Will a new Crypto license and regulation in Hong Kong will take place in 2023?
The Securities and Futures Commission (SFC) of Hong Kong has proposed licensing for crypto service providers for virtual asset trading platforms in Hong Kong.
The regulator wants public input on whether licensed platforms should serve retail investors and what investor protections should be implemented. Pre-existing crypto trading platforms that want a license must review and update their systems and controls for the new regime. Platforms that don’t want a license should prepare for closure.
The proposed regulations for licensed cryptocurrency exchanges and service providers include safe asset custody, Know Your Customer, conflicts of interest, cybersecurity, accounting and auditing, risk management, AML/CFT, and market misconduct prevention. .
The proposed regulations consider retail access to licensed cryptocurrency trading platforms. SFO-licensed platforms initially served only professional investors, but public feedback suggests that denying retail access to cryptocurrency markets may harm investors. Retail investors can indirectly access cryptocurrency futures markets through SFC-regulated exchange-traded funds. After the December 2022 Anti-Money Laundering and Counter-Terrorist Financing Ordinance amendment, Hong Kong financial service providers have been asking about licensing.
The proposed measures for virtual asset trading platforms include assessing clients’ risk profile and setting limits to ensure “reasonable” exposure, due diligence on tokens, monitoring tokens, smart contract audits, and not offering virtual assets that fall under Hong Kong’s Securities and Futures Ordinance. Instead of a hard limit for cold storage assets, operators must provide an SFC-approved compensation arrangement to cover risks. Operators must track customer assets daily and adjust the arrangement.
Crypto legal framework in Hong Kong
Hong Kong has long been a center for finance, business, and cryptocurrency. Hong Kong has become more interested in regulating cryptocurrencies to protect investors, prevent money laundering, and attract more crypto-related businesses. Hong Kong crypto law:
- SFC (SFC) – Hong Kong’s main crypto regulator is the SFC. The SFC mandated licenses for cryptocurrency trading platforms that trade security tokens in 2019. Retail investors can indirectly access cryptocurrency futures exchange-traded funds through SFC regulations.
- AML/CTF Ordinance – The Hong Kong government added virtual asset service providers (VASPs) to the AML/CTF ordinance in December 2022. All VASPs—cryptocurrency exchanges, wallets, and trading platforms—are affected by this amendment.
- Licensure – . SFC licenses are required for cryptocurrency-related businesses. Hong Kong exchanges and service providers that do not apply for a license must prepare to close.
- Investor Safety – The SFC has proposed safeguarding assets, KYC, conflicts of interest, cybersecurity, accounting and auditing, risk management, AML/CFT, and market misconduct prevention to protect investors. If it violates Hong Kong’s Securities and Futures Ordinance, operators should not offer virtual assets that are securities.
- Retail Access to Licensed Cryptocurrency Trading Platforms – with “robust investor protection measures,” the SFC may allow licensed exchanges to serve retail investors. Since 2018, SFO-licensed platforms could only serve professional investors. Public feedback suggests that denying retail access to cryptocurrency markets may harm investors by forcing them to trade on unregulated overseas platforms.
In conclusion, Hong Kong is gradually developing a cryptocurrency legal framework to protect investors, prevent money laundering, and attract more crypto-related businesses. Licensing, AML/CTF compliance, and investor protections are required.
