Hong Kong’s financial watchdog unveiled on Thursday a comprehensive set of regulations governing cryptocurrencies in a move to enhance investor protection which analysts believe could help make the city a major trading centre for virtual assets, analysts said.
The new rules, announced by the Securities and Futures Commission, will target funds that invest in digital currencies as well as the trading platforms on which these virtual currencies are traded. The new regime will ban retail investors from trading bitcoin via these funds or platform, but allow professional investors.
Bitcoin, which just turned 10 years old on Wednesday, has been chased by investors worldwide over the past two years, pushing its price to a high of nearly US$20,000 in December 2017, up from just US$980 at the end of 2016.
The rally came as institutional investors and funds started to invest in the expectation the virtual assets could soon find wider uses in payments, while retail investors joined the rally for short term gains.
Mainland authorities imposed a complete ban on initial coin offerings and cryptocurrency trading exchanges in September 2017, following a number of market manipulation and fraud cases. Bitcoin has been trending lower this year, and is now down two-thirds from its peak to its recent level of US$6,300.
The SFC on Thursday issued two circulars, one on the funds investing in virtual currencies and the other on trading platforms, effective immediately.
The new rules effectively close a regulatory loophole, as neither digital currency funds nor the platforms that enable trade in cryptocurrencies were under the regulatory purview of the Hong Kong Monetary Authority or the SFC.
“It will boost investor protection and hence attract more mainlanders to trade cryptocurrency assets in Hong Kong,” said Gary Cheung, chairman of Hong Kong Securities Association. “This will help Hong Kong to be among the top cryptocurrency trading centres worldwide because proper regulation is very important for attracting the big players.”
“To afford better protection, only professional investors should be allowed to participate for the time being,” said SFC chief executive, Ashley Alder, speaking at the 2018 Hong Kong FinTech Week.
Professional investors under Hong Kong law refers to those with at least HK$8 million (US$1.02 million) in investment assets and two years of experience. It is the responsibility of fund managers, brokers and platform operators to make sure only professional investors are trading.
“We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes,” Alder said.
One key stipulation will be that funds that invest more than 10 percent of their assets in virtual currencies will need to be licensed by the SFC, ending an era in which private equity funds could operate unregulated in the environment.
Cryptocurrency trading platforms will need to join the so-called “sandbox” under which they can continue to trade while negotiating with the SFC on their licensing requirements.
Alder said a sandbox is necessary because cryptocurrency platforms will not be able to match the current requirements for a conventional exchange. He said it was too early to say how long the sandbox period would last.
“The new regulations are aimed at enhancing investor protection as there is a lot of active trading in these virtual assets in Hong Kong while they are not regulated,” Alder said.
Alder said the SFC will adopt high standards for these cryptocurrency platforms, matching those for other automated trading platforms such as dark pools.
Several platform operators have showed interest in applying for a license in Hong Kong.
“We at Paxful applaud the efforts of the Hong Kong economic ministry to regulate cryptocurrency and lead Asia as a hub of financial innovation,” said Ray Youssef, chief executive and co-founder of New York-based Paxful, a US peer-to-peer cryptocurrency platform which recently set up an office in Hong Kong.
Benedicte Nolens, head of compliance for Europe and Asia at Circle, a US cryptocurrency financial services firm that runs an over-the-counter cryptocurrency trading desk in Hong Kong, welcomed the SFC regulatory sandbox as part of its effort in exploring regulation of platform operators.
“We understand that this is an option to enter to sandbox. with a view towards granting a licence,” Nolens said.
Kevin Loo, co-founder of CryptAM, which offers cryptocurrency funds domiciled in the Cayman Islands, said there is a need for a more unified regulatory approach globally towards the custody of digital assets.
“Without more clarity … it would be hard for other parts of the industry, such as trading platforms and exchanges, to grow,” said Loo, referring to anti-money laundering rules and requirements for custodians to observe know-your-customer procedures.
Authors: Enoch Yiu, Georgina Lee