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Can Hong Kong Become a Crypto Hub Following Regulatory Changes?

Hong Kong-based regulator Securities and Futures Commission (SFC) has launched a new consultation for newly proposed requirements for operators of virtual asset trading platforms.

The consultation looks to understand views on whether the SFC should allow licenced virtual assets platform operators to serve retail investors in Hong Kong. SFC is also considering which measures it should implement to ensure the protection of investors.

As part of a new licensing regime starting 1 June 2023, any person or organisation looking to provide a virtual asset service (including operating a virtual asset exchange) will need to apply for, and obtain, a licence from the SFC before they do so.

Julia Leung
Julia Leung, CEO of the Securities and Futures Commission

Julia Leung, chief executive officer of the SFC, explained the timing of the new proposals. Leung said: “As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle.

“In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is a clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed.”

The Securities and Futures Commission has set a deadline for input submissions of 31 March 2023.

Hong Kong’s regulatory proposals for virtual assets

The SFC suggested implementing the following rules to ensure that customer assets are safe and secure:

  • The regulator for Hong Kong proposes that virtual asset trading platforms should hold all client money and virtual assets through a wholly-owned subsidiary.
  • Should the proposals come into play, platforms will need to ensure that no more than two per cent of their client’s virtual assets are stored in ‘hot wallets’. This term refers to wallets that are not connected to a web server and initiate financial transactions involving cryptocurrency via browser-based web pages. ‘Hot wallets’ are highly vulnerable to cyberattacks because the public and private keys are all stored on the internet.
  • Because much of the safe custody of virtual assets comes down to the storage of private keys, all platform operates would need to implement internal policies and governance procedures for private key management. Platforms would securely generate, store, and back up all cryptographic seeds and keys.
  • The new procedure would ensure that platform operators do not deposit, transfer, lend, pledge, repledge or deal with client virtual assets in any way.
  • Operators will also need to keep an insurance policy in place to cover all associated risks of the custody of virtual assets.
  • KYC checks would also form an important part of regulatory changes, ensuring clients have sufficient knowledge of virtual assets. This mainly covers the client’s knowledge of risks, before platforms can provide any services to the client.
Hong Kong: Crypto hub?

The move comes as good news to many in Hong Kong, who currently have to deal with unlicensed exchanges should they want to invest in, or trade, crypto.

Paul Chan
Paul Chan, financial secretary of Hong Kong

The regulatory news also comes shortly after Hong Kong’s financial secretary, Paul Chan, explained that the region was continuing to develop its cryptocurrency infrastructure. Despite the collapse of FTX, Hong Kong continues to attempt to draw crypto firms into its remit.

Hong Kong may have concentrated its efforts to catch up to the status of Singapore, which has continued to promote cryptocurrency. However, recent history has not been kind to the country’s crypto space. Singapore’s state investment fund Temasek had invested hundreds of millions of dollars in the FTX exchange – prior to its collapse.

Lawrence Wong, Deputy Prime Minister of Singapore, explained in November 2022 that the losses had caused reputational damage. As Singapore struggles to rebuild trust in the sector, now could represent an ideal opportunity for Hong Kong to play catch up.

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