Hong Kong’s Securities and Futures Commission (SFC) has proposed new rules for virtual asset trading platforms, which include the establishment of a licensing regime for crypto service providers. The regulator is also seeking public feedback on whether licensed platforms should be allowed to serve retail investors, and under what investor protection measures these services should be offered. According to an official notice, all crypto trading platforms planning to apply for a license should begin reviewing and revising their systems and controls to prepare for the new regime.
Those that do not plan to apply for a license should prepare for an orderly closure of their business in Hong Kong. The consultation paper outlines proposed requirements, such as assessing clients’ risk profile and setting limits to ensure their exposure is reasonable. The proposed measures state that operators should not offer virtual assets that fall within the definition of securities if it would breach Hong Kong’s Securities and Futures Ordinance.
Operators must do due diligence on tokens and monitor them, including assessing the regulatory status of the asset in each jurisdiction in which the operator provides trading services. They can only offer tokens that satisfy the SFC’s criteria for an “eligible large-cap virtual asset,” listed on two “acceptable indices,” and they must do smart contract audits on tokens to check for security flaws. In addition, the proposed measures state that operators must provide a compensation arrangement that covers risks, in place of a hard limit for assets held in cold storage.
Each licensed operator may have to set up a token admission and review committee to assess tokens up for trade and set obligations for issuers to inform operators about any hard forks, airdrops, or regulatory action.
The SFC has acknowledged that industry players want to offer derivatives and is open to hearing about business models and demand, and conducting a separate review to draft related policies. In January 2022, the SFC allowed retail investors to access some regulated crypto-related derivative products traded on conventional exchanges.
The new licensing regime is set to take effect on June 1, while the consultation is open through March 31. The SFC’s proposed measures are intended to ensure that virtual asset trading platforms in Hong Kong are subject to robust regulation, with the aim of protecting investors and maintaining market integrity.
