Hong Kong’s SFC drafts framework to regulate crypto exchanges

Hong Kong’s financial regulator, the Securities and Futures Commission (SFC), has indicated that it has formed an official regulatory framework for virtual asset trading platforms for release later today.

Speaking at a session of the Hong Kong FinTech Week 2019 earlier today, SFC CEO Ashley Alder shared the regulator’s vision for the future of crypto-asset use in Hong Kong.

Alder’s keynote speech explored themes such as artificial intelligence and machine learning in financial markets, virtual banking, and increased market automation.

However, the greatest focus was on blockchain-based assets. Commenting on the rise in popularity of crypto-assets, Alder said:

“There is no doubt that these virtual assets have been moving further into conventional financial markets, with more falling within the existing scope of securities regulation. One example is Bitcoin futures, which are now offered by established exchanges in the US.”

Alder went on to explain that because of the surge in cryptocurrency use in Hong Kong, the number of unregulated exchanges had also increased. This has prompted Hong Kong’s regulator to explore new ways to protect users and legitimise the industry.

Regulatory framework for virtual asset trading platforms

Citing concerns over safe custody of users’ funds and growing cybersecurity risks, the SFC met with Hong Kong crypto-platform operators to discuss forming a credible and practical regulatory response to crypto-asset trading.

Alder explained that any new regulation in this area would have to fit with the unique technical and operational challenges posed by crypto-platforms. Likewise, Alder commented that anonymity in blockchain-based assets is a major concern from an anti-money laundering and terrorism-financing perspective.

Describing what the crypto community can expect from the SFC’s new regulation, Alder explained:

“What we will announce today is a detailed scheme for the regulation of crypto-platforms. It draws heavily on the standards which we expect of conventional securities brokers and automated trading systems. But it also adapts those standards to deal specifically with the technology on which the industry is based.”

Alder also explained that the framework will cover issues of market manipulation, which has been consistently problematic for the crypto-asset industry.

The SFC only has jurisdiction over platforms that trade securities or futures contracts, which actually excludes many digital assets.

Therefore, the new framework will be delivered using an ‘opt-in’ approach, which will allow crypto exchange operators to assure their clients that they are operating a regulated platform should they wish to take part.

The framework is sure to be a boon for Hong Kong crypto trading as the country’s markets mature.