Hong Kong describes a new crypto license system

The Securities and Futures Commission (SFC) of Hong Kong is seeking public input on its recently proposed licensing system for cryptocurrency exchanges, which is slated to go into effect in June 2023.

Whether to permit regulated exchanges to service retail investors in the nation and what steps should be taken to provide a variety of “strong investor protection measures” are two important issues that need to be addressed during the public consultation session.

On February 20, the SFC announced the start of a consultation process defining a new licensing system for the sector that would require all centralized cryptocurrency trading platforms operating in Hong Kong to get a license from the regulatory agency.

The Securities and Futures Commission of Hong Kong requests public input on proposals to permit authorized cryptocurrency exchanges to provide services to retail investors

The SFC’s proposed regulatory standards have been modified to address some of the existing prerequisites for licensed securities brokers and automated trading platforms.

According to SFC CEO Julia Leung, the “recent turmoil” in the cryptocurrency ecosystem and the demise of key players like FTX are the main drivers behind the need for clear regulatory guidelines for the sector that prioritize investor protection:

“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.”

Each individual or company offering services related to cryptocurrencies is required, according the notice, to seek for a license from the SFC. In addition, there are guidelines for service providers and bitcoin exchanges.

The secure custody of assets, Know Your Customer, conflicts of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering/counter-financing of terrorism, and market misconduct prevention are just a few of the prerequisites that come with this.

Reviewing and updating current systems and controls to conform to the standards of the forthcoming regime is suggested for businesses that plan to continue operating and submitting licensing applications. Exchanges and service providers will need to get ready to shut down their operations in Hong Kong if they do not intend to seek for a license.

In order to inform the general public of the registration statuses of various businesses, Hong Kong’s SFC also plans to publish and maintain a list of authorized cryptocurrency exchanges and service providers. The comprehensive 361-page paper outlines the main regulatory criteria for licensing, along with recommendations for establishing AML controls and a variety of additional obligations for the sector.

The part of the proposal that would let regular people use authorized bitcoin trading platforms is possibly the most important. Since its implementation in 2018, the Securities and Futures Ordinance (SFO) regime has restricted platforms with SFO licenses to only service professional investors.

According to the paperwork, public comment has underlined the idea that preventing retail access to cryptocurrency exchanges could hurt investors because they might be forced to trade on unregulated foreign platforms that are available online. Only two trading platforms are now authorized by the SFO, according to the SFC, despite the fact that the SFC has implemented cryptocurrency-specific laws that have facilitated incremental retail investment to restricted bitcoin asset exposure.

Retail investors now have indirect access to these markets through regulated products thanks to a regime for cryptocurrency futures exchange-traded funds that was approved by the SFC in October 2022.In the interim, a handful of authorized brokers and fund managers have started providing investors with services linked to cryptocurrencies under the SFC’s oversight. This has been yet another important factor in the SFC’s decision to open up access to cryptocurrencies to all kinds of investors starting in June 2023 via authorized platforms.

Recently there is report that following a change to the Anti-Money Laundering and Counter-Terrorist Financing Law in December 2022, financial service firms with offices in Hong Kong started to inquire about licensing requirements.

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