Regulatory strikes, the winter of the industry?
Editor’s note: This article comes from the strategic cooperation blockchain media “Odaily Planet Daily” (Public ID: o-daily, < a href="https://download.odaily.com/">APP Download)
At 17:00 this afternoon, Hong Kong’s financial regulator, the Hong Kong Securities and Futures Commission, issued Warnings about Virtual Asset Futures Contracts and ” Stand Book : Regulating Virtual Asset Trading Platform.
The Hong Kong Securities and Futures Commission Chief Executive Ashley Alder once said, “The framework will enable the virtual asset trading platform to be regulated by the Securities and Futures Commission. This is a major development. I proposed this direction at this time last year.”
The SFC said that so far, no one has been licensed by the SFC or approved to sell or trade virtual asset futures contracts in Hong Kong. In view of the risks involved in these contracts, the SFC is unlikely to grant licences or recognition for the operation of the relevant contracts in order to protect the investors.
Only supervising trading securities-based token platforms
The regulatory standards adopted by the CSRC for virtual asset trading platforms are similar to those of traditional licensed securities brokers and automated trading venues. These include: keeping assets safe, knowing your customers (KYC), combating money laundering and terrorist fundraising, market manipulation, accounting and auditing, and the windInsurance management, etc. The SFC will only grant licenses to standards-compliant platforms.
However, the document also states that the SFC does not have the authority to issue or supervise platforms that only buy or sell non-securities virtual assets or tokens. Because the virtual assets operated by these platforms are not in the category of “securities” or “futures contracts” under the Securities and Futures Ordinance, they are not regulated.
Of course, there are some platforms that may be hybrid, both securities and non-securities. However, as long as there is a token that belongs to securities, it is regulated by the CSRC.
In addition, for applicants for licences, the SFC requires that they be “appropriate candidates” or the SFC refuses to grant licences. When reviewing the platform operator’s application for a license, the SFC will consider the way in which the virtual asset trading platform operates its virtual asset trading business, especially if the operator complies with (or is willing and able to comply with) regulatory standards.
In addition, the SFC stipulates that platform operators can only provide their services to professional investors and ensure that their customers fully understand virtual assets. They must also establish strict inclusion criteria to screen virtual assets that are bought and sold on their platforms. In addition, the licensed platform will be included in the SFC Supervision Sandbox and will be subject to close and rigorous supervision during a period of time.
In addition to the above conditions, the SFC requires the platform operator to ensure that (or its associated entities) store 98% of the customer’s virtual assets in the cold wallet, and the hot wallet storage assets do not exceed 2%. Moreover, platform operators and their associated entities should minimize the transfer of assets from offline wallets that hold most of their virtual assets.
In the event of a hack, investors are often struggling to recover losses. The CSRC will require platform operators to ensure that the insurance they purchase is always effective. In addition, all hot wallet assets should be 100% guaranteed, and cold wallet storage assets should be largely protected, for example 95%.
At present, there are dozens of virtual asset trading platforms in Hong Kong. Due to the strict application standards set by the CSRC, the SFC expects that some platforms may decide not to apply for a license from the Securities and Futures Commission under the new regulatory framework.
The SFC said: This is their free choice as long as they can ensure that the virtual assets traded on their platforms are not “securities” or “futures contracts” under the Securities and Futures Ordinance.
Futures contracts are risky and illegal
With regard to futures contracts, the Hong Kong Securities and Futures Commission also issued a risk alert.
The virtual asset prices under virtual asset futures contracts are extremely volatile, and the highly leveraged nature of virtual asset futures contracts also doubles the risk faced by investors. In addition, the complexity and inherent risks of these products may be difficult for general investors to understand.
In addition, the platform for selling or trading virtual asset futures contracts involves manipulating markets and violating activities. The trading rules of the virtual asset trading platform may not be clear and fair, and some platforms may be changed.Changing trading rules, such as suspending a trade or canceling a trade, causes investors to suffer significant losses.
The SFC has suggested that the platform for selling or trading virtual asset futures contracts may be illegal in Hong Kong.
In Hong Kong, any trading platform or person who sells virtual asset futures contracts or provides trading services for virtual asset futures contracts without proper licensing or recognition may violate the Securities and Futures Ordinance (第571 Chapter) or the Gambling Ordinance (Chapter 148).
Depending on the form of the virtual asset futures contract, they may be considered as “futures contracts” within the meaning of the Securities and Futures Ordinance. Unless an exemption applies, any person operating a platform for the sale or trading of “futures contracts” must be licensed or endorsed under the Securities and Futures Ordinance. So far, no one has been licensed by the SFC or approved to sell or trade virtual asset futures contracts in Hong Kong. In view of the risks involved in these contracts, the SFC is unlikely to grant licences or recognition for the operation of the relevant contracts in order to protect the investors. Virtual asset futures contracts may also be interpreted as CFDs under the Gambling Ordinance.
People who violate the relevant provisions of the Securities and Futures Ordinance or the Gambling Ordinance may be prosecuted and will be subject to criminal sanctions upon conviction.
In addition, the SFC has repeatedly reminded investors that investing in virtual assets may expose them to a variety of significant risks, particularly lack of liquidity, high price volatility and potential market manipulation activities. As outlined above, these risks may increase further when investing in virtual asset futures contracts.
Regulatory guidelines have been issued: Only one fund is eligible?
In 2018, the Hong Kong Securities and Futures Commission also issued regulatory guidelines on cryptocurrency funds and exchanges, the “Declaration on the regulatory framework for management companies, fund distributors and trading platform operators for virtual asset portfolios”.
But Reuters research shows that only one year after the Hong Kong Securities and Futures Commission (SFC) announced preliminary provisions for encrypted investment funds, only one encryption fund met the relevant conditions, namely Diginex, which is based in Hong Kong.
Reuters said that in addition to Diginex, other funds are withdrawing from Hong Kong to “circumvent” the Hong Kong Securities Regulatory Commission. The study pointed out that although many companies are still applying for approval, they do not really intend to obtain a license, but only to make a surface effort. However, external factors with low volume are still there, including the potential legacy of the bear market, which may make the encryption fund cautious.
