Hong Kong’s Securities and Futures Fee has established a brand new regulatory framework that enables crypto exchanges to opt-in to be licensed and controlled. Beginning Wednesday, centralized buying and selling platforms can apply for a license, offering they meet sure necessities together with satisfactory measures for the protected custody of property, insurance coverage, cold and warm wallets, and personal key administration.
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An Opt-In System
The Hong Kong Securities and Futures Fee (SFC) printed a brand new regulatory framework for crypto exchanges on Wednesday. CEO Ashley Alder defined that the fee met with plenty of crypto change operators after unveiling a conceptual framework that may very well be used to regulate crypto exchanges final yr. “After an in-depth examination of the distinctive technical and operational options of those platforms, we lastly concluded that some may very well be regulated by us,” he remarked.
The fee has been specializing in whether or not to regulate crypto exchanges. Alder elaborated, “We noticed this as a precedence as a result of this kind of platform has proliferated in Hong Kong and up to now has largely escaped any type of regulation,” including that it’s largely as a result of crypto property fall outdoors the authorized definition of securities and futures contracts. Since bitcoin and different cryptocurrencies are usually not securities and “nothing in our new framework alters this place,” he admitted that the SFC can solely regulate these platforms that select to embody not less than one safety crypto asset or token for buying and selling. “However as soon as this occurs our new guidelines will apply to all platform operations, even when the overwhelming majority of different digital property traded on the platform are usually not securities.” The CEO clarified:
So this, primarily, is a framework permitting a platform operator to opt-in to regulation … As soon as licenses are granted to these platforms which select to opt-in, traders will then give you the option to distinguish simply between correctly regulated platforms, and all the remaining.
What the Regulation Entails
The SFC detailed in its “Place Paper” printed on Wednesday the foundations and necessities for crypto buying and selling platforms to be regulated. The fee additionally emphasised that solely centralized platforms in Hong Kong that present crypto buying and selling, clearing, and settlement companies will likely be thought-about for licensing. Purposes from peer-to-peer marketplaces won’t be accepted presently. The SFC confirmed:
As from 6 November 2019, a agency which operates a centralized digital asset buying and selling platform in Hong Kong and intends to provide buying and selling of not less than one safety token on this platform could apply for a license from the SFC for Sorts 1 and seven regulated actions.
The Sort 1 license is for dealing in securities and the Sort 7 is for automated buying and selling companies (ATS) actions. The fee additionally requires all buying and selling actions of its licensees, together with these performed by their group firms, to be carried out beneath a single, SFC-licensed authorized entity. The regulator defined that not solely will it permit for complete oversight, nevertheless it additionally “minimizes any uncertainty about which components of the enterprise are licensed and supervised by the SFC.”
Additional, licensees are required to acquire prior written approval from the SFC for any plan or proposal corresponding to for introducing or providing a brand new or incidental services or products, or to make a cloth change to an current service or exercise. Licensees should additionally present month-to-month studies to the fee and have interaction an unbiased skilled agency to evaluate their actions and operations yearly.
The Place Paper additionally outlines licensing situations, the primary of which particulars who can commerce on licensed platforms. The SFC famous:
The licensee should solely present companies to skilled traders.
The definition of an expert investor is intensive; it consists of a person, a partnership or a company with a portfolio of not less than eight million HKD (~$1 million) or equal, or a belief company with whole property of not less than 40 million HKD or equal.
For the protected custody of property, the SFC requires licensees “to be sure that an insurance coverage coverage overlaying the dangers related to the custody of digital property held in each scorching storage (full protection) and chilly storage (a considerable protection, eg, 95%) is in impact always.” Licensed platform operators and their related entities should additionally retailer 98% of consumer crypto property in chilly wallets and restrict the quantity saved in scorching wallets to 2%. The fee additionally expects them “to arrange and implement robust inside controls and governance procedures for personal key administration to guarantee all cryptographic seeds and keys are securely generated, saved and backed up.” Furthermore, the SFC added:
A digital asset buying and selling platform operator, upon changing into licensed, will likely be positioned within the SFC Regulatory Sandbox. This might sometimes imply extra frequent reporting, monitoring and opinions.
There are numerous extra situations that have to be met, together with complying with the SFC code of conduct and having satisfactory measures for know-your-client (KYC), anti-money laundering and counter-financing of terrorism (AML/CFT), stopping market manipulation and abusive actions, accounting and auditing, and threat administration.
What do you consider Hong Kong’s opt-in regulation for crypto exchanges? Tell us within the feedback part beneath.
Photographs courtesy of Shutterstock and Asianinvestor.
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