Hong Kong Securities and Futures Commission (SFC) issued a statement on 11th November. It not only sets out a new approach which aims to bring virtual asset portfolio managers and distributors of virtual asset funds under its regulatory net but also sets out a conceptual framework for the potential regulation of virtual asset trading platforms, which also known as crypto-exchanges.
"The measures announced today allow us to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both," said Mr. Ashley Alder, the SFC’s Chief Executive Officer. "We have also set out a conceptual framework to explore a pathway for compliance for virtual asset trading platform operators who are willing to be supervised by us," he added.
Caijing Onchain found that there are several significant points in the measures. First, virtual asset portfolio managers and distributors of virtual asset funds should register in SFC; Second, It provides a “new exploratory approach to regulate crypto exchanges，placing them in the SFC regulatory sandbox. “Sandboxes” typically provide fintech firms special regulatory regime in a limited period of time.
CaijingOnchain analyzed some of the standards referring to the potential regulation of virtual asset trading platform as follow:
(a) Limitations on trading of ICO tokens within the initial 12 months.
A Platform Operator should only admit a virtual asset issued by way of an initial coin offering (ICO Tokens) for trading on its platform at least 12 months after the completion of the ICO or when the ICO project has started to generate profit, whichever is earlier. The precondition is that initiators should expose sufficient market information and tractable record to investors to consider whether an ICO Token is backed by a genuine and viable project.
This requires virtual asset project initiators to be responsible to their investors and tighten up the anaphase management; it also allows the crypto exchanges to strictly review any tokens that it permits to trade on its platform.
(b) Transactions are pre-funded, and no leverage or virtual asset-related futures contracts or other derivative products．A Platform Operator should only execute a trade for a client if there are sufficient fiat currencies or virtual assets in his account with the platform to cover that trade. Further, a Platform Operator should not provide any financial accommodation for investors to acquire virtual assets. It also should not conduct Relevant Activities in relation to virtual assets which are futures contracts or other derivatives.
Since Virtual assets inherently pose substantial risks for investors due to their volatility, SFC worries that providing leverage or virtual asset-related futures contracts or other derivative products may magnify the risks. Therefore, SFC restricts crypto exchanges that encourage Hong Kong residents to trade leverage or virtual asset-related futures contracts or other derivative products or promotes such services in Hong Kong.
CaijingOnchian finds that a famous crypto exchange called Bittrex, which based in Hong Kong, allows investors to trade 100:1 leverage on their platform. It is hard for Bittrex to gain the license based on the regulatory framework. Other crypto exchanges, including Huobi and OKEx, provide leverage trading, if they plan to enter the Hong Kong market, they have to delist these services.
(c) Services to be offered to “professional investors” only
Given the significant risks associated with the trading of virtual assets, a Platform Operator should provide its services only to “professional investors”. Where a Platform Operator offers its trading systems to other companies as a technology solution, it should also ensure that its participants and all end users who are able to access its systems are “professional investors”.
A crypto-market observer told CaijingOnchain, the investors who invest in crypto-assets tend to be young, and have little investment experience. “Some of them have no experience of investing in stock ever.” He added. Only “Professional investors” access to a crypto market, investors would dramatically decrease. This regulation not only restricts investors but also requires crypto exchanges to be responsible.
(d) All virtual asset trading activities under a single legal entity
A Platform Operator should ensure that all virtual asset trading business activities (Relevant Activities) conducted by its group of companies (which are actively marketed to Hong Kong investors or are conducted in Hong Kong) are carried out under a single legal entity licensed by the SFC. Relevant Activities mean any virtual asset (irrespective of the nature of any token) trading activities on and off the platform, and any activities wholly incidental to the provision of such trading services. For the avoidance of doubt, Relevant Activities do not include the distribution of virtual asset funds or management of virtual asset portfolios discussed in the “Circular to intermediaries –Distribution of virtual asset funds” and Appendix 1 to the Policy Statement, “Regulatory standards for licensed corporations managing virtual asset portfolios” dated 1 November 2018. Placing all Relevant Activities within a single legal corporate entity to be licensed allows the SFC to have comprehensive and holistic oversight of the licensed entity and avoids public confusion about which part of its business is licensed and supervised by the SFC.
The Blockchain’s decentralization derives from decentralized crypto-exchanges, and it makes crypto exchanges to be globalization and decentralization. This standard aims to administer and regulate communal crypto exchange, such as FCoin and decentralized crypto exchanges.
It is significant that these regulations only applicable to Hong Kong, and make no effect to crypto exchanges in mainland China. Huang Mengqi, a lawyer from Shanghai Deheheng law office claimed that the internet is boundless, while the license has a control boundary. A license has an influence on both online and offline financial service. However, institutions both abroad and at home which are legitimate through gaining license cannot be applicable in mainland China.