Even the big shots in the US envy the regulatory environment in Hong Kong! What conditions are required for licensed exchanges to accommodate retail investors?
The Securities and Futures Commission (SFC) of Hong Kong has initiated a consultation on virtual asset trading platforms today, 20th, proposing a new licensing regime effective from June 1, 2023. Under this new regime, all centralized exchanges will need to obtain a license from the SFC to operate in Hong Kong.
The consultation period will end on March 31, with one key proposal being the "allowance for retail investors to use licensed virtual asset trading platforms." This potentially opens up a larger market for Hong Kong licensed exchanges that were originally restricted to professional investors. The Chinese community also anticipates more companies to comply in Hong Kong, leading to a surge in "Hong Kong concept coins." For instance, the partnership between China Telecom and Conflux Network to trial blockchain-supported SIM card BSIM in Hong Kong saw CFX surge over 50% in a single day and over 600% in 30 days.
Even Cameron Winklevoss, co-founder of Gemini from the United States, hinted, "The next bull market will start from the East." He criticized that without a clear regulatory framework from the government, the industry would lag behind. Previously, the founder of Coinbase shared a tweet on the FOMO of Hong Kong regulation, stating that the U.S. would lose its competitiveness.
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What are the reasons for Hong Kong to open up to retail investors? What are the conditions?
My working thesis atm is that the next bull run is going to start in the East. It will be a humbling reminder that crypto is a global asset class and that the West, really the US, always only ever had two options: embrace it or be left behind. It can't be stopped. That we know.
— Cameron Winklevoss (@cameron) February 19, 2023
Table of Contents
Reasons for SFC Opening Up to Retail Investors
The Securities and Futures Commission (SFC) stated that in the past, two exchanges, BC Technology's OSL Digital Securities and Hash Blockchain by HashKey Group, had applied for licenses under the Securities and Futures Ordinance. After several years, new policies have been formulated to allow retail investors to invest in virtual assets with limitations. For example, virtual asset derivatives were opened in January 2022, and there are currently three ETFs available since October 2022.
The SFC believes that with the involvement of many international financial institutions and operators, the virtual asset market has undergone significant changes through the introduction of traditional financial systems and monitoring measures. After careful consideration, the SFC believes that various types of investors should be allowed to use licensed exchange services.
Conditions for Opening Up to Retail Investors
The public consultation paper stated:
- In addition to professional investors, licensed exchanges should conduct knowledge assessments for retail investors or provide training before providing services
- Assess suitability, where exchanges are responsible for evaluating retail investors' risk tolerance and setting limits for clients, which need to be reviewed regularly
- It is recommended that exchanges establish a token inclusion and review committee, with guidelines set for token listing and trading halts. For token issuers, exchanges must establish rules requiring them to proactively notify significant changes such as hard forks, airdrops, regulatory actions, etc.
- The SFC intends to establish objective criteria for listing, and if a token meets the definition of a security, it should not be provided to investors
- Exchanges should conduct due diligence on virtual assets: team background, regulatory status in various jurisdictions, market capitalization, circulation, trading volume, etc.; even on a technical level, consensus defects or code vulnerabilities are considered
- The content and white paper of tokens promoted by issuers, whether inappropriate or containing elements of fraud, fall within the scope of exchanges' due diligence
- Exchanges may only list qualified large virtual assets, which must be assets included in the indices of at least two independent non-crypto circles. Note: Nasdaq Crypto Index