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Hong Kong to crypto exchanges: get a securities broker's licence, or go home

Crashes like FTX and Terra have made regulation necessary, say authorities, even as Territory seeks to become a virtual asset hub

Hong Kong’s Securities and Futures Commission (SFC) has called for feedback on a plan to require virtual asset trading platform operators to acquire the same sort of licenses the territory requires securities traders to obtain.

The proposed regulations mean crypto-slingers will need to achieve governance mastery similar to that required of licensed securities brokers and automated trading venues with some modifications. As part of a consultation, the SFC is seeking input until the end of March on whether it should allow retail crypto dealing, and if so under what conditions.

Licensing will be required beginning June 1 of this year and will be required irrespective of whether the entity provides trading services in security tokens or not. The SFC said those not planning to apply for a license, should “start preparing for an orderly closure of their business in Hong Kong.”

“In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed,” said the CEO of SFC, Julia Leung.

The hefty 361-page consultation paper cites the collapse of the Luna token and Terra stablecoin, plunging virtual asset prices and the fall of FTX as among the “tumultuous” virtual asset events of the past year that underscore the need for effective regulation and oversight.

The SFC said regulating beyond anti-money laundering schemes and into investor protection was now necessary. Under the org’s “same business, same risks, same rules” approach platforms will be held to requirement that cover areas including safe custody of assets, Know-Your-Client (KYC), anti-money laundering and counter-financing of terrorism (AML/CFT), prevention of market manipulative and abusive activities, criteria for admitting virtual assets for trading, accounting and auditing, risk management, avoidance of conflicts of interest and cybersecurity.

While cryptocurrencies are illegal in China, the special administrative region, which operates somewhat independently under a "One Country, Two Systems" plan, recently declared it wanted to be a hub for virtual assets.

In October 2022, the Hong Kong government recognized the need to regulate the industry and said it was preparing for a new licensing regime for virtual asset service providers and engaging with global virtual asset exchanges.

Earlier this month, the SFC reportedly added staff to assist in improved supervision of the industry.

South Korea has already decided that virtual assets deserve the same regulations as conventional securities. ®

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