Hong Kong Crypto regime: A milestone reached, long to be covered

Hong Kong regulator admits that Crypto firms might face regulatory difficulties in the beginning 

Hong Kong with the implementation of the regulatory regime for digital assets emerged as one of the optimistic countries about the assets and the scope in the financial and economic periphery. The new regulatory norms though aim to match the international negotiation and deliberations but equally balance the sovereign rights.

The rules are pointed out to be more stringent, as per the drafted rules cryptocurrency exchanges serving or marketing to Hong Kong residents must be licensed in the city. While the city is courting the crypto business, it is not alone in pushing to regulate a once-freewheeling industry in the wake of disasters like the collapse of FTX last year.

As highlighted by crypto businesses and firms, regulations are granular and, in some ways, more stringent than those in other markets. It was also cited that the requirements will entail operational costs for exchanges, but it speaks to the type of players that Hong Kong is looking to attract, which are those with the resources and commitment to meet high compliance standards.

Experts say the city’s rules align with global trends, with some being even more restrictive. Hong Kong exchanges must store private keys on shore, for example, and 98 per cent of customer funds must be kept in what is called cold wallets, which are stored offline for security.

The arrival and implementation brought a new dawn in the crypto ecosystem but the path to be traveled for establishing a well-created internationally linked ecosystem is still long. Though there is a ray of light, it is crucial to note that the potential lies not so much in the local Hong Kong market but in vast Chinese wealth, some of which flows through the city. Also, some investors even see the possibility of China one day lifting its mainland crypto ban and permitting citizens to do some trading through Hong Kong. But this is a mere possibility.

Thus it was pointed out by various investors that an optimistic attitude is important but blindly following the regime without understanding the avenue and scope can backfire. A slew of digital-asset platforms including Huobi, OKX and Amber Group are set to apply for licenses under the new crypto regime, and dozens of others have expressed their interest to the Securities & Futures Commission.

The opportunity set is more rough cut rather than a glittering diamond, which is perhaps why lots of crypto companies are looking hard at Hong Kong, while actual pledges of substantial investment into setting up operations are nowhere to be seen or very very few.

The Securities and Futures Commission (SFC) in May released the Consultation Conclusions on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the SFC.
During the consultation period, the SFC received written submissions from industry and professional associations, professional and consultancy firms, market participants, licensed corporations, individuals and other stakeholders. The Respondents welcomed the proposed requirements.

It further highlighted that a significant respondents agreed to the proposal to allow licensed trading platform operators to serve retail investors. Here, the SFC will implement a number of robust measures to protect these investors including ensuring suitability in the onboarding process, good governance, enhanced token due diligence, admission criteria and disclosures.

The Guidelines for Virtual Asset Trading Platform Operators become effective on 1 June 2023. The Guidelines set out, safe custody of assets, segregation of client assets, avoidance of conflicts of interest and cybersecurity standards and requirements expected of licensed trading platforms.

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