New regulatory guidelines for cryptoexchanges

November 14, 2019   Bitcoin

The need for a functional regulatory framework that would properly address digital currencies has been stronger than ever in countries around the world. While many governments and their regulators have been working on developing such regulations, some have had more success than others.

Hong Kong's financial regulator, the SFC (Securities and Futures Commission), for example, recently announced a new licensing scheme for digital currency exchanges. The new guidances were published only yesterday, November 6th, and according to the SFC, it is not that different from the scheme that was introduced earlier, and that was created for security brokers.

What do the new regulations require?


The regulator also announced that the new scheme must be applied for every exchange that features at least one token that is confirmed to be a security. As for the content of the regulations, the SFC stated that it details how the exchanges must approach compliance, custody, and alike. Special attention was also dedicated to AML (Anti-Money Laundering) and KYC (Know Your Customer) rules.

According to the paper, platform operators must comply with the KYC requirements, which were brought for all licensed corporations of this type. That includes taking steps to establish the identity of each client, and confirm that the identity is true. Furthermore, exchanges must also establish the clients' financial situation, investment objective, as well as investment experience.

As for the new conditions, exchanges can only offer their products to investors who are considered 'professionals.' Meanwhile, new products can be offered only after the exchange receives official approval from the regulator. The same is true for any changes made in regard to existing products.

Next, exchanges must also have an independent auditor, which would hold annual audits and report on the exchanges' activities. However, the SFC also requests that the auditor makes monthly reports that would be sent for review, as well.

The new rules do not stop there, however, as the regulator also decided that hot (online) wallets used by the exchanges must not contain over 2% of the total funds held by the exchange. Also, all of the exchange's assets have to be insured, so that the funds would be protected if the exchange suffers a hacking attack or a security breach.

The SFC also added a part that states that the regulator will not grant a license to platforms that provide only a direct P2P marketplace for investors' transactions. These platforms typically allow investors to remain in control over their own funds, including fiat and cryptocurrencies. Such platforms' licensing applications will not be accepted, at all.

Hong Kong continues to regulate the crypto space


Hong Kong's SFC has been busy this year when it comes to the creation of various new rules and guidance. Apart from these rules, as well as those for brokers, the regulator also published guidelines on STOs (Security Token Offerings). These rules were published back in March 2019, and they were meant to bring clarity in terms of regulatory and legal requirements.

Back then, the regulator's statement read that security tokens are likely to be 'securities' under the SFO (Securities and Futures Ordinance), meaning that they have to follow securities laws that are enforced in Hong Kong.

Author: Ali Raza for Crypto-Rating.com
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