Hong Kong Introduces Upcoming Crypto Licensing Regime

The Securities and Futures Commission (SFC) of Hong Kong has called for public feedback on its newly proposed licensing regime for crypto exchanges, which is set to come into effect from June 2023.

A key consideration of the public consultation component is whether to allow licensed exchanges to provide services to retail investors in the country, and what measures should be implemented to ensure a range of ‘robust investor protection measures’.

The SFC announced the consultation process on February 20, stating that the new licensing regime for the industry proposes that all centralized cryptocurrency trading platforms operating in Hong Kong must be licensed by the regulatory body.

The proposed regulatory guidelines from the SFC are based on existing requirements for licensed securities brokers and automated trading venues, while amendments have been made to some of the existing prerequisites.

In a statement from SFC’s Chief Executive Officer Julia Leung, the ‘recent turmoil’ in the crypto ecosystem and the collapse of industry players like FTX were highlighted as the primary reasons for clear regulatory guidelines for the industry with investor protection as a priority.

– “As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include strong measures for investor protection,” Leung stated.

According to the announcement, any individual or company providing cryptocurrency-related services must apply for a license with the SFC. Furthermore, a number of requirements for crypto exchanges and service providers have been specified.

This includes a range of prerequisites, including secure custody of assets, Know-your-Customer (KYC), conflict of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering (AML), counter-terrorism financing, and preventing market misconduct.

Businesses intending to continue operations and apply for a license are encouraged to review and revise existing systems and controls to meet the requirements of the upcoming regime. Exchanges and service providers that do not intend to apply for a license will need to prepare for the closure of their businesses in Hong Kong.

The SFC also intends to publish and maintain a list of licensed crypto exchanges and service providers to inform the wider public about the registration statuses of various companies.

The 361-page document is comprehensive, outlining key proposed regulatory requirements for licensing, as well as guidelines for implementing anti-money laundering controls and a range of other obligations for the industry.

Perhaps the most relevant section relates to the proposal to allow retail investors access to licensed cryptocurrency trading platforms. The existing regime under the Securities and Futures Ordinance (SFO) has been in place since 2018, which initially restricted SFO-licensed platforms to serving professional investors.

The documentation notes that public feedback highlighted the belief that denying retail investors access to cryptocurrency markets could result in investor harm, as individuals may be driven to trade on unregulated offshore platforms available online.

According to the SFC, only two trading platforms are currently licensed under the SFO, while the SFC has introduced cryptocurrency-focused policies that have facilitated gradual investments by retail investors.

In October 2022, the SFC approved a regime for crypto ETFs, providing retail investors with indirect access to these markets through regulated products.

Meanwhile, several licensed brokers and fund managers have begun offering cryptocurrency-related services to investors under SFC supervision. This has been another key driver for the SFC’s move to enable all types of investors to access cryptocurrencies through licensed platforms from June 2023.

Hong Kong-based financial service providers have begun inquiring about licensing requirements following amendments to AML and counter-terrorism financing regulations in December 2022.