Hong Kong SFC to Establish ‘Consultative Panel’ for Licensed Crypto Exchanges

The Hong Kong Securities and Futures Commission (SFC) plans to create a consultative panel for licensed cryptocurrency exchanges in the city next year, said Eric Yip, the SFC’s Executive Director, Intermediaries.

Speaking at Hong Kong Fintech Week on Oct. 28, Yip said the panel will include representatives from each licensed exchange and would build community transparency and shared responsibility among licensees.

“We expect the panel deliberation will result in a comprehensive virtual assets white paper that outlines the development roadmap for products and services, as well as potential enhancement in compliance and risk management,” he said.

The move will be part of the city’s effort to establish a comprehensive framework for digital assets, which includes upcoming legislation for OTC trading and stablecoins.

Earlier this year, Hong Kong brought in a new licensing regime for virtual asset trading platforms. Three are currently licensed in the city and Yip said the SFC was currently processing the application of another 14, 11 of which have pre-existing businesses in Hong Kong. He added that he expected more licenses to be granted by the end of this year.

But Yip also cautioned that while virtual assets were at the forefront of the agenda for financial regulators globally, investors still need to be protected through regulation and education.

In the first half of this year, HK$1.5 billion ($193 million) was lost to investment fraud in the city, while fraud and scams accounted for almost half of reported crimes, according to a police statement. It did not publish results on how many of these cases involved cryptocurrency but figures from 2023 show that crypto-related fraud accounted for more than half of investment fraud losses.

“At the SFC, we firmly believe the future of virtual assets lies in a regulated marketplace that balances its development with investor protection. We do not need to reinvent too many wheels, as our experience in securities regulation lays a strong foundation,” Yip said.

He called for greater cooperation between different regulators around the world to prevent exchanges from playing “regulatory arbitrage”.

Yet it is proving to be a challenge. Some of the biggest exchanges globally have dropped out of the Hong Kong licensing application process, including OKX, HTX and a local Binance-backed exchange.

The small amount of tokens available on licensed exchanges and the lack of complex financial products mean retail traders are continuing to use overseas exchanges not licensed in Hong Kong. Without mentioning this issue explicitly, Yip said that regulators needed to stay on their toes to keep up.

“If virtual asset liquidity still resides in unregulated VATPs after all our efforts, and regulated entities cannot operate a sustainable business model, then we need to reflect on why investors didn’t pick our state-of-the-art regulatory framework,” he said.

“In short, we need to listen to the market and balance between regulatory perfection and market development.”

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