Legislation needed to validate SFC regulatory framework for crypto exchanges in Hong Kong

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The SFC’s new regulatory framework is a start, but legislation should be undertaken to substantiate these measures.

Photo: Bitcoin Blockchain Cryptocurrency by BeatingBetting.co.uk

The Security and Futures Commission (SFC) announced a new regulatory framework for cryptocurrency (a subset of the virtual assets class) trading platforms at Hong Kong FinTech week in November. 

This updated set of regulations covers main areas of concern such as investor protection, safe custody of assets, and AML/CFT requirements. One notable revision is that the SFC is now licensing exchanges under strict criteria to ensure security and prevent fraud. 

Jehan Chu, Co-founder and Managing Partner of Kenetic Capital, took this new set of rules with a positive outlook:

“[It] is a welcome guidance and clear path for institutional investors to enter the space,” he said, “and I think it will lead to a new generation of businesses operating under this framework.”

While these regulations are well-received, as it stands the framework does not hold power in the legal realm. Joshua Chu, ONC Lawyers’ Consultant specialising Technology Law, stated that these regulations come from the regulating body under the executive branch of the government, not the legislative branch.

“In order to have that legitimacy, you need legislation. Updating existing legislation such as the Security and Futures Ordinance to formally say what part of the govt should have control and jurisdiction over crypto-related matters – that needs to go through the Legislative Council.”

Dominic Wai, the partner in charge of emerging technologies and financial crime practice at ONC Lawyers, adds that there is a need to legally define cryptocurrency. 

“So far, under Hong Kong law there is no legal definition of cryptocurrency. The regulators have generally just considered it a commodity,” Wai stated.

As long as cryptocurrency is classified as a commodity, it will not be regulated by the HKMA.

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