Feb 21, 2023

SFC Seeks Public Feedback on Cryptocurrency Exchange Licensing Regime

The Securities and Futures Commission (SFC) of Hong Kong has put forward a proposal for a licensing regime for cryptocurrency exchanges, which is set to take effect in June 2023. The public is now invited to provide feedback on the proposed regulations, with investor protection being a key consideration.

In a statement, SFC CEO Julia Leung explained that the proposed requirements are based on existing prerequisites for licensed securities brokers and automated trading venues. However, modifications have been made to some of these requirements in light of the “recent turmoil” in the cryptocurrency market.

Any person or business providing cryptocurrency-related services must apply for a license from the SFC. This includes a number of prerequisites, such as safe custody of assets, Know Your Customer, conflicts of interest, cybersecurity, accounting and auditing, risk management, Anti-Money Laundering/counter-financing of terrorism and prevention of market misconduct.

Businesses that intend to continue operating and applying for a license are encouraged to review and revise existing systems and controls to meet the requirements of the upcoming regime. Those that don’t intend to apply for a license will need to prepare to close down their businesses in Hong Kong.

The SFC also intends to publish and maintain a list of licensed cryptocurrency exchanges and service providers to inform the public of the registration statuses of different firms.

The proposal includes allowing retail access to licensed cryptocurrency trading platforms. Currently, the Securities and Futures Ordinance (SFO) regime has been in place since 2018 and restricts SFO-licensed platforms to serving professional investors.

Feedback from the public has highlighted the belief that denying retail access to cryptocurrency markets may result in investor harm, as individuals may be pushed to trade on unregulated overseas platforms.

The SFC has taken steps to facilitate gradual retail investment to limited cryptocurrency asset exposure. In October 2022, the SFC authorized a regime for cryptocurrency futures exchange-traded funds, giving retail investors indirect access to these markets through regulated products.

Meanwhile, a number of licensed brokers and fund managers have begun offering cryptocurrency-related services to investors under the SFC’s supervision. This has been another factor in the SFC’s decision to allow all types of investors to have access to cryptocurrencies through licensed platforms from June 2023.

NFTs have seen a surge in popularity in recent years, and the web3 space is no exception. Crypto-based projects are leveraging NFTs in various ways, from promoting their projects to selling unique digital assets.

As such, NFT marketing has become a popular tool for web3 projects. NFT marketing agencies have emerged to help projects promote their NFTs on social media platforms like Twitter, and web3 agencies are offering services to help projects sell their NFTs.

Ultimately, the SFC’s proposed licensing regime for cryptocurrency exchanges is an important step in the evolution of the web3 space. It will help to ensure investor protection and ensure the legitimacy of the industry. With the public consultation window now open, the industry awaits the outcome of the SFC’s proposal.

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