Hong Kong’s SFC to Accept Crypto Trading Platform Applications: Pros, Cons & Implications

Hong Kong cityscape with futuristic crypto trading platforms, glowing sunset, sleek urban design, warm-toned sky, friendly regulators, cautious optimism, diverse tokens, transparent exchanges, and diligent operators, immersed in a harmonious blend of regulation and innovation.

Starting from June 1, Hong Kong’s Securities and Futures Commission (SFC) will be accepting applications for crypto trading platform licenses, as per an announcement made on Tuesday. The decision demonstrates the regulator’s willingness to allow licensed virtual asset providers to cater to retail investors, provided that operators assess their understanding of the risks involved. This move comes after the SFC opened its initial policy recommendations to public feedback in February.

The rulebook clearly states that crypto “gifts” aimed at incentivizing retail customers to invest, such as airdrops, are banned. The guidelines, some of which have been revised based on public feedback, emphasize the responsibility of platform operators to conduct due diligence. Being included in two acceptable indices is merely the minimum criterion for being listed for trading.

Under these regulations, crypto exchanges are required to maintain at least HKD 5,000,000 ($640,00) in capital at all times. Additionally, at the end of each month, the platform’s available and required liquid capital, a summary of bank loans, advances, credit facilities, and a profit and loss analysis must be submitted to the SFC.

The document also furnishes more details on allowing retail investors to access trading platforms and on conducting due diligence for token listings. Tokens must undergo due diligence procedures before being listed on exchanges – even if they are already listed on another platform. Independent assessors must carry out smart contract audits for all tokens. While independent external members are not required for token review boards, platform operators must address conflicts of interest adequately.

The SFC has further agreed to let platforms segregate client and platform assets through an escrow arrangement or by having the licensed platform set funds aside. Moreover, platform compensation arrangements should cover client virtual assets in full.

Regarding third-party custodians for safeguarding client assets, the SFC contends that since there is no regulatory regime for virtual asset custodians, permitting their use could impede supervision and enforcement.

The SFC has also announced plans to consult a separate review concerning derivatives, recognizing the importance of these instruments to institutional investors. As for implementing the Financial Action Task Force’s (FATF) travel rule for sharing crypto transaction information among financial institutions, the SFC has decreed that when required information cannot be submitted right away, it can be submitted as soon as practicable after the virtual asset transfer, until January 1, 2024.

The updated guidelines also provide clarification on anti-money laundering requirements and the criteria for fining platforms breaching these regulations. These revised guidelines will come into force on June 1.

Source: Coindesk

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