The Securities and Futures Commission (SFC), Hong Kong’s securities watchdog, will soon lay down a regulatory framework for cryptocurrency exchanges in the region.
With the introduction of a new regulatory framework, cryptocurrency exchanges operating in Hong Kong will have regulatory oversight. The new rules will use Hong Kong’s securities and futures guidelines as a template but will be modified for the unique properties of digital assets.
According to Ashley Alder, the Chief Executive Officer of the SFC, “Our new regulatory framework covers all of the key investor protection concerns, including the safe custody of assets, know-your-client requirements, anti-money laundering, and market manipulation. And it also zeros in on many of the new concepts we are getting used to, such as hot and cold wallets, forks, airdrops and the like. We will also set out the criteria for platforms to decide on the inclusion of a new virtual asset for trading.”
Once the regulatory framework comes into force, Hong Kong will be among the first regions to designate the criteria that cryptocurrencies must stick to in order to be considered securities. These new regulations will help crypto-asset exchanges understand and avoid potential securities when adding digital assets to their offerings.
The new framework was developed following consultation with the operators of several crypto-asset trading platforms, which led the SFC to conclude that a credible regulatory framework could allow it to regulate at least some digital asset exchange platforms.
It is a fact that some of the world’s largest cryptocurrency exchanges are operating from Hong Kong, and most have largely escaped regulation since the majority of virtual assets fall outside the definition of securities or futures contracts – and are hence not subject to SFC oversight. However, Alder recognizes the need to deal with the special risks associated with virtual asset trading platforms – particularly ensuring the safe custody of user funds and preventing cybersecurity issues that could lead to theft.