Hong Kong Proposes Rules for Crypto Trading Platforms

Hong Kong’s Securities and Futures Commission (SFC) on Monday published its proposed rules for virtual asset trading platforms and is seeking public comment.

Apart from setting up a licensing regime for crypto service providers, the regulator is also seeking views on whether to allow licensed platforms to serve retail investors, and under what investor protection measures these services should be offered, an official release said.

Under the new regime, all crypto trading platforms planning to apply for a license – including existing platforms – should “begin reviewing and revising their systems and controls to prepare for the new regime,” the notice said.

“Those who do not plan to apply for a license should start preparing for an orderly closure of their business in Hong Kong,” it added. Hong Kong also plans to regulate stablecoins from June this year.

The consultation document published on Monday sets out proposed requirements, such as assessing clients’ risk profile and setting limits to ensure their exposure is “reasonable”.

Under the proposed measures, it will be up to operators to do due diligence on tokens and monitor them. This includes assessing the regulatory status of the asset in each jurisdiction where the operator provides trading services. It also suggests checks on the operator’s liquidity and whether the holdings are concentrated or controlled by a small number of individuals or entities.

Operators can only offer tokens that satisfy the SFC’s criteria for an “eligible large-cap virtual asset,” listed on two “acceptable indices.”

They must perform smart contract audits on tokens to check for security flaws.

The proposed measures also state that operators should not offer virtual assets that fall within the definition of “securities” if that would breach Hong Kong’s Securities and Futures Regulation.

The SFC is proposing that operators provide a compensation scheme that it must approve to cover risk, rather than a hard limit on assets held in cold storage. Operators must daily monitor the amount of customer funds held and adjust the scheme accordingly.

Each licensed operator may need to set up a token admission and review committee to assess tokens for trading and set obligations for issuers to inform operators of any hard forks, airdrops or regulatory actions.

In the paper, the SFC recognizes that industry players want to offer derivatives and is open to hearing about business models and demand, conducting a separate review to draft related guidelines.

In January 2022, the SFC allowed retail investors to access some regulated crypto-related derivative products traded on conventional exchanges.

For much of last year, the SFC appeared reluctant to allow retail investors access to crypto under its virtual asset licensing regime. It signaled that they were willing to change their stance at Hong Kong FinTech Week last November.

The consultation is open until 31 March, while the new licensing regime will come into force on 1 June.

Update (February 20, 2023 10:06 UTC): adds more detail about the consultation throughout.