HK securities watchdog launches public consultation over plans to allow licensed platform operators to serve retail investors

The Securities and Futures Commission (SFC) has launched public consultation over plans to allow retail investors in Hong Kong to purchase big-cap cryptocurrency tokens such as bitcoin and Ether, according to the latest consultation paper by The Securities and Futures Commission (SFC).

According to the an official release from The SFC, its proposed regulatory requirements for virtual asset trading platforms are based on the regulatory requirements of the existing regime under the SFC and are comparable to those for licensed securities brokers and automated trading venues. The SFC has also taken the opportunity to propose modifications to some requirements of the existing regime. The consultation period for the policy will end on 31 March 2023.

As part of the consultation, the SFC is seeking views particularly on whether to allow licensed platform operators to serve retail investors, and if so, the measures to be implemented in addition to the proposed range of robust investor protection measures, which include ensuring suitability in onboarding clients and token admission.

Currently, except for institutional and qualified corporate professional investors, an SFO-licensed platform operator is required to conduct knowledge assessments on investors before providing any services to them. Where a client does not pass the assessment, the operator may provide services to that client only after providing training to that client.

Under a new licensing regime to take effect on 1 June 2023, all centralised virtual asset trading platforms carrying on business in Hong Kong or actively marketing to Hong Kong investors will need to be licensed by The SFC. These platforms can only offer what The SFC regards “eligible large-cap virtual assets” to retail investors. Such tokens are included in at least two acceptable indices issued by at least two independent index providers. Investors will be allowed to trade liquid digital tokens, which will provide certain regulatory oversight and investor protections to once vibrant but unregulated cryptocurrency investment activities.

According to the consultation paper, exchanges can decide on what cryptocurrency tokens retail investors can trade and how much they can invest under the new regime. Platforms will also need to consider a range of general factors when selecting virtual assets to be made available for trading, such as the background of the management or development team of a virtual asset; the supply, demand, maturity and liquidity of a virtual asset; the technical aspects of a virtual asset; the marketing materials for a virtual asset issued by the issuer, amongst others. 

The platforms will also need to conduct knowledge assessments on investors before serving them. They should assess a client’s risk tolerance level and risk profile, accordingly determine the client’s risk profile and assess whether it is suitable for the client to participate in the trading of virtual assets, said the consultation paper. They should also set a limit for each client to ensure that the client’s exposure to virtual assets is reasonable, as determined by the platform operator, with reference to the client’s financial situation and personal circumstances. Such a limit should be reviewed regularly to ensure that it remains appropriate.

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“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle. In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed," said Julia Leung, the SFC’s chief executive officer.

The SFC added that, operators of virtual asset trading platforms which plan to apply for a licence should begin to review and revise their systems and controls to prepare for the new regime. Meanwhile, those which do not plan to apply for a licence should start preparing for an orderly closure of their business in Hong Kong.

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