Hong Kong’s Securities and Futures Commission (SFC) today announced a raft of new regulatory measures for the cryptoasset industry. In an announcement posted on its website on November 1, the SFC sets out the “overarching principles and regulatory standards of the regulatory framework” the regulator will put in place to reduce the risks of investing in cryptoassets.
“The SFC has identified significant risks associated with investing in virtual assets… in order to address these risks, the SFC is issuing guidance on the regulatory standards expected of virtual asset portfolio managers and fund distributors,” states the document.
“The SFC is also exploring a conceptual framework for the potential regulation of virtual asset trading platform operators,” it added.
The SFC says its new regulations will bring the majority of cryptoasset portfolio management activities into its regulatory net, regardless of whether their financial products are classified as “securities” or “futures contracts”.
The South China Morning Post reports that Chairman of Hong Kong Securities Association Gary Cheung spoke about the new regulatory framework at the 2018 Hong Kong Fintech Week this morning (Nov 1).
“It will boost investor protection and hence attract more mainlanders to trade cryptocurrency assets in Hong Kong,” said Cheung.
“This will help Hong Kong to be among the top cryptocurrency trading centres worldwide because proper regulation is very important for attracting the big players,” he added.
In the document outlining the new regulations, the SFC identified seven key areas of risk in the cryptoasset industry that it is seeking to counter:
• Valuation, volatility and liquidity
“Virtual assets are generally not backed by physical assets or guaranteed by the government. They have no intrinsic value.”
• Accounting and auditing
“There are no agreed standards and practices for how an auditor can perform assurance procedures to obtain sufficient audit evidence for the existence and ownership of virtual assets
• Cybersecurity and safe custody of assets
“Cyber-attacks resulting in the hacking of virtual asset trading platforms and thefts of virtual assets are common. Victims may have difficulty recovering losses from hackers or trading platforms.”
• Market integrity
“The market for virtual assets is nascent and does not operate under a set of recognised and transparent rules. Outages are not uncommon, as are market manipulative and abusive activities.”
• Risk of money laundering and terrorist financing
“Platforms which allow conversions between fiat currencies and virtual assets are inherently susceptible to higher risks of money laundering and terrorist financing.”
• Conflicts of interest
“If these operators [crypto-exchanges] are not under the purview of any regulator, it would be difficult to detect, monitor and manage conflicts of interest.”
“Virtual asset trading platform operators or portfolio managers may not have conducted sufficient product due diligence before allowing a virtual asset to be traded on their platforms.”
New Licensing Requirments
Under the new regulations, funds that invest more than 10% of their assets in virtual currencies will be required to be licensed by the SFC.
SFC Chief Executive Ashley Alder, also speaking at the 2018 Hong Kong Fintech Week, said retail investors will be banned from buying into cryptocurrency funds and trading them on platforms – such activity will now be limited to professional investors only.
Under Hong Kong law defines professional investors as those with at least HK$8 million in investment assets and at least two years of experience.
Cryptocurrency trading platforms will now have to apply to join a regulatory “sandbox” under which they can continue to trade while negotiating with the SFC on their licensing requirements while waiting to be approved. Those that do not meet the criteria will be shut down, Alder was quoted as saying in the SCMP report.
“The new regulations are aimed at enhancing investor protection as there is a lot of active trading in these virtual assets in Hong Kong while they are not regulated,” Alder said.
“Proper regulation would allow the proper firms and platforms to thrive. This will benefit the development of markets in Hong Kong,” he added.
The SFC said it will continue to closely monitor the development of the cryptoasset industry and issue further guidance where appropriate.