On June 1, 2023, new rules regarding digital assets go into effect, which may make Hong Kong a crypto hub.
Earlier this month (May 2023), the Hong Kong Securities and Futures Commission (SFC) concluded the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators. According to the SFC, 152 submissions of feedback were received, and respondents generally welcomed the proposed requirements, while a few rules were clarified or altered.
At that time, Julia Leung, the SFC’s Chief Executive Officer, said that providing clear regulatory expectations is the way to enable responsible development.
“Hong Kong’s comprehensive virtual assets regulatory framework follows the principle of ‘same business, same risks, same rules’ and aims to provide robust investor protection and manage key risks. This will enable the industry to develop sustainably and support innovation.”
Crypto exchanges have been invited to apply for a license to operate with multiple platforms pursuing regulatory approval.
Ben Roth, co-founder & CIO at Auros, a crypto market-making firm, believes that the new rules will make Hong Kong the digital asset leader in Asia.
Roth said the update to the regulatory framework in Hong Kong is a noteworthy development because many jurisdictions around the world have been unable to craft workable rules.
“As a trading firm with global operations, we have observed an uptick in interest in the region from abroad for months now. This is notably marked by ecosystem growth as new and innovative projects reevaluate where to best dedicate their scarce resources to cover the most accessible communities that underpin crypto’s growth.
Additionally, Auros has held conversations with some of the most prominent capital allocators in the space, who have increasingly seek out domain expertise as they expand their footprint into Asia. These players want to be well positioned to take advantage of a clear regulatory framework.” said Roth.
He added that Hong Kong regulators have moved quickly to adopt new rules in comparison to their peers around the word.
“This stands in stark contrast to some of its rivals that were looking to take advantage of regulatory uncertainty in the United States but failed to convert initial plans into concrete and reliable actions for projects, venture capitalists, and institutional firms.”
Retail investors will be able to participate in crypto trading, but regulated platforms will need to provide “extensive requirements” for investor education.
“Regulatory clarity does not imply the formalization of an unregulated market,” Roth said. “It means that participants will have a clear and well-considered set of rules to follow. This is a major step in the maturation of the industry. At first glance, this may appear restrictive to some parties, including retail participants, but will ultimately open up the ability for many institutional firms to take their first steps into the space.
Roth described the regulation of crypto in Hong Kong as the next phase of growth for the industry.
“Some of the biggest immediate changes include the need for assets listed on regulated platforms in Hong Kong to now meet new requirements covering the safe custody of assets, segregation of client assets, and cybersecurity standards, including a minimum threshold for retail trading and compliance with IOSCO Principles for Financial Benchmarks. These standards may seem onerous and may even lead to participants considering other regional jurisdictions (Singapore, Dubai) but in the long term, they set the groundwork for a stable system of rules that will govern proper, professional behavior whilst allowing for innovation within the guardrails. “