Hong Kong’s tough new rule for crypto exchanges

By Staff Reporter

Hong Kong’s new rule governing crypto exchanges announced by the Securities Future Commission chief executive Ashley Alder during the second day of the HK FinTech Week has created a bit of furor in the crypto industry.

Under the previous regime, the crypto exchanges – also known as Virtual Asset Service Providers or VASPs – are allowed to decide for themselves if they want to be regulated under the SFC.

However, the proposed new regime represents a significant change. The new dispensation will bring all such crypto exchanges under the purview of the SFC for the first time.

The proposed rule requires all crypto exchanges operating in the city to seek a license from the SFC.

Hong Kong Financial Services and Treasury Bureau had already issued a consultation paper to the effect.

“One year after the Hong Kong SFC announced a new regulatory regime for virtual asset exchanges (VAExchanges) that facilitate trading in security tokens, the SFC has turned its sights on the regulation of non-security virtual assets, outlining a new regulatory framework to formalise and directly regulate trading of virtual assets, such as Bitcoin,” according to a client note by law firm Latham Watkins.

In other words, the SFC will regulate the VASPs even if they do not trade in security tokens. SFC by definition is not supposed to regulate anything other than securities.

While it is hard to know how many large crypto exchanges operate in Hong Kong, the SFC has approved a license under the previous opt-in regime for the OSL, a unit of HKEX-listed BC Group.

But the key issue here is anti-money laundering and counter-terrorist risks that exchanges need to pay attention to when it comes to virtual assets

The new rules, analysts believe, is quite draconian.

Under the proposed regime, VASPs that operate VA Exchanges in Hong Kong or target Hong Kong customers will need to apply for an SFC licence and the failure to do so will be a criminal offence.

Partly because of major push towards regulation at the global level, regulations governing crypto exchanges in all the major financial centers are converging that makes regulatory arbitrage increasingly difficult, experts said.

“Crypto regulation – particularly in relation to anti-money laundering – either already exists or is coming soon in all the major financial centers,” said a Hong Kong-based lawyer specializing in fintech, adding that days of jurisdictional regulatory arbitrage are over.

Recently, a HK-based but Seychelles-registered crypto exchange BitMEX was indicted by the US regulatory authorities, sending shock waves throughout the nascent industry.

The new proposed regulation will only allow professional investors, or those with a minimum of US$1 million in assets to trade in virtual assets. In other words, retail and mom and pop investors will be barred from trading crypto.

Experts believe such an onerous regulation could hamper trading volume on the crypto exchanges and might even trigger consolidation in the market.

The consultation period runs until 31 January 2021 and a bill to bring the new regime into effect will likely be introduced to Hong Kong’s Legislative Council in 2021.

Hong Kong’s proposed rule requires crypto exchanges to seek a license within 180 days after the rule goes into effect.

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