Ashley Alder, the CEO of Hong Kong’s Securities Futures Commission, is blazing a path to regulation for crypto-trading platforms.
It offers crypto exchanges a route to becoming licensed, provided they trade at least one virtual asset that is deemed a security. The SFC is therefore taking a huge step toward the institutionalization of digital assets, and giving some operators the chance to use a Hong Kong base to distinguish themselves globally.
At the same time, however, Alder said the SFC intends to take action against bitcoin futures operators, particularly those marketing high degrees of leverage.
“We’ve been concerned for some time about platforms offering virtual-asset futures contracts to the public,” Alder said on stage at Hong Kong Fintech Week. He cited these contracts for being extremely volatile, high risk, and difficult to value, all exacerbated when exchanges offer enormous amounts of leverage, and charges that some of these platforms engage in manipulation by changing trading rules during the lifetime of a contract.
Alder says the SFC will go public with such risks, and warned that those who offer bitcoin futures may be in breach of the Securities Futures Ordinance or the Gambling Ordinance – in other words, engaging in criminal activities.
OKEx has been one platform accused of changing its trading rules mid-contract, according to the South China Morning Post.
Path to licensing
But the big news from Alder is the decision to legitimize those crypto exchanges that can meet the SFC’s traditional compliance requirements for brokers and market operators, opening the possibility they can receive a Type 9 license for exchanges.
Some crypto exchanges hailed the move. BC Group called it a “watershed moment for financial services in Asia and institutional adoption and trading of digital assets.”
Worldwide, the only regime for requiring licenses for crypto exchanges is the state of New York, which in 2014 issued its BitLicense for any entity carrying out virtual currency activities in the state or for New York residents.
Circle, Coinbase and Square are among those license holders.
But what Hong Kong is doing is far more ambitious. First of all, the SFC does not recognize bitcoin as a currency, but it acknowledges the existence of a broader realm of digital assets that is rapidly permeating the traditional world of finance.
The Libra catalyst
It was Facebook’s June announcement of its Libra project, the most prominent of stablecoin ventures, that really galvanized the SFC, however.
“These [stablecoins] claim to have a mechanism to stabilize their value by backing a virtual token with fiat currencies, commodities, or a basket of other crypto assets,” Alder said. “They not one hundred percent stable, but they are in contrast to a crypto asset such as bitcoin which has no intrinsic value whatsoever,” which is why bitcoin and other alt coins are volatile.
Libra has lit a fire beneath central banks, financial regulators and politicians, because Facebook’s reach means Libra can be adopted globally very quickly. Although the consortium backing Libra has since lost prominent members, Alder said, “The Libra project has at least galvanized regulators across the world to look at the opportunities and the risks in digital assets. That is a complete change from the relatively relaxed attitude of last year.”
Instead, officials around the world realize they need a coordinated response involving many domestic authorities responsible for financial supervision, consumer protection, privacy, data, anti-money laundering and other functions – not to mention an international coordination.
“Libra and similar ideas have raised such fundamental issues about the digitalization and potential privatization of money that they’ve already inspired the beginning of a new global, multilateral approach,” Alder said.
The SFC’s plan
So the SFC is taking the initiative to generate progress on creating a structure to regulate crypto exchanges. There are dozens of these operating in Hong Kong; because there’s been no regulation to date, they all operate beyond any investor-protection compliance.
At last year’s Fintech Week, Alder announced regulation for brokers and fund managers, but this excluded the platforms where most people go to access or trade virtual assets.
The SFC is releasing terms and conditions for exchange operators to meet the traditional standards for trading venues around custody, market manipulation, KYC, AML and insurance, along with guidance on fitting these to blockchain, hot and cold wallets, protocol forks and airdrops.
But the new rules will still leave gaps, which require new legislation to address. Platforms that totally avoid listing or trading securities tokens can continue to avoid regulation. Nor will the SFC have the authority to take legal action against operators for market misconduct if they remain outside its supervision. “Essentially it’s a framework allowing a platform operator to opt in to regulation,” Alder said.
“This is just an interim measure…The game-changing proposals involving stablecoins are likely to be a catalyst for accelerated thinking on a globally consistent set of regulatory expectations.”