Hong Kong’s Securities and Futures Commission calls for public consultation over plans to allow licensed cryptocurrency exchanges to serve retail investors.
Hong Kong’s Securities and Futures Commission (SFC) is seeking public input on its newly proposed cryptocurrency exchange licensing regime, which will take effect in June 2023.
A key aspect of the public consultation window is whether licensed exchanges will be allowed to provide retail services to investors.
On February 20, the SFC announced a consultation process outlining a new licensing regime for the industry, which proposes that all centralized cryptocurrency trading platforms operating in Hong Kong will need to be licensed by the regulator.
The SFC’s proposed regulatory guidance is based on existing requirements for authorized securities dealers and automated trading venues but has made changes to some of the existing requirements. The statement of
SFC CEO Julia Leung emphasized the “recent turmoil” in the crypto ecosystem and the collapse of industry players such as FTX as the main reason for providing clear regulatory guidance for the investor-protected sector:
“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include strong measures to protect investors by adhering to the principle of “same business, same risks, and same rules.”
According to the notice, any person or company offering cryptocurrency-related services must apply for a license from the SFC. In addition, several requirements are set for cryptocurrency exchanges and service providers.
This covers several requirements, including safekeeping of assets, know your customer, conflicts of interest, cyber security, accounting and auditing, risk management, anti-money laundering/terrorist financing, and anti-market abuse.
Businesses intending to continue operations and apply for a permit are advised to review and revise existing systems and controls to meet the requirements of the future system. Exchanges and service providers that do not intend to apply for a license should prepare to cease trading in Hong Kong.
The Hong Kong SFC also intends to publish and maintain a list of licensed cryptocurrency exchanges and service providers to inform the public of the registration status of various companies.
The 361-page document is comprehensive and outlines the main proposed licensing requirements, as well as guidance on implementing anti-money laundering measures and a range of other industry obligations.
Perhaps most important is the section related to the proposal to allow retail sales to licensed cryptocurrency trading platforms. The current Securities and Futures Regime (SFO) has been in place since 2018, which initially restricted platforms licensed by the SFO to serve professional investors.
The documents state that public feedback highlighted the belief that banning retail access to the cryptocurrency market could harm investors, as individuals could be forced to trade on unregulated offshore platforms accessed over the internet.
According to the SFC, only two trading platforms are currently licensed under the SFO, while the SFC introduced policies focused on cryptocurrencies that facilitated retail investment for exposure to limited cryptocurrencies.
In October 2022, the SFC authorized a system of crypto futures exchange funds to give retail investors indirect access to these markets through regulated products.
At the same time, some authorized brokers and fund managers have started offering cryptocurrency services to investors under the supervision of the SFC. This was another key factor in the SFC’s efforts to give all types of investors’ access to cryptocurrencies through licensed platforms from June 2023.
As previously reported by Cointelegraph, the financial services providers based in Hong Kong started asking about licensing requirements after the December 2022 amendment to the Anti-Money Laundering and Anti-Terrorist Financing Order.
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