Hong Kong sets out regulatory framework for virtual asset trading platforms, emphasises investor protection
- Operators can decide whether they want to apply for a licence from the SFC
- Framework seeks to address key regulatory concerns, such as safe custody of assets, know-your-client requirements
Hong Kong’s Securities and Futures Commission has issued a new regulatory framework for granting licences to centralised virtual asset trading platforms, with a strong emphasis on protection for investors and their virtual assets.
The commission has adopted an opt-in approach, which means operators can decide whether they want to apply for a licence. The framework is in the public’s interest as it will allow “investors to choose to participate only in those cryptocurrency platforms or ‘exchanges’ that agree to be regulated and supervised,” Ashley Alder, the SFC’s chief executive, said on Wednesday.
“The safe custody of a user’s cryptocurrency assets and cybersecurity are major concerns. There have been many instances of platforms being hacked, with investors suffering substantial losses. Trading rules may not be transparent and fair, and cryptocurrency markets are vulnerable to manipulation,” he added.
A regulated entity is likely to find it easier to establish banking ties to facilitate a conversion between cryptocurrency and fiat money, some analysts have said. The lack of such support is said to be the key reason for the collapse in April of Gatecoin, one of the oldest virtual exchanges in Hong Kong after several banks refused to deal with its money flow on compliance concerns.
Under the new framework, platforms trading only bitcoin will not be awarded licences as the cryptocurrency is not recognised as a security. Moreover, under Hong Kong law the commission can only regulate securities or futures products, so a platform that wants a licence will need to offer at least one security token, or a product structured like traditional securities.