Crypto exchanges to be treated as brokers under Hong Kong’s new framework

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The securities regulator in Hong Kong has launched its new framework for licensing crypto exchanges, introducing a new system for regulating and monitoring crypto exchanges operating in its jurisdiction.

The Hong Kong Securities and Futures Commission (SFC) issued the new rules, which will enable operators to become licensed by the regulator for the first time.

In common with other crypto exchange licensing frameworks worldwide, the measures are widely welcomed by crypto exchanges and businesses seeking a solid foundation for compliance with Hong Kong securities and other laws.

The head of the Securities and Futures Commission, Ashley Alder, said the regulatory framework would “enable virtual asset trading platforms to be regulated by the SFC, a major development which builds on a way forward I outlined at the same time last year.”

“The safe custody of a user’s crypto-assets and cybersecurity are major concerns. There have been many instances of platforms being hacked, with investors suffering substantial losses. Trading rules may not be transparent and fair, and crypto markets are vulnerable to manipulation,” Alder said at the Hong Kong FinTech Week 2019 event. “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.”

The rules will apply to any “centralized virtual asset trading platform operating in Hong Kong which trades virtual assets including at least one security token”, and “only those platforms which enable clients to trade security virtual assets or tokens fall within the SFC’s regulatory remit.”

According to the SFC, the rules will help the regulator develop its future approach to regulating virtual assets, in what it describes as an “evolving” sector.

The adoption of the new regulatory framework will enable the SFC to formulate its future regulatory strategy for virtual assets through close supervisory interactions with an evolving and dynamic industry.

The framework for regulation brings Hong Kong into line with other regulated jurisdictions worldwide, at a time where more regulators are pushing to introduce legal structures to support their emerging cryptocurrency sectors.