Hong Kong Unveils New Rules for Cryptocurrency Exchanges

Today, Hong Kong’s financial regulator — the Securities and Futures Commission (SFC) — has published a new set of regulations for Bitcoin (BTC) and cryptocurrency exchanges. The initial announcement, reported by Reuters, was made by Chief Executive Ashley Alder at a local fintech event on Nov. 6. 

Regulatory clarity for crypto exchanges

The new requirements detail how exchanges much approach custody and compliance, particularly with regards to Know Your Customer (KYC) and Anti-Money Laundering rules. Specifically: 

“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.”

Moreover, cryptocurrency exchanges can only offer products to “professional investors” and will be required to file a monthly report to the Commission. Additionally, exchanges must have an independent auditor and only alter existing products or offer new products with regulator approval. 

Exchanges must also not hold more than 2% of total funds in hot wallets and all assets have to be insured in the event of a hack.

The SFC adds that non-custodial exchanges will not be considered for licensing, stating: 

“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).”

As Cointelegraph reported, the SFC first established guidelines for crypto funds and exchanges in November 2018. Now, a year later, the regulator is taking that work forward, Alder told the conference on Wednesday.

Huobi could become first licensed exchange in HK

Commenting on the news, private investor Dovey Wan says that this is a big deal for the entire cryptocurrency industry. She points out that Huobi, in particular, may already be on its way to becoming the first licensed exchange in Hong Kong.

“WOW this is BIG,” wrote Wan. “Hongkong SEC will announce details in about an hour regarding cryptocurrency exchange application criteria.” She added: 

“Considering Huobi has already backdoor listed on HKex, this will def play them a huge favor to be the first legalized Chinese crypto exchange.”

Earlier this year in March, the SFC also released regulatory guidelines for Security Token Offerings. The agency outlined that security tokens are “likely to be ‘securities’” under Hong Kong’s Securities and Futures Ordinance, and thus fall under existing securities laws.