Hong Kong to allow retail investors to participate in crypto trading

Hong Kong authorities will allow retail investors to trade cryptocurrency at government-licensed exchanges in a bid to develop the city as a digital-asset hub.

Starting June 1, the jurisdiction’s Securities and Futures Commission (SFC) will let individual investors trade crypto coins listed in at least two acceptable indexes from independent providers with experience in the traditional finance sector.

This new rule will be in effect at the same time as the implementation of a new licensing program for digital asset platforms. Hong Kong has established a voluntary licensing mechanism for crypto exchanges since 2019, but these exchanges could only service institutional clients with total asset values of at least HK$8 million ($1 million). Per June 1, only licensed exchanges can serve retail investors legally in Hong Kong.

The new framework aims to attract crypto firms into investing in Hong Kong’s crypto scene while at the same time protecting investors. The SFC implements safeguards, such as risk profiling, reasonable limits on exposure and knowledge tests on retail investors.

Eddie Yue, chief executive of the Hong Kong Monetary Authority, said crypto firms should expect a more conducive regulatory backdrop for the development of the sector.

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“We will let them create the ecosystem here and that actually brings a lot of excitement,” Yue said. “But that doesn’t mean light-touch regulation.”

Hong Kong officials expect a “boon” in the region’s economy as it deals with the aftermath of the COVID-19 pandemic and Beijing-imposed national security law. The city’s crypto sector used to thrive before the peak of crypto winter last year.

According to analysts, the high-profile collapse of the crypto exchange FTX last year further reduced risk appetite among investors. Financial regulators in Hong Kong pledged to “provide robust investor protection and manage key risks” by implementing the new regulation.

Analysts predict that Hong Kong’s new crypto regulation will attract mainland China’s investors looking to trade crypto, which is banned in their home country.

Bitcoin Association of Hong Kong co-founder Leo Weese said there is a “huge appetite” from Chinese crypto ventures to establish a presence in Hong Kong to attract the “lucrative” mainland Chinese market. Having a Hong Kong license will convince these investors about the safety of trading crypto.

Huobi and OKX, two major crypto exchanges founded in China, have announced that they will apply for Hong Kong licenses.

"It's not a full open-arm stance as they want to maintain financial stability while opting for financial innovation."

Cici Lu, Founder of Venn Link Partners

Venn Link Partners founder Cici Lu said Hong Kong’s new regulation is not a “full open-arm” to crypto because the authorities still aim to maintain financial stability. She said the approach is pragmatic and the application for a license may still be challenging.

Crypto regulations in other countries

The collapse of several crypto ventures last year prompted financial authorities around the globe to call for tighter regulations over the nascent sector, say analysts.

Recently, financial regulators in Malaysia ordered the Huobi Global platform to stop its activities in the country due to alleged illegal operations. Huobi claims that it has not operated in Malaysia since last year.

The Phillippines also said a non-U.S. derivatives trading platform initiated by Gemini Trust did not have proper permits to operate in the jurisdiction. Gemini has not responded to inquiries regarding the issue.

In the U.S., crypto investors say that financial authorities are conducting a “crackdown” on the industry. After the FTX collapse last year, lawmakers demanded that crypto companies follow standard regulations imposed on traditional financial firms.

Crypto proponents have argued that tough regulations on crypto by American authorities will drive more firms offshore. The community also says that it hinders innovation in the industry.

Earlier this month, the EU approved the first comprehensive rules on the sector, which are expected to roll out next year.