Hong Kong Proposes Rules for Crypto Trading Platforms

Hong Kong's Securities and Futures Commission (SFC) on Monday published its proposed rules for virtual asset trading platforms and is seeking public comment.

Aside from setting up a licensing regime for crypto service providers, the regulator is also seeking views on whether to allow licensed platforms to serve retail investors, and under what investor protection measures these services should be offered, an official notice said.

Under the new regime, all crypto trading platforms planning to apply for a license – including pre-existing platforms – "should begin to review and revise their systems and controls to prepare for the new regime," the notice said.

"Those which do not plan to apply for a license should start preparing for an orderly closure of their business in Hong Kong," it added. Hong Kong is also planning to regulate stablecoins starting in June this year.

The consultation paper published on Monday sets out proposed requirements, like assessing clients' risk profile and setting limits to ensure their exposure is "reasonable."

Under the proposed measures, it will be up to operators to do due diligence on tokens, and monitor them. That includes assessing the regulatory status of the asset in each jurisdiction in which the operator provides trading services. It also proposes checks on the operator’s liquidity and whether its holdings are concentrated or controlled by a small number of individuals or entities.

Operators can only offer tokens which satisfy the SFC's criteria for an "eligible large-cap virtual asset," listed on two "acceptable indices."

They must do smart contract audits on tokens to check for security flaws.

The proposed measures also state that operators should not offer virtual assets which fall within the definition of "securities" if it would breach Hong Kong's Securities and Futures Ordinance.

The SFC proposes operators provide a compensation arrangement which it must approve to cover for risks, in place of a hard limit for assets held in cold storage. Operators will have to monitor daily the amount of customer assets held and adjust the arrangement accordingly.

Each licensed operator may have to set up a token admission and review committee to assess tokens up for trade and set obligations for issuers to inform operators about any hard forks, airdrops or regulatory action.

In the paper, the SFC acknowledges that industry players want to offer derivatives and is open to hearing about business models and demand, and conducting a separate review to draft related policies.

In January 2022, the SFC allowed retail investors to access some regulated crypto-related derivative products traded on conventional exchanges.

For much of last year, the SFC seemed unwilling to allow retail investors access to crypto under its virtual asset licensing regime. It signaled it was willing to change its stance at Hong Kong FinTech Week in November last year.

The consultation is open through March 31, while the new licensing regime is set to take effect on June 1.

Read more: No, Hong Kong Won’t Be Allowing Retail Traders Access to Crypto on June 1

Update (Feb. 20, 2023 10:06 UTC): adds more detail on the consultation throughout.