Hong Kong's Crypto Rules: Good for Institutional Investors, Bad for Retail

David Drake

While the western world grapples with decisions concerning cryptocurrency and governance, the Asian community is forging ahead. Hong Kong’s Securities and Futures Commission (SFC) is not derailed by indecision. Just recently, the commission announced favorable regulations towards cryptocurrencies. The country’s financial agency unveiled a comprehensive list of rules in an unprecedented move that could see Hong Kong become a major hub for digital assets in future.

The new rules are geared towards controlling funds that invest in digital assets, and by extension, the platforms they use to trade. Companies engaged in retail services will be banned from using platforms that are strictly for professional investors. Also, a crucial element of the regulation is that funds have to be licensed by the SFC if they invest in excess of 10 percent of their portfolios in digital currencies. They are required to have insurance for almost all the funds they hold and have bank accounts in Hong Kong.

The Upside
Investors have been able to trade in Hong Kong for some time now, but the country has not been exempted from bad actors. The new rules will offer security to existing and potential investors now as both the Monetary Authority and the SFC have closed the regulatory gap.

According to Gary Cheung, President of the Securities Association in Hong Kong, the move will enhance investor protection and will encourage more people from the mainland to trade in digital assets in Hong Kong.

Cheung also believes this move will make Hong Kong one the leading cryptocurrency traders in the world since proper regulation is what is necessary to attract big players to the industry.

The Drawbacks
Only professional or institutional investors are allowed to trade or invest in digital assets. This limits how much business the country is likely to attract in the coming years. The decision to limit this service only to institutional investors is informed by the need to provide better protection. Fund managers are agencies that trade at least HK$8 million in digital assets and have at least two years of experience.

Ashley Adler, Chief Executive for the SFC said the aim is to promote responsible utilization of emerging technologies while providing investors with a range of choices as well as better outcomes.

However, the problem with institutional investors is that they are slow in investing in cryptocurrencies. Even in countries where regulation is loose, the negative events surrounding cryptocurrencies have been sufficient to keep them at bay. The market is fickle, and so are its players, and until it stabilizes, institutional investors will not be at the front of the pack.

The other potential downside is the fact that while crypto exchanges can be licensed by being thrown into the sandbox, they will only be able to do business with institutional investors.

Currently, exchanges do not need licensing to operate in Hong Kong because, according to the SFC, they do not have the financial authority to regulate events that are not related to “
securities” or “futures contracts”. On the one hand, a license would likely earn some attention from institutional investors, while on the other, these exchanges might lose other clients such as retail operators. Depending on the extent of the portfolios, exchanges might not place themselves inside the regulatory sandbox but will operate as they have before.

At the same time, none of the exchanges in Hong Kong has been qualify under the rules laid out by the SFC. Most operate with retail investors and none have lists of security tokens. For Leo Weese, head of the Bitcoin Association of Hong Kong, the sandbox is nothing more than “a cage that places unreasonable burdens on exchanges.”

Considering that licenses are not a requirement to trade in cryptocurrencies, the regulatory rules constructed by the SFC might turn out to be nothing more than an deal. If compliance isn’t mandatory, total investor security will remain an elusive goal.

   Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.