existing platforms, i.e., those with meaningful and substantial business in Hong Kong before June 1, 2023) that plan to apply for a license should begin to review and modify relevant systems and control measures to prepare for the new system. As for operators who have no intention of applying for a license, they should start preparing to end their business in Hong Kong in an orderly manner.
In fact, as early as 2019, the Hong Kong Securities and Futures Commission introduced a regulatory framework for central virtual asset trading platforms that provide at least one security token trading service.
In November 2022, in response to the turmoil in the cryptocurrency market and the bankruptcy of the large cryptocurrency exchange FTX, the Financial Secretary of the Hong Kong Special Administrative Region, Paul Chan, said in his "Secretary's Essay" that the development of the virtual asset industry in Hong Kong should be promoted steadily and prudently. "We must fully utilize the potential brought by innovative technologies, but also be careful to guard against the volatility and potential risks that may be caused, and avoid these risks and impacts from being transmitted to the real economy."
In December 2022, a circular published on the official website of the Hong Kong Securities and Futures Commission showed that the Amendment Ordinance will introduce a licensing system for virtual asset service providers. Under this licensing system, anyone who intends to operate a virtual asset exchange business in Hong Kong must apply for a license from the Hong Kong Securities and Futures Commission, and the relevant persons must also meet the appropriate person criteria and comply with the anti-money laundering and terrorist financing regulations and other regulatory requirements.
Financial technology expert Cai Kailong told Metaverse NEWS reporters that the move by the Hong Kong Securities and Futures Commission is to clarify the regulation of virtual assets. In the past, virtual asset transactions were still a gray area, and even those exchanges without licenses could operate indirectly or directly in Hong Kong. Now, after June 1, it is confirmed that if you do not have a license, your operation in Hong Kong is illegal.
Are retail investors being allowed to stay afloat?
The Hong Kong Securities and Futures Commission plans to publish several lists on its website to list the regulatory status of various virtual asset trading platforms to the public, and will continue to cooperate with the Investor and Financial Education Committee to strengthen investor education for the Hong Kong public.
It is worth noting that in this consultation, the Hong Kong Securities and Futures Commission specifically sought market opinions on the following issues: whether licensed platform operators should be allowed to provide services to retail investors; if allowed, in addition to the recommended series of appropriate investor protection measures (including ensuring suitability when establishing business relationships with clients and relevant provisions for the inclusion of tokens), what other measures should be implemented.
In addition, the Hong Kong Securities and Futures Commission previously stipulated that platform operators can only provide their services to professional investors and ensure that their customers have a full understanding of virtual assets. They must also establish strict inclusion criteria to screen virtual assets traded on their platforms.
Specifically, individual investors must have an investment portfolio of HK$8 million or more; corporations and partnerships are required to have an investment portfolio of HK$8 million or more; and trust corporations must have total assets of HK$40 million or more.
“It is not open to all retail investors because there is a requirement for qualified investors. This is the expected direction of development.” Cai Kailong told reporters that it is not like what everyone imagines that all retail investors can trade cryptocurrencies; and there is a whitelist of traded cryptocurrencies, which means that in the future only a few coins will be allowed to be listed on compliant exchanges, which is similar to the Japanese exchange model. In fact, Hong Kong will be stricter than Japan in terms of retail compliance.
In Cai Kailong's view, this move actually has little impact on the industry. He believes that the local market in Hong Kong is not big, and the real retail market in Hong Kong is even smaller; the most important thing in Hong Kong is institutions and high-net-worth clients, but they have various investment channels, and the new customer base, new traffic, and new funds that can be brought to the cryptocurrency circle are smaller than expected.
Wang Feng, founder of Consensus Lab, told the Metaverse NEWS reporter that the policy of opening up the virtual asset trading market in Hong Kong has been brewing for at least a year. The policy was launched mainly after consulting the opinions of professional investment institutions in the field of blockchain technology application and the virtual currency market. However, whether it will be fully open to retail investors in the future needs to be open to the public for opinions.
"This just reflects the professionalism and transparency of the Hong Kong government. But how to do it specifically will have to wait until the consultation is over."
Huang Lichong, president of Huisheng International Capital, told a reporter from Metaverse NEWS that the future of virtual currencies is still uncertain, especially in terms of regulation. With increasingly stringent regulation, virtual currencies that do not comply with regulations may be banned from trading, which may also lead to the collapse of the virtual currency market. Therefore, in the future, virtual currencies need to comply with compliance regulations, and at the same time, they need to find a more robust business model to maintain ecological operations to ensure sustainable development.
“Simply put, except for Bitcoin, Ethereum or a few of the world’s large digital currencies (equivalent to the world’s blue chips), retail investors cannot trade,” Huang Lichong emphasized.
The views expressed in this article represent only the author’s personal views and do not constitute investment advice. I do not make any guarantees about the accuracy, completeness, or timeliness of the information in the article, nor am I responsible for any losses arising from the use or reliance on the information in the article.
