Hong Kong strives to strike a balance in regulating retail crypto trading

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28th May 2023 – (Hong Kong) Hong Kong is set to become a hub for cryptocurrency trading as regulators introduce new rules allowing retail investors to buy popular cryptocurrencies like Bitcoin at government-licensed exchanges. The move is designed to bolster the city’s economy, which has been hit by the pandemic, social unrest and the impact of a Beijing-imposed national security law. The rules will also make Hong Kong a key route for mainland Chinese investors seeking to trade cryptocurrencies, which are outlawed in China. Although global crypto markets have suffered a series of high-profile failures in recent months, Hong Kong regulators hope to attract firms with favourable business conditions while balancing the need for investor protections.

Hong Kong’s voluntary licensing system for crypto trading platforms since 2019 had restricted licensees to servicing professional clients with portfolios of at least HK$8m (US$1m), while retail investors had to rely on offshore websites or brick-and-mortar shops. The incoming rules will be mandatory and require all exchanges doing business in Hong Kong to get licensed, providing more clarity and safety standards for investors.

Hong Kong is racing regulators worldwide to establish ground rules for cryptocurrencies, which still have a global market capitalisation of over $1tn despite their crashes. The European Union recently approved the world’s first comprehensive rules on the sector, and the International Organisation of Securities Commissions proposed its recommendations shortly afterwards. In contrast, China has maintained a strict ban on cryptocurrencies since 2021, while Hong Kong, with financial regulations separate from the mainland, is seen as a gateway to the lucrative mainland market for China’s crypto businesses and investors.

The new regulations will only allow exchanges to provide “large-cap virtual assets” like Bitcoin and Ethereum to retail investors, and they must set up internal committees to decide which cryptocurrencies to offer. Retail clients will also have to undergo knowledge tests and risk profiling before they can trade, although it remains unclear what level of knowledge is deemed enough. Stablecoins and crypto derivatives are off-limits for retail investors for the time being.

As the memory of FTX’s collapse still lingers, Hong Kong regulators aim to “provide robust investor protection and manage key risks” with the new rules. HashKey and OSL, the two existing licensees, will apply for fresh licences and grow their retail presence, while major crypto exchanges like Huobi and OKX, both founded in China, have announced plans to apply for a Hong Kong licence. Hong Kong regulators hope to issue the first licences quickly and believe that the new regime will provide much-needed clarity and safety standards for investors while making Hong Kong a leading digital asset hub.