1/15

So as announced last night Hong Kong will be requiring cryptocurrency exchanges to pursue an SFC/SFO license.

Hong Kong is home to operations for the largest crypto exchanges (Huobi OKEx, FTX, BitMex and Binance)

So here is some unpacking on what the SFC license means.
2/15

First Licensing is divided into 10 categories including, securities, futures, forex, automated trading, and margin.

None of which were previously applied to 'virtual assets' as long as they were not considered to also be a security.
3/15

In 2019 HK SFC put out a position paper on virtual asset trading which was an opt-in framework.

It is however unclear if this position/framework is what is expected to now be mandatory after yesterdays announcement.
4/15

Previously they noted: "It is, however, important to make clear that the SFC has no power to grant a licence to or
supervise a platform that only trades non-security virtual assets or tokens"

Yet this position seems like it may have change.
5/15

HKs SFC has 10 license types covering margin, futures, securities, forex, automated trading, advising and asset management.

The hope is that any restriction on crypto exchanges would be a new license type.

Otherwise, exchanges would likely need to pursue multiple licenses
6/15

In their 2019 position paper they noted that "Virtual assets traded on the platform are not subject to the authorization or prospectus registration provisions"

Which is positive as it means teams won't face more cumbersome regional requirements in listing.
7/15

The big pain point in the SFC 2019 position paper was that platforms would only provide services to "Professional Investors" which I believe is someone with a net worth of more than $8M HKD.

This would be crippling to crypto as most of these exchanges cater to consumers.
8/15

Outside of that are standard licensing regimes, KYC/AML and supervisory regimes. But the professional investor clause is one that is even more restrictive than US crypto policy.
9/15

Their previous position paper also discusses the concerns of allowing 'futures' and 'automated trading' to exist - something that is yet another pillar of these major exchanges.
10/15

The KYC/AML, security requirements and supervisor requirements are straight forward. They may increase trade fees as it is operational overhead, but, its what we've come to expect from the industry.

It would remove these exchanges having a tier where their is no KYC/AML
11/15

Places like Binance who let you trade and withdraw certain amounts KYC free would really feel the sting - and it would prevent an US users from using VPNs - which I imagine is still quite a few.

Places like FTX who already have mandatory KYC wouldn't feel a sting.
12/15

In summary the HK SFC concern comes down to, will they keep with the 2019 framework and will all crypto activities be under the classic SFC Types 1-7 licenses, or will it be one new license?
13/15

Crypto futures and auto trading is in the cross-hairs, but, its access for general consumers that is the big risk.

Just like US accredited investor rules this shift could result in most users being cut off from diverse early stage crypto projects.
14/15

This sudden change likely seems from mounting pressure from Chinese influence in Hong Kong and concerns about crypto being used to get money out of China.
15/15

Hopefully Hong Kong has a more processive license type coming from crypto exchanges - otherwise they'll need to start looking and more processive jurisdictions (all which require licenses, but some which still allow their current style of operations)
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