This week, Hong Kong's Securities and Futures Commission (the SFC) launched a consultation on their proposed regulatory requirements for operators of virtual asset trading platforms (i.e. crypto exchanges).
Under a new licensing regime to take effect on 1 June 2023, all centralised virtual asset trading platforms carrying on business in Hong Kong or actively marketing to Hong Kong investors will need to be licensed by the SFC.
In 2019, the SFC introduced a limited regulatory framework for centralised virtual asset trading platforms which offer services in at least one security token. The new licensing regime will modify these requirements and apply them to all virtual asset trading platforms.
The requirements will cover key areas such as:
safe custody of assets;
know-your-client checks;
conflicts of interest;
criteria for admission of virtual assets to trading;
cybersecurity, accounting and auditing;
risk management;
anti-money laundering/counter-financing of terrorism; and
prevention of market misconduct.
As part of the consultation, the SFC is seeking views particularly on whether to allow licensed platform operators to serve retail investors. The SFC have indicated that they propose to permit retail investors to access virtual assets subject to additional investor protection measures such as knowledge quizzes, suitability tests and exposure limits.
“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,”
said Ms Julia Leung, the SFC’s Chief Executive Officer, who also added,
“In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed.”
SFC said operators of virtual asset trading platforms which plan to apply for a licence, including existing platforms, should begin to review and revise their systems and controls to prepare for the new regime. Those which do not plan to apply for a licence should start preparing for an orderly closure of their business in Hong Kong.
This consultation is the latest step taken by Hong Kong in an effort to reclaim its status as Asia's top virtual asset hub. It follows the Hong Kong Monetary Authority's confirmation in January that it will establish a mandatory licensing regime for stablecoin activities by 2024.