Hong Kong's SFC regulatory framework: the positives vs the negatives

David Drake

Global popularity of cryptocurrencies is undisputable. However, differences in the way digital assets are handled and the disparities across crypto exchanges have been on the rise, making it necessary for countries to develop regulations. In Hong Kong, the Securities and Futures Commission (SFC) intends to regulate the crypto market to prevent possible digital currency fraud.

Just recently, Hong Kong’s SFC stated that it will introduce new governing rules and course of actions for the crypto market. Specifically, the regulator intends to focus on digital currency exchanges and funds operations. The SFC observed that current rules do not consider digital assets as securities or future contracts and are therefore not regulated by it. This means that those dealing in digitals assets are prone to insecurities.

Due to this, the SFC resolved to safeguard investor assets by including them in the regulations. In the new regulations, those dealing and handling cryptocurrencies will be required to acquire licenses from the SFC.

The Positive
SFC’s intended regulatory framework could have more positive outcomes than negative ones. The basic nature and features of digital assets make them unpredictable and their price variations unstable. Virtual assets are also susceptible to illegal activities and online security challenges such as fraud, money laundering, financing terror activities and theft.

By licensing operators, Hong Kong is likely to increase investor confidence. This will attract more investors and entrepreneurs to the country as well as safeguard their interests through monitoring of digital asset movements. The possibility of theft, fraud and illegal transactions will be greatly reduced.

As such, the new guidelines will enable SFC to oversee the running or distribution of digital asset funds. This is critical in safeguarding the interests of investors at both levels of management and distribution based on the choice of investors.

The SFC aims to promote better utilization of the latest technology, ensure investors have additional choices and improve results when dealing with digital assets. With these regulations, the country will be able to boost the cryptocurrency industry while providing assurance and transparency to industry players.

The Negative
The proposed regulations are also likely to have negative consequences. Determining which digital assets will be considered for regulation might pose a challenge and hinder development of the cryptocurrency industry.

At the same time, Hong Kong's regulations may be too stringent for some crypto companies and could discourage them from conducting business in the country. Also, strict rules may create an opportunity for peer-to-peer transactions, which will likely limit the growth and expansion of the cryptocurrency industry.

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