Hong Kong Regulator Proposes Issuing Licenses to Local Cryptocurrency Exchanges

To prevent any sort of cryptocurrency fraud and other illicit activities, the Hong Kong regulator has published new rules on Wednesday, November 6, asking local cryptocurrency exchanges to get their operating licenses.

In its position paper, the Hong Kong Securities and Futures Commission (SFC) talks of a licensing scheme to crypto exchanges, which is similar and currently applicable to security brokers and other trading venues in the country.

The regulator stated that any virtue asset company trading at least one security token falls under its purview. Ashley Alder, chief executive of Hong Kong's Securities and Futures Commission (SFC), said that several exchanges selling security tokens have escaped any scrutiny.

"After an in-depth examination of their unique technical and operational features, we concluded that some could be regulated by us,” added Alder.

However, the agency clarified that it won’t be reviewing applications for decentralized exchanges (DEX), peer-to-peer exchange (P2P), and other non-custodial trade platforms.

Most of the exchanges in Hong Kong and overseas have acknowledged regulations saying that it will boost standards and allow the legitimate to distinguish themselves from its unlicensed competitors.

With the new licensing conditions in place, it will be mandatory for crypto exchanges to have ties with independent auditing firms that can file annual reports on exchange activities. Besides, exchanges will have to submit a monthly report to the regulator.

Crypto exchanges facilitating its customers with hot wallet storage facilities should not hold more than 2% of the total funds with the exchange. This is to safeguard investors’ money from potential online hacks and thefts. Furthermore, the good thing is that licensed exchanges need to have insurance for all the funds stored in the hot wallets.

Needless to say that SFC has asked crypto exchanges to implement strict Anti-money laundering (AML) and know-your-customer (KYC) procedures. It added that exchanges need to take steps to “establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience and investment objectives.”

In another clarification, the SFC issues a strict warning for exchanges to not issue any cryptocurrency futures products like the Bitcoin Futures without doing any proper framework. The agency said  it “has not licensed or authorized any person in Hong Kong to offer or trade virtual asset futures contracts” to date and remains “unlikely to grant a license or authorization to carry on a business in such contracts.”