What Does New Hong Kong Licensing Regime Mean for Crypto?

Hong Kong’s new cryptocurrency licensing regime is set to begin today, June 1st, 2023. Under the new rules, retail traders will be able to trade larger-cap cryptocurrencies, with high liquidity. Crypto providers, including exchanges, will be able to apply for a license to operate in Hong Kong.

In summary:

• Retail investors in Hong Kong will have access to certain cryptocurrencies with large market caps and high levels of liquidity.
• While the SFC will not publish an exhaustive list of large-cap cryptocurrencies eligible for trading, they should be listed on at least two acceptable indices, which are independent of each other. One of these indices should also comply with the IOSCO Principles for Financial Benchmarks.
• All trading platforms and exchanges will be required to apply for a license, failure of which could result in fines and potential jail terms for non-compliance.
• Trading platforms licensed under the new Hong Kong crypto regime will be expected to carry out “reasonable due diligence” before listing a cryptocurrency on the exchange for retail investors.
• Exchanges will also have to provide a number of disclosures. These include any affiliation the exchange has with the issuer or development team of a cryptocurrency they list on the exchange.
• Exchanges must hold 50% of cryptocurrency in cold storage. In addition, any client assets held on hot wallets must be covered by the exchange’s “compensation arrangement”.
• Chinese citizens who also hold Hong Kong residency will be able to trade cryptocurrencies. China banned crypto trading and mining back in 2021.

This is a big step for Hong Kong and it will be interesting to see if other countries, including China, follow their lead.