On February 20, the Securities & Futures Commission of Hong Kong (SFC) presented for consideration its regulations for platforms which trade in virtual assets.
Crypto trading rules include risk reduction
According to the official notice, in addition to the new licensing requirements for crypto trading platforms, the SFC is also considering whether it should allow licensed platform operators to provide services to retail customers, and which investor protection measures should be provided.
According to the official notice, all digital asset trading platforms wishing to obtain a license – including the existing ones — “should begin to review and revise their systems and controls to prepare for the new regime,” while “those which do not plan to apply for a license should start preparing for an orderly closure of their business in Hong Kong.”
The consultation document published on February 20 determines proposed requirements, such as assessing the risk profile of customers. Operators will need to conduct a comprehensive due diligence review and monitoring of tokens. The procedure will include evaluating the regulatory status of crypto in the respective jurisdiction where the trading services are provided. Moreover, the operator’s liquidity and crypto control methods should be evaluated, in particular whether their assets are controlled by a small number of individuals or entities.
According to the new regulations for trading crypto and providing services, tokens can only be offered if they comply with the regulator’s criteria for an “eligible large-cap virtual asset” that is listed on two “acceptable indices.” It will be necessary to conduct smart contract audits on tokens in order to identify any security holes.
The regulator also suggests that operators should not offer virtual assets which can be defined as “securities” if it would breach the Securities and Futures Ordinance.
The SFC says that operators should establish a compensation mechanism to cover for risks, instead of a hard cap on crypto held in cold storage. They will also be required to monitor the amount of customer assets held every day and adjust the arrangement in an appropriate manner.
It is possible that each operator with a license under the new regulations will need to establish a token admission and review committee that will evaluate and check tokens listed for sale. Operators will also have to establish obligations for issuers according to which they will have to notify operators of any hard forks, airdrops, or regulatory action.
In January 2022, the SFC provided retail investors with access to some regulated crypto-related derivative products traded on traditional exchanges.
