The Security and Futures Commission (SFC) in Hong Kong has initiated a public consultation on its new proposal for a licensing regime for cryptocurrency exchanges, which is anticipated to be enforced from June 2023. The consultation period aims to solicit feedback on whether licensed exchanges should be allowed to serve retail investors and measures to be implemented to provide strong investor protection.

Per the proposal, centralized crypto trading platforms operating in Hong Kong must obtain a license from the regulatory body. The suggested guidelines are derived from already formulated requirements solely for licensed securities brokers and automated trading venues, with modifications to some existing prerequisites.

In a statement by SFC CEO Julia Leung, the recent turbulence faced by the crypto ecosystem and the defunct industry players such as FTX have been cited as the primary reasons for establishing precise guidelines regulated for the industry, with investor protection being a top priority.

According to the announcement, the proposal contains stringent rules for entities providing crypto-related services, and a license from the SFC is mandatory. A comprehensive list of prerequisites for cryptocurrency exchanges and service providers includes secure asset custody, Know Your Customer, accounting and auditing, conflict of interest, cybersecurity, prevention of market misconduct, anti-money laundering /counter-financing of terrorism, and risk management.

Implications For Businesses And Investors On The New Licensing Regime 

It is recommended that businesses that intend to continue operating obtain a license review and update their current systems and controls to comply with the revised regime’s requirements. Conversely, cryptocurrency exchanges and service providers not planning to apply for a license would face the penalty of closing down their operations in Hong Kong.

Moreover, the SFC plans to publish and maintain a database of licensed cryptocurrency exchanges and service providers. This list will inform the general public of the registration status of different firms and help investors make informed decisions about which exchanges to use.

The SFC’s move follows the amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance in December 2022, which prompted several Hong Kong-based financial service providers to seek information on licensing requirements. The SFC’s revised regime for licensing the cryptocurrency industry is expected to offer increased clarity and protection for investors in Hong Kong.

The SFC’s proposed guidelines for regulations aimed at enhancing investor protection and the overall integrity of the cryptocurrency market in Hong Kong. The public consultation presents an opportunity for stakeholders to provide feedback on the proposal to ensure it is robust and effective.