Hong Kong’s Securities and Futures Commission (SFC) has released a consultation paper on proposed rules for virtual asset trading platforms, seeking public comment. The paper outlines requirements for operators, including assessing clients’ risk profiles and limits to ensure reasonable exposure, as well as due diligence on tokens and monitoring of liquidity. The SFC proposes operators provide a compensation arrangement for risks, in place of a hard limit for assets held in cold storage. The proposed measures state that operators should not offer virtual assets that breach Hong Kong’s Securities and Futures Ordinance. The SFC also suggests that licensed operators should be allowed to serve retail investors, subject to investor protection measures, and asks for public input on the matter.
Proposal for Retail Investors to Trade Cryptocurrencies
The SFC plans to allow retail investors to trade top cryptocurrency assets on licensed exchanges, while ensuring investor protection measures, such as exposure limits and risk profiles. The proposal aims to safeguard investors in the volatile virtual asset space. To ensure that the assets are listed on reputable indexes, operators must list eligible large-cap virtual assets on two acceptable indices, one of which should have a traditional finance background. The SFC intends to end the consultation period on March 31, with the new licensing regime set to come into effect on June 1.
Preparing for the New Regime
The SFC advises all trading platforms planning to apply for a license to review and revise their systems and controls to prepare for the new regime. Those who do not plan to apply should prepare for an orderly closure of their business in Hong Kong. The proposal also sets out an obligation for licensed operators to assess tokens up for trade and set obligations for issuers to inform operators of any regulatory action or hard forks. The SFC also acknowledges the interest in offering derivatives and will conduct a separate review to draft related policies.
Hong Kong has seen several recent cryptocurrency and blockchain-related developments, including the government’s first tokenized green bond of HKD 800 million ($101 million) and the launch of its first Bitcoin exchange-traded funds (ETFs) tracking US-listed crypto futures. Financial Secretary Paul Chan has also expressed a commitment to making Hong Kong a crypto hub, stating that it will be a great place for crypto and fintech startups to operate from. The SFC’s proposal for retail investors to trade cryptocurrencies is in line with this commitment.
