His chief sensitivity, however, he told the South China Morning Post, is that the SFC is technically restricted by its legal regulatory reach of securities only.
“We do not think imposing a total ban on these platforms is necessarily the right approach, and it will not work in today’s internet world when trading can cross national boundaries,” said Tong, who is due to hand over the SFC’s reins to Tim Lui Tim-leung on October 19.
“Even if we were to ban them, transactions can still be easily conducted via platforms in overseas markets.”
Similar to traditional stock exchanges, centralised crypto-exchanges are generally run by organisations that oversee their operation, maintenance and security, and which grant users access to the platform by paying a fee. Several are being operated in Hong Kong, but they remain unregulated.
The SFC has issued several warnings in recent months for investors to be wary of trading on them, and to the operators, too, that they must in turn abide strictly to SFC regulations.
But in light of increasing trade in bitcoin or other cryptocurrencies, Tong said the watchdog is now anxious to get some more formal cryptocurrency regulations firmly in place.
“We have to carefully consider the regulatory approach for these platforms because they are new technology and may not qualify as securities,” he said.
“They do not fit in the custodian, audit or valuation requirements, for instance, normally expected under the Securities and Futures Ordinance.
“But no other international market currently has a comprehensive regulation framework for these cryptocurrency platforms. We need to see if and how these platforms can be regulated to a standard that is comparable to that of a licensed trading venue, while at the same time ensuring investors interest are being protected.”
For their part, the cryptocurrency exchange operators have welcomed the move.
Angelina Kwan, chief operating officer of The Bitcoin Mercantile Exchange (BitMEX) one of the world’s biggest cryptocurrency platforms, said she would work closely with the SFC on the proposed regulations.
“We hope the guidelines or regulations being considered will keep pace with market developments,” she said in a telephone interview with the South China Morning Post.
“The US has introduced regulations over cryptocurrency and there are futures products being traded by the CME Group and the CBOT. This shows that a regulatory authority can help to develop a new industry,” she said.
“We hope that sharing information about cryptocurrency markets and market developments in this space will help international regulators better understand cryptocurrency as an asset class.”
[CME Group is one of the world’s most diverse derivatives marketplaces, made up of four exchanges: CME, NYMEX, COMEX and CBOT. Each offers a wide range of global benchmarks across major asset classes. CME merged with the Chicago Board of Trade (CBOT) in 2007. CBOT brought a suite of interest rates, agricultural and equity index products to its existing offering.]
Jeremy Allaire, founder and chief executive for US-based cryptocurrency unicorn Circle, said his Hong Kong operation now offers over-the-counter trading in cryptocurrency commodity assets such as bitcoin and ethereum, but it was well aware it operates in a non-regulated space.
“We’ll pay very close attention when new licensing or regulatory frameworks emerge, and will proactively work with the government on those frameworks,” Allaire said.
“We also recognise there are real risks for investors and rules need set in place to deal with those risks. So we try to be constructive in working with regulators in all the markets we are in,” he added.
Circle is notably backed by Chinese investors counting Bitmain, Baidu, Credit Ease, and investment bank Goldman Sachs.
“Since we started the company, we have given a commitment to collaborating with governments, ” Allaire added. “We want to ensure the long-term potential of the digital asset industry.”
