Hong Kong’s Securities and Futures Fee has established a brand new regulatory framework that enables crypto exchanges to opt-in to be licensed and controlled. Beginning Wednesday, centralized buying and selling platforms can apply for a license, offering they meet sure necessities together with ample measures for the protected custody of property, insurance coverage, cold and hot wallets, and personal key administration.
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An Opt-In System
The Hong Kong Securities and Futures Fee (SFC) printed a brand new regulatory framework for crypto exchanges on Wednesday. CEO Ashley Alder defined that the fee met with a lot of crypto alternate operators after unveiling a conceptual framework that could possibly be used to regulate crypto exchanges final yr. “After an in-depth examination of the distinctive technical and operational options of those platforms, we lastly concluded that some could possibly be regulated by us,” he remarked.
The fee has been specializing in whether or not to regulate crypto exchanges. Alder elaborated, “We noticed this as a precedence as a result of one of these platform has proliferated in Hong Kong and up to now has largely escaped any type of regulation,” including that it’s largely as a result of crypto property fall outdoors the authorized definition of securities and futures contracts. Since bitcoin and different cryptocurrencies should not securities and “nothing in our new framework alters this place,” he admitted that the SFC can solely regulate these platforms that select to embody at the least one safety crypto asset or token for buying and selling. “However as soon as this occurs our new guidelines will apply to all platform operations, even when the overwhelming majority of different digital property traded on the platform should not securities.” The CEO clarified:
So this, primarily, is a framework permitting a platform operator to opt-in to regulation … As soon as licenses are granted to these platforms which select to opt-in, traders will then give you the option to distinguish simply between correctly regulated platforms, and all the remaining.
What the Regulation Entails
The SFC detailed in its “Place Paper” printed on Wednesday the principles and necessities for crypto buying and selling platforms to be regulated. The fee additionally emphasised that solely centralized platforms in Hong Kong that present crypto buying and selling, clearing, and settlement providers will probably be thought of for licensing. Purposes from peer-to-peer marketplaces won’t be accepted right now. The SFC confirmed:
As from 6 November 2019, a agency which operates a centralized digital asset buying and selling platform in Hong Kong and intends to supply buying and selling of at the least one safety token on this platform could apply for a license from the SFC for Varieties 1 and seven regulated actions.
The Kind 1 license is for dealing in securities and the Kind 7 is for automated buying and selling providers (ATS) actions. The fee additionally requires all buying and selling actions of its licensees, together with these performed by their group corporations, to be carried out beneath a single, SFC-licensed authorized entity. The regulator defined that not solely will it enable for complete oversight, however it additionally “minimizes any uncertainty about which elements of the enterprise are licensed and supervised by the SFC.”
Additional, licensees are required to get hold of prior written approval from the SFC for any plan or proposal comparable to for introducing or providing a brand new or incidental services or products, or to make a fabric change to an present service or exercise. Licensees should additionally present month-to-month experiences to the fee and have interaction an impartial skilled agency to evaluation their actions and operations yearly.
The Place Paper additionally outlines licensing situations, the primary of which particulars who can commerce on licensed platforms. The SFC famous:
The licensee should solely present providers to skilled traders.
The definition of knowledgeable investor is in depth; it contains a person, a partnership or an organization with a portfolio of at the least eight million HKD (~$1 million) or equal, or a belief company with complete property of at the least 40 million HKD or equal.
For the protected custody of property, the SFC requires licensees “to be sure that an insurance coverage coverage overlaying the dangers related to the custody of digital property held in each sizzling storage (full protection) and chilly storage (a considerable protection, eg, 95%) is in impact always.” Licensed platform operators and their related entities should additionally retailer 98% of consumer crypto property in chilly wallets and restrict the quantity saved in sizzling wallets to 2%. The fee additionally expects them “to arrange and implement sturdy inside controls and governance procedures for personal key administration to guarantee all cryptographic seeds and keys are securely generated, saved and backed up.” Furthermore, the SFC added:
A digital asset buying and selling platform operator, upon changing into licensed, will probably be positioned within the SFC Regulatory Sandbox. This could sometimes imply extra frequent reporting, monitoring and evaluations.
There are numerous extra situations that have to be met, together with complying with the SFC code of conduct and having ample measures for know-your-client (KYC), anti-money laundering and counter-financing of terrorism (AML/CFT), stopping market manipulation and abusive actions, accounting and auditing, and danger administration.
What do you consider Hong Kong’s opt-in regulation for crypto exchanges? Tell us within the feedback part under.
Photos courtesy of Shutterstock and Asianinvestor.
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