Hong Kong SFC concludes consultation on regulation?
Colin Wu . 2023-05-23 . Data

Regarding the comments on the requirement for a non-security token to have at At least a 12-month track record, this requirement was proposed specifically due to the inherent difficulties platform operators may face when conducting due diligence. While a 12-month requirement may not have prevented the recent collapses of some tokens, this requirement aims to reduce the risk of reasonably hard-to-detect Fraud as well as the possible impact on the price of a token of the marketing efforts leading up to its initial offering, especially since token offerings are generally unregulated and not subject to the safeguards which are present in the traditional securities markets.


We proposed that tokens meet additional minimum criteria before they could be traded by retail investors. These criteria are based on the underlying principle that tokens accessible by retail investors should be less prone to market manipulation, not just on the platform operated by the platform operator but across the virtual asset market as a whole, given that most, if not all, VA trading platforms are currently unregulated or only regulated from an AML/CFT (anti-money laundering/counter-financing of terrorism) perspective across the globe. This is reflected in our proposed requirement that, to be eligible for trading by retail investors, tokens must be eligible large-cap virtual assets included in at least two acceptable indices issued by two independent index providers.

The SFC would like to reiterate that being included in two acceptable indices is not the sole criterion for admitting a virtual asset. It is merely a minimum criterion.


We agree that platform operators should not offer gifts tied to the trading of a specific virtual asset, as is the case with all other intermediaries. This principle formed the basis for the requirement that platform operators should not post any advertisement in connection with a specific virtual asset.


With regard to proprietary trading, we agree that liquidity on a trading platform is important for clients. Hence, the SFC allows market making activities to be conducted by third-party market makers. However, the current prohibition on proprietary trading is all encompassing and effectively prohibits even the group companies of a licensed VA trading platform from having any positions in virtual assets. We have accordingly revised the requirements in the VATP Guidelines to allow trading by affiliates other than trading through the licensed VA trading platform.


The Travel Rule is a key AML/CFT measure for virtual asset service providers (VASPs) and financial institutions as it provides fundamental information for carrying out sanctions screening and transaction monitoring, as well as other risk mitigating measures. It also helps to prevent the processing of virtual asset transfers for illicit actors and designated parties and detect such transfers when they occur.


We note the international focus on the risks posed by stablecoins and the push for regulation of stablecoins to ensure, amongst other things, that stablecoin reserves are properly managed to maintain price stability and enable investors to exercise redemption rights. These risks have fundamental implications for the stability of a stablecoin. A stablecoin which is unable to maintain its peg or return an investor’s funds upon redemption cannot be said to be stable. In addition, heightened vulnerability to runs greatly affects their liquidity and renders them generally unsuitable for retail investors. The Hong Kong Monetary Authority (HKMA) published the conclusion on its discussion paper on crypto-assets and stablecoins in January 20237 and the regulatory arrangements for stablecoins are expected to be implemented in 2023/24. Prior to stablecoins being subject to regulation in Hong Kong, it is our view that they should not be admitted for retail trading.


With respect to the provision of other services commonly seen in the virtual asset market such as earning, deposit-taking, lending and borrowing, the SFC does not allow licensed VA trading platforms to provide these services and this is covered by paragraph 7.26 of the VATP Guidelines. Ultimately, a licensed VA trading platform’s primary business is to act as an agent and provide an avenue for the matching of orders between clients. Any other activities may lead to potential conflicts of interest and require additional safeguards. As such, licensed VA trading platforms will not be allowed to conduct these activities at this stage.

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