Hong Kong recommends crypto laws to safeguard investors after FTX

Hong Kong’s securities regulator said cryptocurrency-trading firms must leave the city if they do not intend to obtain licenses, and it proposed new measures to better safeguard investors in the aftermath of FTX’s demise. According to the proposed rules, the Securities and Futures Commission would require crypto exchanges to ringfence customer deposits, implement controls to keep crypto keys secure and ensure that no more than 2% of customer funds are stored in a so-called “hot wallet,” which is a less secure way to hold crypto assets. The laws are an important step in Hong Kong’s efforts to promote itself as a digital assets powerhouse, as part of a larger push to recruit global corporations and talent after harsh pandemic controls harmed the city’s credibility as a global financial center. The government would compel all crypto-trading platforms with Hong Kong operations — as well as those marketing their services in the city — to obtain a license.

The SFC is currently seeking input on the proposed rules, which are set to go into effect in June. The cryptocurrency sector is still grieving after the demise of FTX, long one of the world’s most prominent cryptocurrency exchanges. The company, which was headquartered in Hong Kong before relocating to the Bahamas in 2021, had utilized customer funds to back dangerous bets by an allied trading firm. Since then, American regulators have stiffened their stance on cryptocurrency, while the UK government has announced intentions to regulate crypto exchanges and lenders.

“In light of recent upheaval and the collapse of major leading crypto trading platforms around the world, there is clear unanimity among authorities worldwide to guarantee that investors are sufficiently safeguarded.

Some cryptocurrency exchanges have already expressed an interest in becoming regulated businesses in Hong Kong. Huobi adviser Justin Sun tweeted on February 20 that the crypto exchange is asking for a license in the city. Other firms, like as DBS and Interactive Brokers, have previously stated their desire to win crypto business in the city. According to the SFC, cryptocurrency exchanges should not deposit, transfer, or lend their customers’ funds. It stated that exchanges must conduct know-your-customer checks, including determining how well their consumers understand the hazards of investing in cryptocurrency. Exchanges would also be required to impose rigorous limits for each customer’s exposure, based in part on their financial status, according to the regulator.

The SFC has also proposed regular disclosure requirements for cryptocurrency enterprises, such as submitting an auditor’s report each year and monthly reporting to the regulator on their business activities. After accounting for all of their assets, obligations, and transactions, businesses must have enough liquid capital. Individual investors would have more access to trade cryptocurrency on licensed platforms under the new structure. Individual investors were authorized to trade a limited selection of crypto-related derivative instruments last year, according to the SFC. The regulator has also just allowed exchange-traded funds that follow cryptocurrency futures for private investors. If retail clients were not permitted to trade on licensed platforms, they may instead trade on overseas exchanges, putting them at greater risk, according to an SFC representative.