The Securities and Futures Commission (SFC) of Hong Kong has introduced a new regulatory framework that allows crypto exchanges to opt-in to be licensed and regulated.
Effective from November 6, centralized trading platforms can apply for a license, providing they meet certain requirements, including adequate measures for the safe custody of assets, insurance, hot and cold wallets, and private key management.
According to the SFC, the new regulatory framework would essentially allow a platform operator to opt-in to be regulated. Once licenses are granted to those platforms, investors would then be able to distinguish easily between regulated platforms and the rest.
The Commission, in its “Position Paper” published on November 6, detailed the rules and requirements for crypto trading platforms to be regulated. The commission also emphasized that only centralized platforms in Hong Kong that provide crypto trading, clearing, and settlement services would be considered for licensing. Applications from peer-to-peer marketplaces will not be accepted.
From November 6, 2019, a firm that operates a centralized virtual asset trading platform in Hong Kong and intends to offer trading of at least one security token on the platform may apply for a license from the SFC for Types 1 and 7 regulated activities, the SFC said.
The Type 1 license is for dealing in securities and Type 7 is for Automated Trading Services (ATS) activities. The commission also requires all trading activities of its licensees, including those conducted by their group companies, to be carried out under a single, SFC-licensed legal entity. The regulator explained that not only will it allow for comprehensive oversight, but it also “minimizes any uncertainty about which parts of the business are licensed and supervised by the SFC.”
Further, licensees are required to obtain prior written approval from the SFC for any plan or proposal, such as introducing or offering a new or incidental product or service or to make a material change to an existing service or activity. Licensees must also provide monthly reports to the commission and engage an independent professional firm to review their activities and operations annually.
SFC’s CEO Ashley Alder explained that the commission met with several crypto exchange operators after unveiling a conceptual framework that could be used to regulate crypto exchanges last year. “After an in-depth examination of the unique technical and operational features of these platforms, we finally concluded that some could be regulated by us,” he remarked.