Hong Kong has a thriving legal cryptocurrency trading. For this reason, the city is implementing a new licensing regulation for crypto exchanges in an effort to establish itself as a virtual asset hub in Asia.  

At the Bloomberg Wealth Asia Summit, Eddie Yue Wai-man, Chief Executive of the Hong Kong Monetary Authority (HKMA), stated that the regulations would be ‘tight’, and they would let the industry develop and innovate.  

After a string of meltdowns last year, Hong Kong is re-emerging as an attractive location for some businesses in the crypto industry. Last October, the government announced its objective to become an international virtual asset centre.  

Hong Kong’s securities regulator, the Securities and Futures Commission (SFC), proposed new regulations for retail participation in cryptocurrency trading in February. According to the new rules, retail investors may purchase tokens with significant market capitalisations, such as bitcoin and ether, on authorised virtual asset platforms. 

Hong Kong has a thriving legal cryptocurrency trading. For this reason, the city is implementing a new licensing regulation for crypto exchanges in an effort to establish itself as a virtual asset hub in Asia.  

At the Bloomberg Wealth Asia Summit, Eddie Yue Wai-man, Chief Executive of the Hong Kong Monetary Authority (HKMA), stated that the regulations would be ‘tight’, and they would let the industry develop and innovate.  

After a string of meltdowns last year, Hong Kong is re-emerging as an attractive location for some businesses in the crypto industry. Last October, the government announced its objective to become an international virtual asset centre.  

Hong Kong’s securities regulator, the Securities and Futures Commission (SFC), proposed new regulations for retail participation in cryptocurrency trading in February. According to the new rules, retail investors may purchase tokens with significant market capitalisations, such as bitcoin and ether, on authorised virtual asset platforms. 

What are the key requirements for crypto exchanges under the new rules?  

Starting 1 June, virtual asset trading platforms must store the money and virtual assets of the clients securely through fully owned subsidiaries. In addition, hot wallets can store no more than 2 per cent of a client’s cryptocurrency. Through KYC, licensed platform operators must also take all reasonable means to validate each client’s identity and assess their financial situation, investment experience and objectives.  

The exchange must have an adequate AML and CFT policy in place. For instance, it can utilise virtual asset tracking tools to track the history of transactions involving specific cryptocurrency units. Platform operators may not engage in private trading or marketing activities to avoid a conflict of interest.  

Moreover, the operator must design and apply a written policy and control measures to detect, prevent and disclose any manipulations or unlawful trading activity on the platform. The SFC also requires platform operators to submit annual financial audit reports and monthly commercial reports. Additionally, a crypto exchange must have a solid system to recognise, measure, regulate and manage all risks associated with its business activities.  

Next steps 

By 2024, the HKMA will also be implementing a mandatory licensing system for stablecoin-related activities. The regulations mandate that the value of the reserve assets backing a stablecoin, which is pegged to a fiat currency or basket of currencies, always be equal to the value of the outstanding tokens. 

Amid recent market instability, the Hong Kong government continues to show commitment to promoting virtual assets while educating the public about associated risks.

Furthermore, the SFC recommended increased supervision of decentralised finance (DeFi) platforms, and individuals “operating or performing” DeFi activities should be subject to Hong Kong’s licensing requirements as “providing automated trading services” is a regulated activity regardless of whether it is decentralised. 

In conclusion 

Operators of cryptocurrency exchanges that intend to apply for a license must start adjusting their systems to the new rules. On the other hand, those who do not intend to obtain a license should plan to shut down their Hong Kong operations.  

With the new licensing regime, virtual asset regulations will hopefully improve and draw more crypto startups to Hong Kong.  

Our regulatory compliance solutions and crypto fund administration services can help crypto fund managers to stay focused on expanding their portfolios amid a rapidly shifting crypto regulatory landscape in Hong Kong.   

Please contact our Hong Kong office to learn more about our services.