As published on forkast.news, Friday 19 February, 2021.
The Hong Kong government is pushing forward a legislative proposal to ban retail investors from trading crypto and require all virtual assets trading platforms to obtain licenses to operate in the territory — a prospect that crypto industry insiders say will cause Hong Kong to lose competitiveness in the crypto space.
The legislative proposal, introduced by Hong Kong’s Financial Services and Treasury Bureau in November last year, recently completed a three-month consultation with the industry and members of the public. The proposal will now turn into a bill and possibly become law later this year.
The proposed law would require virtual assets services providers — including crypto exchanges, custody services providers and virtual assets financing services — to apply for a license from the Securities and Futures Commission (SFC). It also would require all virtual assets service providers who want to apply for the SFC license should serve “professional investors only.”
Industry insiders say that the proposed restrictions on crypto trading, if it becomes law, could make companies and fintech talent lose interest in Hong Kong and move to more crypto regulation-friendly shores.
“The industry is still in its early stage of development and regulators should allow more open space for innovation and entrepreneurship,” said Flex Yang, CEO at Babel Finance, a Hong Kong-based crypto asset management firm, told Forkast.News. “Limiting crypto trading opportunities only to professional investors risks losing market competitiveness for Hong Kong in comparison to other markets such as the U.S., U.K. and in particular Singapore.”
Global Digital Finance (GDF), a not-for-profit industry association with over 300 members, including Coinbase, EY and the London Stock Exchange Group, warned in a letter that the proposed regulation could inhibit innovation and hinder the competitiveness of the Hong Kong financial market in the virtual assets business. The industry association also asserts the limitation to professional investors goes beyond the Financial Action Task Force (FATF) recommendations and could increase the risk of money laundering, as retail investors could switch to unregulated exchanges.
But Hong Kong’s Financial Services and the Treasury Bureau disagrees with that assessment. The bureau says that it is a member of the FATF — the inter-governmental body that sets international standards for combating money laundering and terrorist financing — and that it developed the proposal in accordance with the FATF’s recommendations.
The proposed rule states that it would “empower the SFC to decide the requirements of licensing conditions of virtual assets service providers.” One of the requirements included “professional investors only” at the initial stage. It further states, “the SFC will continue to monitor the market and reconsider its position as the market becomes more mature in future”.
A professional investor means an individual or corporation having a portfolio of not less than 8 million HKD, or about US$1.03 million. But only about 7% of the territory’s population would have enough money to qualify as “professional investors” and the remaining 93% would be banned from trading crypto under the proposed rule, according to the South China Morning Post.
“We will certainly consider applying for a license.” Lennix Lai, director of financial markets of cryptocurrency exchange OKEx, told Forkast.News. “This would definitely be beneficial given the increased participation of institutional investors in the space.”
But the SFC should consider allowing retail investors to trade as well, as cryptocurrency can democratize investing and provide inclusive financing to everyday people, Lai said. “After all, cryptocurrency is the hottest alternative asset right now and shouldn’t be exclusively available to the wealthy.”