Thousands of exchange platform license thresholds reach the cloud or 5 platforms enter the Hong Kong Securities Regulatory Commission's sandbox

Source: 21st Century Business Herald

Author: Zhou scorching

The confrontation between the United States and Iran has escalated, and the price of Bitcoin has increased by more than 20% in just 5 days. After virtual assets return to the field of vision, re-examining the regulatory framework of the Hong Kong Securities and Futures Commission on virtual asset exchanges that has been in place for more than a year, what are the implications for the market?

On November 1, 2018, the Hong Kong Securities and Futures Commission issued new rules for investment in virtual assets such as digital currencies, and proposed to include virtual asset trading platforms in the regulatory sandbox management and then issue licenses. Many trading platforms in Hong Kong were struggling.

More than a year later, a reporter from 21st Century Business Herald learned from people familiar with the matter that up to now, no more than five digital asset exchanges have been included.

"They have all gone through a rigorous selection process, including the founder's exhaustive information." The person familiar with the matter said, "99% of the so-called world-class platforms you know are not on the list."

Thresholds for turning into a licensee

Hong Kong, China has less stringent regulations on digital assets and virtual currencies than the mainland, which is strictly forbidden, but more stringent than Japan, the United States and Singapore.

On November 1, 2018, the Hong Kong Securities and Futures Commission issued the "Statement on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators of Virtual Asset Portfolios" (hereinafter referred to as the "Regulatory Framework"), targeting virtual currencies such as virtual currencies. New rules on asset investment. This "Regulatory Framework" provides a platform for compliance for platform operators who are capable and willing to follow strict standards and practices, and distinguishes between those who hold a license and those who do not intend to apply for a license.

It is worth noting that the "Regulatory Framework" provides a path to becoming a licensed platform: First of all, in the initial stage, the Hong Kong Securities Regulatory Commission does not issue licenses to exchanges, but communicates regulatory standards (including anti-money laundering, anti-terrorism) to applicants. (Such as financing requirements) and the actual operation of virtual asset trading platforms; secondly, some exchanges are included in the regulatory sandbox of the CSRC, and based on the performance of these platforms in the sandbox, rigorous judgment is made as to whether they are suitable for the supervision of the CSRC , And then issue the license; finally, the license needs to enter the next stage of the sandbox, and the platform needs to report, be monitored and reviewed more frequently, so that they can develop strict internal control measures under the close supervision of the CSRC; 12 You can apply for withdrawal from the sandbox only after a few months.

On November 6, 2019, the Hong Kong Securities and Futures Commission issued a "Position: Regulating Virtual Asset Trading Platform", which mentioned that it would begin accepting license applications submitted by platform operators who are committed and capable of complying with expected licensing standards and ongoing ethics requirements .

It is worth noting that after many domestic virtual currency exchanges in China withdrew from the Mainland business, they moved to Hong Kong. Well-known names such as Huobi and OKcoin have already entered the world's forefront of business volume, but this does not mean that they can smoothly enter the list. As stated in the Regulatory Framework, "Some of the world's largest virtual asset trading platforms appear to be operating in Hong Kong, but are outside the scope of the SFC and any other regulatory agency."

The founder of a newly established exchange that is applying for a license, HKbitEX (Hong Kong Digital Assets Exchange), Gao Han, told a reporter from 21st Century Business Herald that the Hong Kong Securities Regulatory Commission has proposed the following conditions for exchanges seeking licenses, including: Not limited to these:

First, the main legal entity of the digital asset exchange must be registered in Hong Kong in order for Hong Kong residents and persons with assets in Hong Kong to trade here and be subject to the supervision of the Hong Kong Securities Regulatory Commission. Many companies claim to trade in Hong Kong, but in fact they do not necessarily have the conditions of registration in Hong Kong and an office in Hong Kong. Such problems have eliminated a large number of currency exchanges.

Secondly, the company's headquarters and decision-making power must be in Hong Kong. If an executive registers a shell company in Hong Kong and actually operates in Beijing, it is also non-compliant, which can also eliminate a number of license competitors.

Furthermore, the CSRC will also examine whether the shareholders of the exchange have experienced violations in traditional financial institutions or engaged in violations in the digital asset industry. There are also technical requirements, investor asset insurance requirements, and third-party auditing normative reports.

At present, there are not many companies applying for this license, and the Hong Kong Securities Regulatory Commission has not yet made the shortlist. In addition to the above five first batch statements, a virtual currency practitioner told reporters that he had heard that a company from the Hong Kong exchange HashKey Group was also applying.

A 21st Century Business Herald reporter found that the Hong Kong stock BC Technology Group (00863.HK) also announced in November last year that it was about to apply for this license.

The scale of Hong Kong regulation

Although in the second half of 2019, the central government brought the topic of "blockchain" back to the public eye, the attitude towards virtual currency has always been resolute.

In December 2019, Wang Xin, the director of the Research Bureau of the People's Bank of China and the secretary-general of the China Institute of Finance, stated in a public speech that private digital currencies are difficult to solve the problem of trust and therefore cannot be widely used. If folk digital currency is generated by an algorithm and there is no central issuer behind it, who will maintain the stability of folk digital currency and what the source of its value is, it is doubtful.

"Besides, it is difficult for private currencies to meet the needs of promoting economic development and maintaining financial stability. In order to maintain the needs of economic development, the supply and supply of money needs to be flexible. It should be adjusted flexibly as the economy develops. In the event of a crisis, once the liquidity of private institutions and financial markets suddenly dried up, there must be a unified institution such as the Central Bank to provide liquidity to the market. In this case, if private digital currencies dominate, private currencies are very popular It is difficult to play such a role, so it is difficult to adapt to the needs of modern economic development and financial stability. "Wang Xin said.

The earliest open position on digital assets was the Singapore Monetary Authority (MAS). In June 2016, the “Supervisory Sandbox” was launched to take proper supervision of ICO issuance, which needs to be filed and authorized in advance by the Monetary Authority. On August 1, 2017, we formally stated our position: First, we should clarify the exchange attributes of digital currencies; and then we emphasized that the products made up of digital credentials in ICOs that fall into the scope of the Securities and Futures Law, and the ICO process needs to be regulated by MAS .

Hong Kong, China has opened up the sandbox supervision of digital asset exchanges, which is more lenient compared to the mainland, but more stringent than Singapore.

In Hong Kong, exchanges need to have sufficient financial robustness to cope with risks such as theft or hacking. They must insure 100% of online virtual assets (hot wallets) in the platform and 95% of offline virtual assets (cold wallets). . Tokens that want an ICO need to be subject to trading restrictions in the first 12 months to prevent "cutting leeks".

According to the 21st Century Business Herald reporter, for the audit of digital asset exchanges, the supervision should be conducted by executives due diligence, and they will ask a lot about your customers (KYC), anti-money laundering (AML), and counter-terrorism financing (CTF) measures. The "Position Book: Supervising Virtual Asset Trading Platform" mentioned above involves detailed rules such as asset custody, KYC certification, market manipulation, compliance supervision, accounting and auditing, professional investor thresholds, and anti-money laundering. At the same time, it also issued a "Warning on Virtual Asset Futures Contracts", reminding the risks of virtual currency asset derivative transactions; and said that so far no one has obtained permission from the Securities and Futures Commission to sell or trade virtual asset futures contracts in Hong Kong.

In October 2019, the Hong Kong Securities Regulatory Commission issued the "Standard Terms and Conditions Applicable to Licensed Corporations Administering Investment Portfolios Invested in Virtual Assets." Specific requirements for compliance audits, combating money laundering and counter-terrorism.