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The licensing threshold for trading platforms is high, or five may enter the SFC's sandbox

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What are the market implications of reviewing the SFC's regulatory framework for virtual asset exchanges, which has been in place for more than a year?

Title of original text: "high licensing threshold for coincircle exchange or 5 platforms entering SFC sandbox"
The 21st century business report

The price of bitcoin has risen more than 20 per cent in just five days amid an escalating stand-off between the us and Iran. What are the implications for the market of re-examining the SFC's regulatory framework for virtual asset exchanges, which has been in place for more than a year?

On November 1, 2018, the securities and futures commission of Hong Kong issued a new regulation on investment in digital currencies and other virtual assets, proposing to include virtual asset trading platforms in the regulatory sandbox for re-licensing.

More than a year later, the 21st century business herald has learned from people familiar with the matter that no more than five digital asset exchanges have been included so far.

"They went through a very rigorous screening process, including the founders' due diligence information, which was very thick and thick." "99 percent of the so-called world class platforms you know about don't make the list," the person said.

Threshold for becoming a licensee

Hong Kong's regulations on digital assets and virtual currencies are less stringent than those of the banned mainland but more stringent than those of Japan, the us and Singapore.

On 1 November 2018, the SFC issued the "statement on the regulatory framework for virtual asset portfolio management companies, fund distributors and trading platform operators" (hereinafter referred to as the "regulatory framework"), issuing new regulations on investment in digital currencies and other virtual assets. The regulatory framework provides a means of compliance for platform operators who are able and willing to adhere to strict standards and practices, and distinguishes between those who hold licences and those who do not intend to apply for them.

It is worth noting that the regulatory framework provides a path to becoming a licensed platform: first, in the initial stage, the SFC does not grant licences to exchanges, but communicates with applicants about regulatory standards (including anti-money laundering, anti-terrorist financing and other requirements) and the real operation of virtual asset trading platforms; Second, some exchanges will be included in the regulatory sandbox of the CSRC, and based on the performance of these platforms in the sandbox, the suitability of these platforms to be regulated by the CSRC will be judged rigorously, and then licences will be issued. Finally, getting a licence will take them to the next phase of the sandbox, where platforms need to be reported more frequently, monitored and scrutinised so that they can develop strict internal controls under the close supervision of the SFC; Apply for withdrawal from sandbox after 12 months.

On 6 November 2019, the SFC issued its position paper on regulating virtual asset trading platforms, which stated that it would begin to accept applications for licences from platform operators who are committed to and capable of complying with the expected licensing guidelines and the continuing conduct requirements.

It is worth noting that a number of Chinese exchanges have moved to Hong Kong after exiting their mainland operations. Well-known ones such as huobi and OKcoin have entered the global forefront in terms of business volume, but this does not mean they can enter the list smoothly. As the regulatory framework notes, "some of the world's largest virtual asset trading platforms appear to operate in Hong Kong but are outside the purview of the SFC or any other regulator."

Gao han, founder of HKbitEX (Hong Kong digital asset exchange), a newly established exchange that is applying for a license, told 21st century business herald that the SFC requires the following conditions for an exchange seeking a license, including but not limited to:

First, the main legal entity of the digital asset exchange must be domiciled in Hong Kong so that local residents and people with assets in Hong Kong can trade there and be regulated by the SFC. Many companies claim to trade in Hong Kong, but don't necessarily have the domicile or office in Hong Kong, and such problems eliminate a large number of currency exchanges.

Second, the company must have its headquarters and decision-making power in Hong Kong, where an executive registered a shell company that actually operates in Beijing is not compliant, which can weed out a host of licence contenders.

In addition, the SFC will examine whether exchange shareholders have any experience of violating rules at traditional financial institutions or working in the digital asset industry. There are also technical requirements, investor asset insurance requirements, and third party audit specification reports.

The SFC has yet to publish a shortlist of companies that have applied for the licence. In addition to the first five mentioned above, one virtual currency practitioner told reporters he had heard of a company from the HashKey Group, a Hong Kong exchange, applying.

21st century business herald reporter found that the Hong Kong stock BC technology group (00863.hk) in November also announced the upcoming application for this license.

The scale of hong kong-style regulation

Although the central government brought the issue of "blockchain" back into public view in the second half of 2019, its attitude towards virtual currency has always been resolute.

In December 2019, wang xin, director of the research bureau of the people's bank of China and secretary-general of the China institute of finance, pointed out in a public speech that private digital currency is difficult to solve the problem of trust, so it cannot be widely used. If private digital currency is generated by an algorithm without a central issuing body behind it, who will maintain the stability of private digital currency and what is the source of its value are in doubt.

"In addition, the folk money is hard to meet the needs of promoting economic development and maintaining financial stability. In order to maintain the needs of the development of economy, the supply of money supply and needs to have flexibility, it should be flexibly adjusted along with the development of the economy, when a crisis, when private institutions and financial market liquidity suddenly dries up, be sure to have such a unified central bank institutions to provide liquidity to the market. In this case, if digital currency occupy the main position of folk, folk money is hard to play such a role, so it is difficult to adapt to the need of modern economic development and financial stability." Wang Xin said.

The first to take an open stance on digital assets was the monetary authority of Singapore (MAS), which launched a "regulatory sandbox" in June 2016. Icos are properly regulated and require prior filing and authorisation with the monetary authority. On August 1, 2017, China officially stated its position: first, to clarify the exchange nature of digital currency; Furthermore, it is emphasized that the products constituted by digital credentials in icos fall within the management scope of securities and futures law, and the ICO process needs to be supervised by MAS.

China's Hong Kong has opened up its digital asset exchange to sandbox regulation, more lenient than on the mainland but more restrictive than Singapore.

In Hong Kong, the exchange needs to be financially robust enough to cope with risks such as theft or hacking, by insuring 100 per cent of the platform's online virtual assets (hot wallets) and 95 per cent of its offline virtual assets (cold wallets). Tokens that want icos are subject to trading restrictions for the first 12 months to prevent leeks from being cut.

According to 21st century business herald, the review of the digital asset exchange requires executive due diligence, and many questions will be asked about measures to understand your clients (KYC), anti-money laundering (AML), and anti-terrorism financing (CTF). The position paper mentioned above: regulating virtual asset trading platform involves detailed rules on asset custody, KYC certification, market manipulation, compliance supervision, accounting and auditing, professional investor threshold, anti-money laundering and so on. At the same time, it also issued a warning on futures contracts of virtual assets to warn of the risks of derivatives trading of virtual currency assets. It said no one had yet received permission from the SFC to sell or trade futures contracts on virtual assets in Hong Kong.

In October 2019, the SFC issued the standard terms and conditions applicable to the management of a licensed corporation investing in a portfolio of virtual assets. From the perspective of a virtual asset fund management company, the SFC proposed specific requirements for corporate qualification, risk management, compliance audit, anti-money laundering and counter-terrorism.

Source:http://www.21jingji.com/2020/1-9/yMMDEzODBfMTUyNTkyMg.html