Hong Kong’s Security regulator to bring crypto into its regulatory reach

Last Thursday, Hong Kong’s Securities and Futures Commission (SFC) said its regulatory net will extend to cryptocurrency. Industry insiders welcome the move but say its reach is not extensive enough.


The move came after its chief executive Mr Ashley Alder broke the news in a fintech conference on the same day and its chairman Mr Carlson Tong Ka-shing hinted at regulation, rather than a complete ban, in an interview with a local paper in mid-October.

The regulation aims at two targets – virtual asset portfolio managers and distributors, as well as the trading platforms of cryptocurrency.

Regulating at management and distribution level

For the former, the SFC will impose licensing conditions on firms which manage or intend to manage portfolios investing in virtual assets, whether they constitute “securities” or a “futures contract”.

So far, the only way that virtual assets are governed by the SFC is with a classification of “securities” or “futures.”

“In essence, all those supervised by the SFC intending to invest more than 10 percent of a mixed portfolio in virtual assets will need to observe new requirements targeting crypto assets,” Mr Alder said.

And only professional investors will be allowed to participate for the time being.

The watchdog also reminds firms which distribute funds investing in virtual assets that they should be registered with, or regulated by, the SFC as brokers.

This means they will have to comply with its regulatory requirements, including the suitability obligations, when distributing these funds.

“The management or distribution of crypto funds will be regulated in one way or another, so that investor interests will be protected either at the fund management level, at the distribution level, or both,” Mr Alder added.

A “sandbox” for crypto exchanges

Meanwhile, the SFC proposed an “exploratory approach” to see if crypto-exchanges should be regulated and how it should be done.

Under this opt-in approach, interested operators would first explore the conceptual framework with the SFC in the strict Sandbox environment.

In the Sandbox stage, no formal regulatory approval will be given to an operator.

“To be regulated by the SFC, the standards of conduct, operational resilience and financial soundness expected of a platform operator should be the same as, if not higher, than those which apply to the automated trading platforms which we already supervise – such as dark pools,” Mr Alder said.

If regulation is deemed appropriate, then the SFC would consider granting these exchanges a licence and putting them under its close supervision.

Mr Brad Maclean, chief operations officer of Gatecoin, tells Harbour Times that while it is a nice step forward, it lacks coverage of all digital assets and investors types.

“The proposed framework targets the security token offering market with the sandbox only eligible for the sandbox that is SFC-licensed, and if they are trading securities. It is reinforced by other limitations such as allowing professional investors only,” Mr Maclean says.

“The prominent challenges such as investor protection and market integrity remain unclear. This is unlikely to lead or facilitate any changes in the retail market, nor lead to mass adoption of cryptocurrency in Hong Kong,” he adds.

But at least the SFC is in line with the global discussions, Mr Maclean says.

Recently, regulators in the UK advocate for a coordinated global strategy to regulate the crypto asset ecosystem.

Two weeks ago, the Financial Action Task Force on Money Laundering also recommended on an anti-money laundering-based regulatory regime for virtual asset service providers.

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