Hong Kong Proposes Crypto Rules to Protect Investors After FTX
Hong Kong’s securities regulator said cryptocurrency trading firms will have to leave the city if they do not plan to obtain licenses, and laid out proposed new rules that seek to better protect investors in the wake of the collapse of FTX.
The Securities and Futures Commission will require crypto exchanges to cap customer deposits, put controls in place to keep crypto keys safe and ensure that no more than 2% of customer funds are stored in a so-called “hot wallet”, which is a less secure way of holding crypto assets on, according to the proposed rules.
Financial news reveals Twenty Most Influential in Crypto 2023
The rules are a key step in Hong Kong’s push to establish itself as a hub for digital assets, part of a broader push to attract global companies and talent after strict pandemic controls have tarnished its reputation as a global financial center.
The regulator will require all crypto trading platforms operating in Hong Kong – and those marketing their services in the city – to obtain a license.
READ LMAX CEO David Mercer: “It’s foolhardy for crypto to take on the regulators”
The SFC is currently seeking feedback on the proposed rules, which are due to come into force in June.
The cryptocurrency industry is still reeling from the collapse of FTX, once one of the world’s highest profile crypto exchanges. The company, which was based in Hong Kong before moving its headquarters to the Bahamas in 2021, had used customer funds to finance risky bets from an affiliated trading firm. US regulators have since tightened their stance on crypto, while the UK government is making plans to regulate crypto exchanges and lenders.
“In light of the recent turmoil and collapse of some leading crypto trading platforms around the world, there is a clear consensus among regulators globally … to ensure that investors are adequately protected and key risks are effectively managed,” said Julia Leung, the SFC’s chief executive. officer.
Some crypto exchanges have already shown interest in becoming a regulated business in Hong Kong. Justin Sun, an adviser to Huobi, tweeted on February 20 that the crypto exchange is applying for a license in the city. Other companies, including DBS and Interactive Brokers, have previously made clear their ambitions to win crypto business in the city.
Crypto exchanges should not deposit, transfer or lend their clients’ assets, the SFC said. It said exchanges must have know-your-customer checks, including finding out how aware their customers are of the risks of investing in crypto. Exchanges must also set a strict limit on each client’s exposure, depending in part on their financial situation, the regulator said.
READ Coinbase’s EU boss: We’re growing in the UK – but we’re not hiring yet
The SFC has also proposed regular disclosure requirements for crypto companies, including submitting an auditor’s report every year and monthly reports to the regulator on their business activities. Companies must have enough liquid capital after accounting for all their assets, liabilities and transactions.
Under the new framework, individual investors will have more access to trade crypto on licensed platforms. Last year, the SFC allowed individual investors to trade a limited set of crypto-related derivative products. The regulator has also recently approved exchange-traded funds for individual investors that track crypto futures.
If retail clients were not allowed to trade on licensed platforms, they could only trade on foreign exchanges, which could put them at greater risk, an SFC spokesperson said.
Write to Elaine Yu at [email protected]
This article was published by The Wall Street Journal, a division of Dow Jones
