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Virtual asset trading platform operators in Hong Kong have welcomed the launch of new guiding regulations in the region, with China paying close attention to developments in the space.

In an interview with Forkast News, Angelina Kwan, CEO of regulatory consultancy firm Stratford Finance, said the new rules for digital exchanges may see China back-pedal on its blanket ban on digital currencies. Kwan clarified that the hypothesis largely rests on the success of Hong Kong’s grand digital currency strategy of attracting global investors.

Although the new rules will see greater retail investor participation, Kwan confirmed the presence of guardrails to prevent misuse. Exchanges licensed under Hong Kong’s Securities and Futures Commission (SFC) are saddled with ensuring that retail investors understand the inherent risks associated with investing in a particular asset class, complemented by educational seminars.

Under the new rules, management teams of exchanges are expected to conduct due diligence before listing tokens on their platforms. Experts have pointed out that the absence of a provision to outsource digital currency custody, requiring licensed firms to be responsible for the safekeeping of customers could pose several challenges.

“The current SFC rules do not have legislation to have outsourced custodians at this time,” Kwan said. “They’re going to require that the exchange getting a license has to have a custodial function, either as an associated entity or within that exchange.”

Kwan, a former director at the SFC, noted that the stringent rules regarding custody flow from the collapse of FTX on account of co-mingling customer and proprietary assets. The new rules require a clear separation of funds and regular disclosures of holdings to regulators.

Experts have identified the negative stance of Hong Kong’s regulators on retail trading of stablecoins in the new digital exchange rules. However, Kwan remarked that the HKMA is currently working on a legal framework to guide stablecoins but hinted that algorithmic stablecoins might have no place in Hong Kong’s financial system.

As the special administrative region of China, Hong Kong’s digital asset foray has piqued the interest of Mainland China. State-backed Chinese banks moved to Hong Kong to offer incoming digital asset firms banking services despite a blanket ban on digital currencies in China.

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