Coinsuper, a cryptocurrency exchange based in Hong Kong, is just a year old but has already weathered market turbulence that saw virtual currencies lose 80 per cent of their market cap in 2018. That experience, says its co-founder and chief executive Karen Chen, toughened Coinsuper up for its next challenge: steering its business to institutional traders. The change comes as Hong Kong is moving forward with new regulations to oversee what has been, up to now, a wild west market. No licenses have been needed in the city to operate a cryptocurrency exchange. Different parts of the world are trying to figure out how to approach the volatile, still-new innovation of digital assets: Japan last year became the first country to regulate crypto exchanges, while China has banned them outright. Hong Kong hopes to become a major trading centre for virtual assets, but in a safe and regulated manner overseen by its Securities and Futures Commission. Under the rules unveiled in November, exchanges can only serve institutional traders with portfolios of at least HK$8 million (US$1 million), offer no leverage or margin trading, and hold insurance. Those who want to be licensed must enter a “regulatory sandbox,” where the rules are being hammered out. The regulatory framework will apply to exchanges that only service institutional investors. While it isn’t 100 per cent clear, insiders are reading this to mean that newly licensed operators for virtual asset trading will need to leave out retail investors, which account for a substantial amount of today’s trading. For Coinsuper, the changes mean beefing up security. An average of $2.7 million in crypto assets was stolen from the world’s exchanges every day in 2018, or 13 times higher than 2017. And also it must keep trading volumes up once it leaves retail investors behind. Explainer: What is Hong Kong’s plan for licensing cryptocurrency exchanges “Institutional clients are mindful of security breaches, and we have learned a lot from the market. If our infrastructure is steady and robust, we would naturally entice trading volume. We are not worried about declines in trading volume too much,” Chen said. Professional investors have more knowledge and financial capability to bear the volatility of trading virtual assets, Chen said. Coinsuper, which she said has one million registered users, trades Bitcoin, Etherum and other non mainstream utility tokens. It is backed by venture capital funds such as Sky9 Capital and others. Chen, a veteran banker, was most recently the former president of UBS (China) heading its wealth management unit before switching over to the crypto world. She said she remains hopeful Coinsuper will be extended a licence when the securities regulator concludes the “sandbox” process. Licensing, she said, will mean that crypto assets and their trading will be legitimised as part of mainstream finance. Cryptocurrency rules unveiled by SFC as Hong Kong aims to become major trading hub Today, 80 per cent of Coinsuper’s 100 workers are in Hangzhou and Chengdu in mainland China. They are engineers helping the trading platform upgrade to tailor for institutional clients’ requirements. That includes new functions to help them with portfolio management and reporting requirements to stakeholders. Coinsuper will face stiff competition. Over-the-counter brokers are already servicing institutional investors such as hedge funds and large family offices to trade in larger size. These include “block trades” valued at more than US$100,000 – a size that some industry players claim would exceed the amount that the typical trader on an exchange are able to buy or sell. Participation by financial institutions in cryptocurrency trading has declined, according to a JPMorgan report released in January. It found that as of the end of 2018, bitcoin futures volume trading was down on the two US futures exchanges, CME and Chicago Board Options Exchange, whose contracts are targeted towards institutional investors. Futures volume as a proportion of bitcoin volume on crypto-exchanges dropped to below 1 per cent, down from 10 per cent seen in third quarter 2018. Despite the challenge, Coinsuper is in the process of screening out existing clients that fulfill the requirements of a “professional investor”, as it prepares for more new services, Chen said.