Hong Kong outlines upcoming crypto licensing regime

Hong Kong’s Securities and Futures Commission calls for public consultation over plans to allow licensed cryptocurrency exchanges to serve retail investors.

Hong Kong’s Securities and Futures Commission (SFC) calls for public feedback on its newly proposed licensing regime for cryptocurrency exchanges set to take effect from June 2023.

A key consideration of the public consultation window is whether to allow licensed exchanges to serve retail investors in the country and what measures should be implemented to provide a range of “robust investor protection measures.“

The SFC announced the consultation process on Feb. 20, outlining a new licensing regime for the industry which proposes that all centralized cryptocurrency trading platforms operating in Hong Kong must be licensed with the regulatory body.

The SFC’s proposed regulatory guidelines are based on existing requirements for licensed securities brokers and automated trading venues, while modifications have been made to some of the existing prerequisites.

A statement from SFC CEO Julia Leung highlighted the “recent turmoil” in the cryptocurrency ecosystem and the collapse of industry players like FTX as a primary reason for clear regulatory guidelines for the industry with investor protection top of mind:

“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle.”

According to the announcement, any person or business providing cryptocurrency-related services must apply for a license from the SFC. Furthermore, a number of requirements are set out for cryptocurrency exchanges and service providers.

This includes a host of prerequisites, including the safe custody of assets, Know Your Customer, conflicts of interest, cybersecurity, accounting and auditing, risk management, Anti-Money Laundering/counter-financing of terrorism and prevention of market misconduct.

Related: Hong Kong watchdog aims to restrict retail traders to liquid products

Businesses that intend to continue operating and applying for a license are encouraged to review and revise existing systems and controls to meet the requirements of the upcoming regime. Exchanges and service providers that do not intend to apply for a license will have to prepare to close down their businesses in Hong Kong.

Hong Kong’s SFC also intends to publish and maintain a list of licensed cryptocurrency exchanges and service providers to inform the general public of the registration statuses of different firms.

The 361 page document is exhaustive, outlining the key proposed regulatory requirements for licensing as well as guidelines for implementing AML controls and a host of other obligations for the industry.

Perhaps most pertinent is a section related to the proposal to allow retail access to licensed cryptocurrency trading platforms. The existing Securities and Futures Ordinance (SFO) regime has been in place since 2018, which initially restricted SFO-licensed platforms to serving professional investors.

The documentation notes that feedback from the public has highlighted the belief that denying retail access to cryptocurrency markets may result in investor harm given that individuals may be pushed to trade on unregulated overseas platforms which are accessible online.

According to the SFC, just two trading platforms are currently licensed under the SFO, while the SFC has introduced cryptocurrency-focused policies that have facilitated gradual retail investment to limited cryptocurrency asset exposure.

In October 2022, the SFC authorized a regime for cryptocurrency futures exchange-traded funds, giving retail investors indirect access to these markets through regulated products.

Meanwhile a number of licensed brokers and fund managers have begun offering cryptocurrency- related services to investors under the SFC’s supervision. This has been another key driver in the SFC’s move to allow all types of investors to have access to cryptocurrencies through licensed platforms from June 2023.

As previously reported by Cointelegraph, Hong Kong-based financial service providers had begun to enquire about licensing requirements after an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance in December 2022.