Hong Kong Rolls Out Plan for Crypto Fund, Exchange Regulation

The new regime includes banning retail investors from trading virtual coins via funds and possibility for a similar measure for exchanges.

Hong Kong’s Securities and Futures Commission (SFC) has published a cryptocurrency regulation framework that targets digital asset funds and trading platforms. The fund’s rules have already been adopted, while the exchange provisions will go through an exploratory stage before the SFC makes any decision whether to enact them or not, the Commission head Ashley Alder said during a speech at Hong Kong FinTech Week on Thursday.

The SFC’s legal status limits the regulator oversight only to securities and futures (SF) trading, but the Commission came up with “a creative framework” that brings “a significant” number of crypto assets under its control, Alder explained. For example, funds that invest more than 10% of their portfolio in virtual currencies need to observe the new special crypto rules, irrespective whether the crypto investment is SF or not. Moreover, as the funds that manage only coins, cannot be obliged to obtain an asset management license, SFC puts those firms in the brokerage category, and they should apply for that kind of permit, Alder said.

The main rule for funds is the prohibition for retail investors. Those financial instruments are now allowed only for professional players with at least HK$8 million (US$1.02 million) in assets and at least two years of experience.

On the other hand, dealing with crypto exchanges is more complicated than with funds, and therefore, SFC will create a sandbox, where it will test several rules, the regulator boss outlined. The Commission will trial several rules including allowing only trading for professional players, limitations on offerings of ICO tokens, and banning trading in leverage and in virtual asset-related derivative products.

Sandbox participation will be voluntarily, and SFC will not announce the name of the engaged exchanges publicly. If the experiment shows that the Commission can regulate trading platforms, SFC will start issuing licenses.

“The jury is still out on whether virtual assets serve a useful social function and should be considered in the same bracket as more familiar financial assets. But it is clear that if we do regulate operators in the virtual asset space, we should hold them to the same standards as the rest of the financial system,” Alder said.

“In my view it is far too early to attempt to change our laws to specifically cover the crypto world.”