Hong Kong Sets Out New Rules on Crypto

"Hong Kong's securities regulator said cryptocurrency-trading companies would need to leave the city if they don't plan on getting licenses and released proposed new rules seeking to better protect investors in the wake of the collapse of FTX.

The Securities and Futures Commission would require crypto exchanges to ringfence customer deposits, put controls in place to keep crypto keys secure and make sure that no more than 2% of customer funds are stored in a "hot wallet," which is a less secure way to hold crypto assets, according to the proposed rules.

The rules are a key step in Hong Kong's effort to establish itself as a digital-assets hub, part of a wider push to attract global companies and talent after strict pandemic controls dented its reputation as a global financial center.

The regulator would require all crypto-trading platforms with operations in Hong Kong -- and those marketing their services in the city -- to get a license. The SFC is soliciting feedback on the proposed rules, which are due to come into force in June.

The cryptocurrency industry is still reeling from the collapse of the FTX, once one of the world's highest-profile crypto exchanges. The company, which was based in Hong Kong before moving its headquarters to the Bahamas in 2021, used customer assets to fund risky bets by an affiliated trading firm. U.S. regulators have since toughened their stance on crypto, while the U.K. government is setting out plans to regulate crypto exchanges and lenders.

"In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally. . . to ensure investors are adequately protected and key risks are effectively managed," said Julia Leung, the SFC's chief executive officer.

Some crypto exchanges have already indicated their interest in becoming a regulated business in Hong Kong. Justin Sun, adviser to Huobi, tweeted Monday that the crypto exchange is applying for a license in the city. Companies including DBS Group Holdings Ltd. and Interactive Brokers have previously made clear their ambitions to win crypto business in the city.

Crypto exchanges shouldn't deposit, transfer or lend their customers' assets, the SFC said. It said exchanges need to have know-your-customer checks, including finding out how aware their clients are of the risks of investing in crypto. Exchanges would also need to set a strict limit for each customer's exposure, depending partly on their financial situation, the regulator said.

The SFC has proposed regular disclosure requirements for crypto companies, including the submission of an auditor's report each year and monthly reports to the regulator on their business activities. Companies must have enough liquid capital after accounting for all of their assets, liabilities and transactions.

Under the new framework, individual investors would be given more access to trade crypto on licensed platforms. Last year, the SFC allowed individual investors to trade a limited set of crypto-related derivative products. The regulator has also recently approved exchange-traded funds for individual investors that track crypto futures." [1]

1. Hong Kong Sets Out New Rules on Crypto
Yu, Elaine.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 21 Feb 2023: B.5.