Hong Kong now offers optional regulation for cryptographic exchanges

The Hong Kong Securities and Futures Commission has put in place a new regulatory framework that allows cryptographic exchanges to accept a license and regulation. Starting Wednesday, centralized trading platforms may apply for a license, provided certain requirements are met, including adequate asset retention, insurance, hot and cold portfolios, and private key management.

Read also: 23 central banks disclose their digital currency needs

An opt-in system

The Securities and Futures Commission (SFC) of Hong Kong released Wednesday a new regulatory framework for cryptographic exchanges. The CEO, Ashley Alder, explained that the commission had met with a number of cryptographic exchange operators after unveiling a conceptual framework that could be used to regulate cryptographic exchanges last year. "After a thorough review of the unique technical and operational characteristics of these platforms, we have finally concluded that some of them could be regulated by us," he said.

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Ashley Alder, CEO of SFC

The commission focused on the need to regulate cryptographic exchanges. Alder explained, "We have seen this as a priority because this type of platform has proliferated in Hong Kong and has largely escaped any form of regulation," adding that it's largely because the assets Cryptography does not fall under the legal definition of securities and futures. contracts. Since bitcoins and other cryptocurrencies are not transferable securities and "nothing in our new framework alters that position," he admitted that the SFC could regulate only those platforms that chose to include less a security crypto-asset or token for trading purposes. "But once that happens, our new rules will apply to all platform operations, even though the vast majority of other virtual assets traded on the platform are not securities."

So it's essentially a framework for a platform operator to adhere to the regulations … Once the licenses are granted to the platforms that choose to adhere to them, investors will then be able to easily the distinction between properly regulated platforms and everything else. .

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That implies the regulation

The SFC has detailed in its "Position Paper" published Wednesday the rules and requirements for crypto trading platforms to regulate. The Commission also pointed out that only centralized platforms in Hong Kong offering crypto trading, clearing and settlement services would be considered for licensing. Applications from peer-to-peer markets will not be accepted at this time. The SFC confirmed:

Effective November 6, 2019, a company that operates a centralized virtual asset trading platform in Hong Kong and intends to offer trading of at least one token of Security on this platform may apply for a license from the SFC for Type 1 and Type 7 regulated activities.

The Type 1 license is for securities trading and the Type 7 license is the Automated Trading Services (ATS) business. The Commission also requires that all trading activities of its licensees, including those conducted by the companies in their group, be carried out under a single approved SFC legal entity. The regulator explained that it would not only allow full monitoring, but would "also minimize any uncertainty as to which parts of the activity are licensed and supervised by the SFC".

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In addition, licensees are required to obtain the prior written approval of the SFC for any plan or proposal to, for example, introduce or offer a new or additional product or service, or to make a significant change to an existing service or activity. Licensees must also provide monthly reports to the board and use an independent professional firm to review their activities and operations on an annual basis.

The statement also outlines the licensing conditions, the first of which states in detail who can trade on licensed platforms. The SFC noted:

The licensee must only provide services to professional investors.

The definition of a professional investor is vast; it is an individual, a partnership or a company with a portfolio of at least HKD 8 million (approximately $ 1 million) or l & rsquo; Equivalent, or a trust company with total assets of at least HKD 40 million or its equivalent.

To ensure asset preservation, the SFC requires licensees "to have an insurance policy covering the risks of keeping virtual assets held in both hot storage (full coverage) and in a warehouse. refrigerant (a substantial coverage, for example 95%) is in force at all times. Licensed platform operators and their associated entities must also store 98% of customer encryption assets in cold portfolios and limit the amount stored in hot wallets to 2%. The Commission also expects them to "put in place and put in place strong internal controls and governance procedures for the management of private keys, to ensure that all encryption keys and Cryptographic keys are securely generated, stored and backed up. "

Once the license is granted, an operator of the virtual asset trading platform will be placed in the SFC regulatory sandbox. This would usually mean more frequent reports, checks and exams.

Many other conditions must be met, including compliance with the SFC Code of Conduct, the adoption of adequate customer awareness measures, the fight against money laundering and the financing of terrorism (AML / CFT). , the prevention of market risks. manipulation and abusive activities, accounting and auditing, and risk management.

What do you think of Hong Kong's optional regulation for cryptographic exchanges? Let us know in the comments section below.


Images courtesy of Shutterstock and Asianinvestor.


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Kevin Helms

A student in Austrian economics, Kevin discovered Bitcoin in 2011 and has always been an evangelist. His interests include Bitcoin security, open source systems, network effects and the intersection of economics and cryptography.




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