More Details on Hong Kong's Issuance of Compliant Cryptocurrency Exchange Licenses

Feb 20, 2023

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https://apps.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=23CP1

1、The tone is regulation

The turmoil in the virtual asset market and the collapse of FTX. Major jurisdictions are transitioning from a light-touch approach (ie, regulating from an anti-money laundering (AML) or payment perspective) to a more comprehensive approach (ie, regulating from an investor protection perspective).

2、What kind of tokens are allowed to list

a) the background of the management or development team of a virtual asset;

b) the regulatory status of a virtual asset in each jurisdiction in which the platform operator provides trading services and whether its regulatory status would also affect the regulatory obligations of the platform operator;

c) the supply, demand, maturity and liquidity of a virtual asset, including its market capitalisation, average daily trading volume, track record (for example, issued for at least 12 months except for security tokens), whether other platform operators also provide trading for the virtual asset, the availability of trading pairs (for example, fiat currency to virtual asset), and the jurisdictions where the virtual assets have been made available for trading;

d) the technical aspects of a virtual asset, including the security infrastructure of its blockchain protocol, the size of the blockchain and network and especially how resistant it is to common attacks (for example, a 51% attack), the type of consensus algorithm, and the risk relating to code defects, breaches and other threats relating to the virtual asset and its supporting blockchain, or the practices and protocols that apply to them;

e) the marketing materials for a virtual asset issued by the issuer, which should be accurate and not misleading;

f) the development of a virtual asset including the outcomes of any projects associated with it as set out in its Whitepaper (if any) and any previous major incidents associated with its history and development;

g) the market risks of a virtual asset, including concentrations of virtual asset holdings or control by a small number of individuals or entities, price manipulation, and fraud, and the impact of the virtual asset’s wider or narrower adoption on market risks;

h) the legal risks associated with the virtual asset, including any pending or potential civil, regulatory, criminal, or enforcement action relating to its issuance, distribution or use; and

i) whether the utility offered, the novel use cases facilitated, or technical, structuralor cryptoeconomic innovation exhibited by the virtual asset appears to be fraudulent or scandalous

The selected virtual assets will satisfy the specific token admission criteria below as an eligible large-cap virtual asset.“Eligible large-cap virtual assets” refer to virtual assets which are included in at least two “acceptable indices” issued by at least two independent index providers.

An “acceptable index”is an index which has a clearly defined objective to measure the performance of the largest virtual assets20 in the market and fulfils the following criteria:

a) The index should be investible, meaning the constituent virtual assets should be sufficiently liquid.

b) The index should be objectively calculated and rules-based.

c) The index provider should possess the necessary expertise and technical resources to construct, maintain and review the methodology and rules of the index.

d) The methodology and rules of the index should be well documented, consistent
and transparent.

Among the two indices, licensed platform operators should ensure that at least one ofthem is issued by an index provider which has experience in publishing indices for the traditional non-virtual asset financial market. An example of such an index provider is one which has issued an index tracked by an SFC-authorised index fund.

3、No derivatives are allowed

Under the existing SFO regime, licensed platform operators are not allowed to offer, trade or deal in virtual asset futures contracts or related derivatives. The SFC understands that the industry is increasingly interested in offering virtual asset derivatives, particularly to institutional investors. The SFC acknowledges the important role virtual asset derivatives play in facilitating the interface between the virtual asset space and traditional finance, especially for institutional investors to hedge risks more effectively. Notwithstanding this, the SFC would like to better understand through this consultation exercise the type of business models and VA derivatives which licensed platform.

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