Hong Kong’s SFC is setting up a licensing regime for all crypto trading platforms

The Securities and Futures Commission of Hong Kong published a proposal of rules for virtual asset trading platforms on Monday and is seeking public comment.

In addition to establishing a licensing for crypto service providers, Hong Kong's SFC setting regulator is seeking feedback on whether licensed platforms should be allowed to serve retail investors and what investor protection measures should be in place, according to an official notice.

Under the new regime, all crypto trading platforms, including pre-existing platforms, "should begin to review and revise their systems and controls to prepare for the new regime," according to the notice.

"Those who do not intend to apply for a license should begin preparing for an orderly closure of their Hong Kong business," it added. Hong Kong also intends to regulate stablecoins beginning in June of this year.

The consultation paper, which was released on Monday, outlines proposed requirements such as assessing clients' risk profiles and establishing limits to ensure their exposure is "reasonable."

Operators will be responsible for conducting due diligence on tokens and monitoring them under the proposed measures. This includes determining the asset's regulatory status in each jurisdiction where the operator provides trading services.

It also suggests that the operator's liquidity be checked, as well as whether its holdings are concentrated or controlled by a small number of individuals or entities.

Operators can only sell tokens that meet the SFC's definition of an "eligible large-cap virtual asset" and are listed on two "acceptable indices."

To check for security flaws, they must conduct smart contract audits on tokens.

The proposed measures also state that operators should not offer virtual assets that are classified as "securities" if doing so would violate Hong Kong's Securities and Futures Ordinance.

Instead of a hard limit for assets held in cold storage, the SFC setting proposes that operators provide a compensation arrangement that it must approve to cover risks. Operators will need to monitor the number of customer assets held daily and adjust the arrangement accordingly.

To check for security flaws, they must conduct smart contract audits on tokens.

The proposed measures also state that operators should not offer virtual assets that are classified as "securities" if doing so would violate Hong Kong's Securities and Futures Ordinance.

Instead of a hard limit for assets held in cold storage, the SFC proposes that operators provide a compensation arrangement that it must approve to cover risks. Operators will need to monitor the number of customer assets held daily and adjust the arrangement accordingly.

Each licensed operator may be required to form a token admission and review committee to evaluate tokens for trading and to impose obligations on issuers to notify operators of any hard forks, airdrops, or regulatory action.

The SFC acknowledges in the paper that industry participants want to offer derivatives and is open to hearing about business models and demand, as well as conducting a separate review to draught related policies.

The SFC granted retail investors access to some regulated crypto-related derivative products traded on traditional exchanges in January 2022.

For much of last year, the SFC appeared hesitant to grant retail investors access to cryptocurrency through its virtual asset licensing regime. It indicated its willingness to change its stance during Hong Kong FinTech Week in November last year.