In an industry-defining move, Hong Kong’s Securities and Futures Commission (SFC) is poised to accept applications for crypto trading platform licenses starting June 1st, 2023. This move, representing a significant regulatory overhaul, opens the gate to retail investors, enabling Hong Kong to emerge as a potential crypto hub, even as the world was still reeling from crypto-exchange FTX’s collapse late last year.

The SFC has successfully concluded its consultation on the proposed requirements for these licensed operators, garnering feedback from an extensive network of stakeholders. A collective consensus emerged to allow licensed platforms to serve retail investors, ushering in a new era of crypto access in Hong Kong.

“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.”

Ms. Julia Leung, SFC’s Chief Executive Officer.

The rules of the game: protecting investors

The consultation conclusions partly underscore the SFC’s commitment to protecting retail investors. Licensed platforms will have to follow rigorous protocols, including the safe custody of assets, avoidance of conflicts of interest, and adherence to cybersecurity standards. Also, the SFC will closely monitor and ensure robust token due diligence, admission criteria, and disclosures. In addition, the emphasis on anti-money laundering requirements and criteria for penalizing platforms for breaches further underscores the SFC’s intent to protect the investor community.

These regulations aim to balance facilitating the crypto industry’s growth and ensuring operations’ security and transparency. While operators are allowed to serve retail investors, they are expected to assess the understanding of the risks involved adequately. Crypto “gifts,” typically used to incentivize retail customers, are explicitly banned under the new guidelines.

The regulatory framework also mandates a capital threshold for crypto exchanges, stipulating a minimum of 5,000,000 Hong Kong dollars ($640,000) at all times. Moreover, approved tokens must show a 12-month “track record” to be listed on regulated exchanges.

While the SFC’s move holds transformative potential for Hong Kong’s crypto landscape, the initial response from industry players has been mixed. The existing two licensed crypto exchanges, HasKey Pro and OSL, are already in partnerships with local securities brokers to facilitate crypto trading for professional investors. They will likely be among the first to apply for licenses under the new regulations, heralding a shift towards retail investor inclusion.

In contrast, unlicensed platforms will face closure or change course to compliance, as they will be barred from selling cryptocurrency products in the city starting June 1st, 2023.