Crypto Exchange Sandbox Proposed By Hong Kong Securities Watchdog

News, Regulation | November 1, 2018 By:

Hong Kong’s Securities and Futures Commission (SFC) has propsed a “sandbox” approach in regulating cryptocurrency exchanges in the country.

Speaking at the Hong Kong Fintech Week 2018, SFC chief executive Ashley Alder said a sandbox approach will allow them to discover if it would be appropriate for crypto exchange operators to be regulated. He said that crypto exchanges that want to be regulated will be set apart from those that don’t, adding that in the “sandbox” stage no formal regulatory approval will be given to any exchange.

A sandbox typically allow companies to carry out research and test financial products in a limited setting and under the auspices of regulators.

“This is essentially an opt-in approach for exchanges and platform operators, and they will first explore the conceptual framework with us in a strict sandbox environment,” Alder said. “If, and only if, we decide at the Sandbox stage that we should regulate, we would consider granting a license. The platform would then be subject to intensive reporting and monitoring to ensure that strict internal controls operate as expected and investor interests are protected.”

In a separate announcement, the SFC said that it will bring crypto funds under its securities regulations to improve investor protection. Under the new rules, funds that invest more than 10 percent of their assets in cryptocurrencies will need to be licensed by the SFC. It will ban retail investors from buying into crypto funds and trading them on platforms. Crypto funds will be limited to professional investors, those with at least HK$8 million ($1M USD) in investment assets and two years of experience.

Jehan Chu, managing director of the Hong Kong-based crypto investment firm Kenetic Capital, said the move comes after the SFC had reached out to the industry, seeking feedback and insights.

“We are happy to see the SFC taking concrete steps to provide clarity and guidance around digital asset management, distribution of fund interests and trading platforms, which shows that the SFC is willing to support the growth of the crypto and blockchain eco-system in a safe and sustainable manner,” Chu said.

Gary Cheung, chairman of Hong Kong Securities Association, said that the new rules will boost investor protection and hence attract more mainlanders to trade cryptocurrency assets in Hong Kong.

“This will help Hong Kong to be among the top cryptocurrency trading centres worldwide because proper regulation is very important for attracting the big players,” Cheung said.