On 3 November 2020, the chief govt of the Securities and Futures Fee (SFC), Ashley Alder, stated in a speech that Hong Kong will quickly regulate all cryptocurrency buying and selling platforms, whether or not or not they commerce securities.
Introduction
Cryptocurrency and different digital asset funding merchandise have sparked buyers’ pursuits globally up to now few years, and Hong Kong is not any exception, with sure ICOs and crypto initiatives based mostly there. Regulators in Hong Kong have been assessing whether or not and the way the cryptocurrency trade needs to be regulated, with a view to facilitate investor safety and stop cash laundering, amongst different considerations.
Monetary hubs in Asia have been amongst the primary to reply to such altering market tides. While Japan and Singapore have already applied their licensing regimes to require all cryptocurrency buying and selling platforms to be regulated, Hong Kong additionally launched a regulatory framework for digital asset buying and selling platforms final 12 months.1
Current regulatory regime underneath the 2019 Place Paper
Within the 2019 Place Paper, the SFC put in place an “opt-in” licensing regime for operators of centralised on-line buying and selling platforms and provide buying and selling of a minimum of one safety token. Below this regulatory framework, these operators fall throughout the jurisdiction of the SFC and may apply for a licence for conducting Kind 1 (dealing in securities) and Kind 7 (offering automated buying and selling providers) regulated actions. Topic to assembly different licensing necessities, together with the match and correct standards, the SFC might then grant a licence to a certified platform operator to hold on its digital asset buying and selling enterprise.
Presently, the SFC is categorical that it’ll not settle for licensing purposes from the next kinds of platforms:
- platforms which solely present a direct peer-to-peer market for transactions by buyers who usually retain management over their very own property; and
- platforms which commerce digital property for purchasers, together with order routing, however don’t present automated buying and selling providers themselves.
The SFC is of the view that, for a platform operator to be licensed, its infrastructure, core health and properness, and conduct of digital asset buying and selling actions needs to be considered as an entire. Though buying and selling actions in non-security tokens should not “regulated actions”, the SFC’s laws will apply to all points of platform operations as soon as a platform includes buying and selling actions in safety tokens, even when they solely represent a small a part of its enterprise.
When assessing a platform operator’s licence software, the SFC will contemplate the style wherein a digital asset buying and selling platform conducts its complete buying and selling enterprise and, particularly, whether or not it follows, or is prepared and capable of comply with, the next anticipated regulatory requirements.
Additional laws going ahead
Amongst different initiatives, the SFC noticed a rising concern that some digital asset buying and selling platform operators have discovered methods to function in order that they fall exterior the regulatory remits of the SFC and different Hong Kong regulators.
“This can be a vital limitation, as underneath the present legislative framework if a platform operator is actually decided to function utterly off the regulatory radar it will possibly achieve this just by guaranteeing that its traded crypto property should not throughout the authorized definition of a safety,” stated Ashley Alder, chief govt of the SFC, in his speech on 3 November 2020.2
Alder additional signifies that, consequently, the Hong Kong authorities will suggest a brand new “catch-all” licensing regime underneath its anti-money laundering laws, requiring all cryptocurrency buying and selling platforms working or focusing on buyers in worldwide monetary centres to use for an SFC licence. In different phrases, whether or not or not these platforms are providing or buying and selling “securities”, they are going to quickly fall throughout the new regulatory ambit.
So far, dozens of cryptocurrency exchanges function in Hong Kong, together with a number of the world’s largest, although many selected to not apply for a licence underneath the present regime.
Potential affect on cryptocurrency markets in Hong Kong
There are a number of crypto exchanges working in Hong Kong which give buying and selling providers for cryptocurrencies out and in of Hong Kong {dollars}. Because the charges of those native exchanges stay comparatively excessive, buyers would usually purchase their crypto (primarily Bitcoin and Ethereum) by way of these exchanges, after which switch them to different exchanges not based mostly in Hong Kong to commerce them towards different cryptocurrencies. Conversely, they might money out the earnings that they’ve made by cashing out their cryptocurrencies in Hong Kong {dollars}.
It stays to be seen whether or not the SFC will go so far as regulating crypto exchanges not based mostly in Hong Kong, by, for instance, imposing denial of entry to those websites from Hong Kong IP addresses, and mandating anti-money laundering measures resembling know-your-client (KYC) necessities on these exchanges. The US, for instance, has been taking numerous measures to manage these points to allow the IRS to hint capital positive aspects made by crypto buyers. The problem is within the implementation – retail buyers can nonetheless acquire entry to such exchanges simply through the use of a VPN service.
The crypto group may even see additional laws by the SFC as a menace to the decentralisation idea of cryptocurrencies. Alternatively, a correctly drafted set of laws, resembling these at present in Singapore and Japan, might appeal to crypto operators who have been contemplating Hong Kong as a base however have been discouraged by the uncertainty underneath the earlier framework laws. Confronted with much less uncertainty, operators will have the ability to undergo the regulatory necessities and arrange the exchanges with out having to fret about whether or not including a sure coin to their buying and selling platform will breach the SFO.
Relying on the stance taken by the SFC, the laws might imply extra safety for buyers in Hong Kong and additional prevention of cash laundering by way of cryptocurrencies. On the flip aspect, if the laws are extra stringent, this may increasingly affect cryptocurrency buying and selling in Hong Kong, wherein case buyers might should resort to different means to commerce their cryptocurrencies. A advantageous stability of each points, nevertheless, will allow the regulators to maintain cryptocurrency buying and selling by Hong Kong buyers underneath their jurisdiction, but provide extra safety to cryptocurrency buyers.
