- The new regulatory regime could drive the cryptocurrency industry into a tailspin
- No cryptocurrency exchange currently qualifies according to the new rules
- Hong Kong Bitcoin association feels the sandboxes are a cage
Cryptocurrency exchange operators in Hong Kong are foreseeing tough times ahead, following last week’s unveiling of new rules relating to cryptocurrency trading. The new regulatory regime could drive the sector into a tailspin and exchanges and investors try to gain an understanding.
Testing the Waters
Hong Kong’s Securities and Futures Commission (SFC) on Thursday November 1, 2018, announced new rules targeting cryptocurrency investors and exchanges which proposed a regulatory sandbox to cryptocurrency regulation in the island nation. Details are now emerging about what the “sandbox approach” will really involve and cryptocurrency stakeholders are not sure what the future holds for them.
Commenting on the development, the founder of Gatecoin Cryptocurrency exchange Aurélien Menant said:
“We will approach the SFC to understand better what would be the requirements to get into that sandbox and then we will see whether it makes sense for us or not; so far, no plan to leave Hong Kong.”
The new rules proposed by SFC mean that first funds investing over 10 percent of their portfolios in cryptocurrencies will have to seek to SFC licensing and they must only deal with institutional investors.
Additionally, all cryptocurrency exchanges that want to be licensed will have to voluntarily enter the regulatory sandbox, which requires them to deal with only institutional investors among other things, for them to get consideration for licensing.
The SFC said the regulatory sandbox will be a trial period for an unspecified amount of time before they decide what direction to take.
The outgoing chairman of SFC Carlson Tong Ka-Shing cited investor protection as the reason for the regulation plans by the agency and expressed concerns about SFC’s legal limitations allowing them to only regulate “classified financial securities” meaning cryptocurrencies would first have to be recognized as such by the government for regulation to apply.
The Road Ahead
The securities watchdog has persistently warned crypto investors and exchanges about the “risks involved in trading digital assets” warning of legal action against businesses if they fail to comply with the SFC regulations. Last month Ka-shing observed:
“No other international market currently has a comprehensive regulation framework for these cryptocurrency platforms. We need to see if and how these platforms can be regulated […] while at the same time ensuring investors’ interest is being protected.”
Most cryptocurrency exchanges in Hong Kong deal with retail investors and as a result, none of them currently fulfills SFC requirements while digital assets are not yet considered securities.
The president of Hong Kong Bitcoin association Leo Weese says the sandboxes are a “cage that places unreasonable burdens on exchanges,” adding that exchanges will have to work harder in Hong Kong to remain in business, happening when crypto businesses are relocating to Hong Kong.
