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Hong Kong-based crypto exchanges offering security token trading now required to acquire SFC license

Hong Kong has recently bolstered its crypto regulation, releasing a position paper that requires crypto exchanges to acquire an SFC license if they’re offering trading services in security tokens.

Image via James Cridland (Flickr)

Thu, 07 Nov 2019, 04:18 am UTC

Hong Kong has just added more restrictions on crypto businesses in a bid to not only protect investors from illicit actors but to strengthen the foundation of the country’s regulation. Hong Kong’s watchdog released a position paper yesterday, Nov. 6, explaining that crypto trading platforms will be treated similar to traditional brokers if these platforms offer trading in security tokens.

Any businesses that fall within this category will be governed by the authority of the Securities and Futures Commission (SFC). The paper outlines that any exchanges dealing with security tokens will need to acquire a license from the regulatory body to be able to conduct activities in Hong Kong.

"Licensed platforms will also be placed in the SFC Regulatory Sandbox for a period of close and intensive supervision," it said.

Under this new regulation, businesses are required to offer their services to professional investors only and provide insurance protection to clients in the event of hacking. What’s more, providers need to get the green light from the SFC if they wish to change their product or services. The business is also mandated to partner with an independent auditing firm that will monitor and report its activities on an annual basis, CoinDesk reported.

A thorough background check

With criminals using crypto exchanges to conduct illegal activities like money laundering and terrorist financing, the SFC underscored the importance of providers to stringently do a background check for every customer that it’s dealing with. Here’s what the paper has to say about this front:

“A platform operator should comply with the KYC (Know-Your-Client) requirements which are applicable to a licensed corporation. It should take all reasonable steps to establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience, and investment objectives,” the paper read.

The exempted crypto platforms

Platforms that are exempted from needing to acquire an SFC license are those that offer products that are not defined as security. Ashley Alder, chief executive of Hong Kong's Securities and Futures Commission (SFC), said that crypto exchanges have been operating relatively freely in the country as the products they offered aren’t technically securities. That all changed when the SFC scrutinized these platforms and found that some fall on the agency’s jurisdiction, The New York Times reported.

Meanwhile, the SFC has also issued a warning on virtual asset futures contracts. At the moment, it said that no platform offering trading services in crypto futures contracts has been given the thumbs up. Any businesses that will offer such products to unsuspecting clients will be answering to authorities and will be fined accordingly.

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