Conversation from the SFC Regulatory Forum 2018, held on 14 March 2018 at the Hong Kong Convention and Exhibition Centre
Conversation from the SFC Regulatory Forum 2018, held on 14 March 2018 at the Hong Kong Convention and Exhibition Centre. SFC

Hong Kong’s financial regulator now has a new licensing scheme for cryptocurrency exchanges, according to its second round of regulatory guidance for the industry published on 6 November.

The Securities and Futures Commission (SFC) has said that the new scheme is similar to the one that is applied to security brokers and automated trading venues, and that exchanges that trade at least one security token fall under its purview.

The new set of regulations also detail how exchanges must approach custody and compliance, especially when it comes to KYC and Anti-Money Laundering rules.

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The paper reads:

“A platform operator should comply with the KYC requirements which are applicable to a licensed corporation. It should take all reasonable 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.”

According to the new licensing conditions, exchanges can only offer products to “professional investors”, and can alter existing products or offer new ones only after regulatory approval. Exchanges not only must have an independent auditor, which will file annual reports on its activities, but will also need to file monthly reports to the SFC.

The new regulations also state that hot wallets must not hold more than 2% of the exchange’s total funds, and that all assets must be insured in the event of a breach or hack.

The paper further reads:

“The SFC will not accept licensing applications from platforms which only provide a direct peer-to-peer marketplace for transactions by investors who typically retain control over their own assets (be they fiat currencies or virtual assets).”

Back in March, the SFC also published official guidance on security token offerings (STO), which was aimed at clarifying the legal and regulatory requirements. The statement said that “Security Tokens are likely to be “securities” under the Securities and Futures Ordinance (SFO) and so subject to the securities laws of Hong Kong”.

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