Does HK’s proposed retail trading ban spell good or bad news for its crypto market?

Retail investors in Hong Kong may soon be barred from trading crypto, while exchanges must have licences

Copper

It appears that the UK’s decision back in October to limit crypto access to retail investors has caught the eye of policymakers in Hong Kong.

Earlier this month at the Hong Kong FinTech Week, the city’s financial markets regulator, the Securities and Futures Commission (SFC), announced new rules that, if green-lighted, could bring the curtain down on retail crypto trading for its citizens.

Under the new framework, it would be mandatory for all cryptocurrency platforms operating in the region, or those targeting its citizens, to obtain a license from the SFC – changing its previous ‘opt in’ approach.

The proposed rules also stipulate that licensed exchanges must provide services to professional investors only, and have an insurance policy to protect clients in case assets are lost or stolen. Such investors are defined by Hong Kong regulators as those who hold assets worth over 8 million Hong Kong dollars, equivalent to over $1 million.

The new licensing rule would match requirements of the Financial Action Task Force (FATF), of which Hong Kong is one of more than 200 member jurisdictions. Since last year, the international anti-money-laundering organisation has insisted for all its members to introduce compulsory licensing or registration for crypto exchanges.

Markets just for the institutions?

The immediate feedback from the global crypto community appears to be a mixed bag.

Some market commentators believe that these laws could spell good news for the crypto industry overall, given that Hong Kong would be increasing compliance with the FATF rule. However, concerns remain that the new framework may hurt cryptocurrency businesses in Hong Kong and impact its status as a thriving crypto hub.

Even more worryingly, the measures within the new framework may simply push disgruntled retail investors on to less regulated offshore platforms (via VPNs), while promoting inequality by concentrating return opportunities to those that have financial power.

Another possible outcome could be institutional-grade digital asset exchanges emerging in the city, potentially run by its incumbent traditional banks. Singapore’s DBS, one of the largest banks in Southeast Asia is already believed to be setting up a cryptocurrency exchange. Could a similar scenario play out in Hong Kong, perhaps?

Jonathan Tse, Head of Trading at Copper believes that such onerous regulation may trigger consolidation in the market.

He commented: “The stricter licensing regime is likely to lead to consolidation in the industry as some trading platforms that can’t satisfy the licensing requirements and related compliance costs exit the Hong Kong market.”

Jonathan also remarked that while the proposed regime may seem like a blow for retail investors, when it comes to digital assets, regulators have good reason to think about investor protection.”

“Retail investors have been the force behind much of cryptocurrency’s rise, especially throughout 2017, so naturally many are now responding angrily to the proposed rules. However, in light of all the recent troubling news concerning crypto exchanges, my view is that Hong Kong’s move to professionalise this market and restrict it to institutional investors could be encouraging for the sector.”

“The license requirement creates a high entry barrier for the firms, but it also means greater credibility. I suspect that only once the regulated exchanges are established and operational, Hong Kong’s cryptocurrency market can then open itself up to a much broader audience.”

Hong Kong is certainly not alone in looking to regulate cryptocurrency firms. Toeing the correct regulatory line that strikes a balance between investor protection and market development has suddenly become an overriding concern for regulators all across the world. Singapore is in the process of bringing in licensing for digital asset firms while Japan’s Financial Services Agency already licenses 23 cryptocurrency exchanges.

Hong Kong Financial Services and Treasury Bureau has already issued a consultation paper which runs until 31 January 2021 to collect views on the proposed rules. The bill to bring the new regime into effect will likely be introduced to Hong Kong’s Legislative Council in 2021.

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