Hong Kong’s Securities and Futures Commission has established a brand new regulatory framework that permits crypto exchanges to opt-in to be licensed and controlled. Starting 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 belongings, insurance coverage, cold and hot wallets, and personal key administration.
An Opt-In System
The Hong Kong Securities and Futures Commission (SFC) revealed a brand new regulatory framework for crypto exchanges on Wednesday. CEO Ashley Alder defined that the fee met with a lot of crypto trade operators after unveiling a conceptual framework that could possibly be used to regulate crypto exchanges final yr. “After an in-depth examination of the unique technical and operational features of these platforms, we finally concluded that some could be regulated by us,” he remarked.
The fee has been specializing in whether or not to regulate crypto exchanges. Alder elaborated, “We saw this as a priority because this type of platform has proliferated in Hong Kong and up to now has largely escaped any form of regulation,” including that it’s largely as a result of crypto belongings 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 position,” he admitted that the SFC can solely regulate these platforms that select to embrace at the very least one safety crypto asset or token for buying and selling. “But once this happens our new rules will apply to all platform operations, even if the vast majority of other virtual assets traded on the platform are not securities.” The CEO clarified:
So this, primarily, is a framework permitting a platform operator to opt-in to regulation … Once licenses are granted to these platforms which select to opt-in, buyers will then find a way to distinguish simply between correctly regulated platforms, and all the remaining.
What the Regulation Entails
The SFC detailed in its “Position Paper” revealed on Wednesday the principles 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 providers might be thought-about for licensing. Applications 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 supply buying and selling of a minimum of one safety token on this platform might apply for a license from the SFC for Types 1 and seven regulated actions.
The Type 1 license is for dealing in securities and the Type 7 is for automated buying and selling providers (ATS) actions. The fee additionally requires all buying and selling actions of its licensees, together with these carried out by their group corporations, to be carried out underneath 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 parts of the business are licensed and supervised by the SFC.”
Further, licensees are required to get hold of prior written approval from the SFC for any plan or proposal similar to for introducing or providing a brand new or incidental services or products, or to make a cloth change to an present service or exercise. Licensees should additionally present month-to-month studies to the fee and have interaction an unbiased skilled agency to assessment their actions and operations yearly.
The Position Paper additionally outlines licensing circumstances, the primary of which particulars who can commerce on licensed platforms. The SFC famous:
The licensee should solely present providers to skilled buyers.
The definition of knowledgeable investor is in depth; it consists of a person, a partnership or an organization with a portfolio of no less than eight million HKD (~$1 million) or equal, or a belief company with complete belongings of a minimum of 40 million HKD or equal.
For the protected custody of belongings, the SFC requires licensees “to ensure that an insurance policy covering the risks associated with the custody of virtual assets held in both hot storage (full coverage) and cold storage (a substantial coverage, eg, 95%) is in effect at all times.” Licensed platform operators and their related entities should additionally retailer 98% of shopper crypto belongings in chilly wallets and restrict the quantity saved in scorching wallets to 2%. The fee additionally expects them “to set up and implement strong internal controls and governance procedures for private key management to ensure all cryptographic seeds and keys are securely generated, stored and backed up.” Moreover, the SFC added:
A digital asset buying and selling platform operator, upon turning into licensed, will probably be positioned within the SFC Regulatory Sandbox. This would sometimes imply extra frequent reporting, monitoring and critiques.
There are many extra circumstances 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 danger administration.
What do you consider Hong Kong’s opt-in regulation for crypto exchanges? Let us know within the feedback part under.
Images courtesy of Shutterstock and Asianinvestor.
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