Hong Kong are preparing to adopt 5 crypto exchanges into its sandbox

According to a report by a Chinese media, 21jingji read about five crypto exchanges have been added to Hong Kong’s regulatory sandbox.

Even though Hong Kong has less stringent regulations on digital assets and cryptocurrencies than the Chinese Mainland where is strictly prohibited, it is still more stringent than Japan, the United States, and Singapore.

On November 1, 2018, Hong Kong’s Securities and Futures Commission (SFC) enacted new regulations on virtual asset investment and proposed to add it to the regulatory sandbox management before giving licenses, for which numerous crypto trading platforms in Hong Kong were struggling.

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The regulation was called “Statement on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators of Virtual Asset Portfolios”. This “regulatory framework” provides a compliance path for platform operators who are willing to follow strict standards, practices and distinguish operators who hold licenses from those who do not intend to apply for licenses.

Details of Regulatory Framework

The “Regulatory Framework” provides a path to becoming a licensed platform, there are 3 steps:

  • Firstly, the Hong Kong Securities Regulatory Commission does not issue licenses to exchanges but communicates regulatory standards to applicants, such as financing requirements, the actual operation, anti-money laundering, and anti-terrorism.
  • Secondly, based on the performance of these platforms in the sandbox, CSRC will make a judgment to consider if they are suitable for its supervision and then issue the license.
  • Finally, these platforms need to report, be monitored and reviewed more frequently, so that they can develop strict internal control measures under the close supervision of the CSRC.

Before that, massive crypto exchanges in China moved to Hong Kong after withdrawing from the mainland. Some well-known platforms such as Huobi and OKEx have not entered the list. The “regulatory framework” also stated that though some of the world’s largest crypto asset trading platforms were being operated in Hong Kong, some of them are not regulated by the SFC or any other regulator.

The founder of a newly established exchange that is applying for a license, HKbitEX (Hong Kong Digital Assets Exchange), Gao Han, told that the SFC has proposed the following conditions for exchanges seeking licenses, including but not limited to these:

Firstly, the registration place of the main legal entity of the digital assets exchange must be in Hong Kong, so that local residents and people with assets in Hong Kong can trade here and be supervised by SFC. Many companies claim to trade in Hong Kong, but in fact, they do not necessarily have the conditions of registration and an office in Hong Kong. Such problems have eliminated a large number of currency exchanges.

Secondly, the company’s headquarters and decision-making power must be in Hong Kong. If an executive registers a shell company in Hong Kong and actually operates in Beijing, it is also non-compliant, which can also eliminate a number of license competitors.

In Hong Kong, an exchange needs to have sufficient financial stability in order to resolve risks such as theft or hacking. And these exchanges need to guarantee 100% for online crypto assets (hot wallet) in the platform and 95% for offline crypto assets (cold wallet).

Furthermore, the SFC will also examine whether the shareholders of the exchange have experienced violations in traditional financial institutions or engaged in violations in the digital asset industry. There are also technical requirements, investor asset insurance requirements, and third-party auditing normative reports.

Fex exchanges have applied for the license up to now

At present, there are not many companies applying for this license, and the Hong Kong Securities Regulatory Commission has not yet made the shortlist. In addition to the above first five exchange, there is a report that a company from the Hong Kong exchange HashKey Group was also applying.

Hong Kong stock BC Technology Group (00863.HK) also announced in November last year that it was about to apply for this license.

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