Hong Kong regulator wants all digital currency exchanges regulated

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Hong Kong’s securities regulator will now require all digital currency exchanges to be regulated, regardless of whether they offer securities or not. The watchdog previously had an ‘opt-in’ regulatory framework which it believes has been taken advantage of.

Hong Kong’s Securities and Futures Commission announced the regulatory structure on November 3, Reuters reported. The regulator expects the shift in regulations to fix a loophole that its previous regulatory structure had presented.

Under its ‘opt-in’ regulatory regime, digital currency exchanges were at liberty to operate outside the regulatory structure as long as they didn’t offer securities or futures trading. This acted as a huge limitation for the regulator in regards to its ability to monitor the digital currency industry and enforce the regulations.

SFC chief executive Ashley Alder explained the watchdog’s dilemma in his speech at the Hong Kong Fintech Week, “This is a significant limitation, as under the current legislative framework, if a platform operator is really determined to operate completely off the regulatory radar, it can do so simply by ensuring that its traded crypto assets are not within the legal definition of a security.”

Alder revealed that the new structure will apply to all digital currency exchanges based in Hong Kong and overseas which target local investors.

Alder remarked, “Once this new regime is in place, all virtual asset trading platforms in Hong Kong would be regulated, supervised and monitored under one of two regimes: the existing opt-in framework we introduced last year, or the proposed new licensing approach being announced today. Failure to do so would, of course, be an offense.”

Hong Kong has been on the frontline in regulating digital currencies. These positive regulations have ushered in an era of rapid growth, with blockchain emerging as Hong Kong’s largest fintech sector in 2019.

In October 2019, the SFC published official regulations for digital currency fund managers. They included a requirement for fund managers to implement adequate risk management procedures, ensuring that fund orders are executed on the best available terms and adhering to a set organization and management structure.

The SFC followed this up with a tightening of its policies in line with FATF recommendations in early 2020.

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