Hong Kong Securities Regulator to Commence Accepting Crypto Exchange License Applications from June 1st

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The Securities and Futures Commission (SFC) of Hong Kong has announced that it will commence accepting applications for licenses for cryptocurrency trading platforms starting from June 1.

In a report published on Tuesday, it was stated that the regulator has granted permission for licensed virtual asset providers to cater to retail investors, on the condition that operators evaluate their comprehension of the associated risks. The Securities and Futures Commission (SFC) initiated the public feedback process for its preliminary policy recommendations in February.

The regulatory body further recommended that stablecoins, which are cryptocurrencies tied to the value of other assets, should not be authorized for retail trading until the jurisdiction's intended regulations for this particular asset class come into effect.

The rulebook clearly prohibits the offering of crypto "gifts" aimed at enticing retail customers to invest, which probably encompasses airdrops.

The revised guidelines, which took into account public feedback, emphasize that platform operators bear the responsibility of conducting thorough assessments. They emphasize that meeting the minimum requirement of being listed for trading requires inclusion in at least two reputable indices.

According to the regulations, cryptocurrency exchanges must maintain a minimum capital of no less than 5,000,000 Hong Kong dollars ($640,000) at all times. Additionally, at the conclusion of each month, they are required to submit various financial information to the SFC, including the platform's available and necessary liquid capital, a summary of bank loans, advances, credit facilities, as well as a profit and loss analysis. The rules state that regulated exchanges must have a "track record" of at least 12 months for approved tokens.

The document further elaborates on enabling retail investors to utilize trading platforms and implementing thorough due diligence processes for token listing. All tokens that are listed on exchanges, regardless of their listing on other platforms, will be required to undergo due diligence procedures before being listed. Independent assessors will conduct smart contract audits for these tokens. The conclusions state that platform operators do not need to appoint external members to token review committees as long as they effectively address conflicts of interests.

The SFC will enable platforms to separate client assets from their own by implementing an escrow arrangement or by establishing a licensed platform that reserves funds. Each platform's compensation arrangement should provide complete coverage for client virtual assets.

The SFC explained that incorporating third-party custodians to safeguard client assets would impede their supervision and enforcement efforts, as there is currently no regulatory framework in place for custodians of virtual assets.

The SFC has announced its intention to seek input from a dedicated review regarding the potential inclusion of derivatives, recognizing their significance to institutional investors.

The SFC announced its plans to enforce the travel rule established by the Financial Action Task Force (FATF), which involves sharing information on cryptocurrency transactions among financial institutions. According to the SFC, if the necessary information cannot be immediately provided to the receiving institution, it will be accepted as soon as reasonably possible after the virtual asset transfer, up until January 1, 2024.

The guidelines also provide additional details regarding anti-money laundering obligations and establish specific criteria for imposing fines on platforms that violate these obligations.

The updated guidelines will take effect from June 1st.