Five Crypto Exchanges are Expected to Enter Regulatory Sandbox in Hong Kong

About five crypto exchanges have been included in Hong Kong’s regulatory sandbox, according to report by a Chinese media.

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

Hong Kong regulates digital assets and cryptocurrencies less strictly than the Chinese Mainland where is strictly prohibited, but more strictly than Japan, the United States and Singapore.

The regulation issued on November 1, 2018 provides a compliance path for platform operators who are willing to adhere to the strict standards, and distinguish operators who hold licenses from those who do not intend to apply for licenses.

Before that, a number of crypto exchanges in China moved to Hong Kong after withdrawing from Chinese mainland. The well-known ones such as Huobi and OKEx haven’t entered the list. As stated in the regulatory framework, “Though some of the world’s largest crypto asset trading platforms are operated in Hong Kong, but are not regulated by the SFC or any other regulator.”

SFC gives the following limitations on crypto exchanges which asking for licenses, including but not limited to:

First of all, 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 exchanges claim to trade in Hong Kong, but in fact, they do not have the conditions to be registered in Hong Kong. So that a large number of crypto exchanges are eliminated.

Second, the company’s headquarters and decision-making power must be in Hong Kong. If the executives register an empty shell company in Hong Kong and actually operate in Beijing, it is also not compliant.

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

Moreover, SFC will also examine whether the shareholders of the exchange have any experience of violating the rules in traditional financial institutions or in the crypto asset industry. In addition, there are technical requirements, investor asset insurance requirements, and third-party audit standard reports.

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