Hong Kong SFC's New Regulations for Cryptocurrency Exchanges

New Direction for Crypto Exchanges

In a groundbreaking move for the cryptocurrency landscape, Hong Kong’s Securities and Futures Commission (SFC) has rolled out a fresh set of regulations aimed at Bitcoin (BTC) and cryptocurrency exchanges. This announcement, made by Chief Executive Ashley Alder at a fintech event on November 6, signals a significant step towards regulatory clarity in the realm of digital currencies.

Key Requirements for Exchanges

Under the new guidelines, exchanges are now held to stringent standards regarding custody and compliance, especially concerning Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols. For example, Alder stated, “A platform operator should comply with the KYC requirements which are applicable to a licensed corporation.” With this, exchanges are expected to verify the identity of clients, understand their financial situation, and consider their investment objectives.

Restrictions and Responsibilities

Aside from increased compliance expectations, the SFC mandates that cryptocurrency exchanges can only cater to ‘professional investors.’ Monthly reporting to the SFC is now a requirement, along with hiring independent auditors. Furthermore, a notable limit is placed on the exchanges, which may hold no more than 2% of total funds in hot wallets. In the wake of any potential hacking incidents, all assets must also be insured.

No Room for Non-Custodial Exchanges

In a firm declaration, the SFC has made it clear that non-custodial exchanges will be sidelined from the licensing conversation, stating: “The SFC will not accept licensing applications from platforms which only provide a direct peer-to-peer marketplace for transactions.” This decision reinforces the SFC’s commitment to ensuring investor protection and regulatory oversight.

Industry Reactions

Industry experts are already weighing in on these developments. Dovey Wan, a private investor, noted that this is a monumental moment for the cryptocurrency industry. She suggested that exchanges like Huobi are positioning themselves to be at the forefront of compliance. Wan exclaimed, “WOW this is BIG!” She hinted that Huobi appears to be on the fast track to becoming the first licensed cryptocurrency exchange in Hong Kong due to its previous backdoor listing on HKex.

Context and Future Prospects

This latest move by the SFC builds on the previous guidelines established in November 2018. Earlier this year, the SFC also introduced regulatory guidelines for Security Token Offerings, clarifying that security tokens likely fall under existing securities laws. As the cryptocurrency market evolves, these new regulations could pave the way for increased legitimacy and growth within Hong Kong’s cryptocurrency sector.