Hong Kong’s Securities and Futures Commission (SFC) has set the standards for Virtual Asset Service Providers (VASPs) “incredibly high.” The SFC wants the crypto industry to match the same compliance standards as traditional financial firms.
The founder of crypto venture firm Token Bay Capital, Lucy Gazmararian, who is also an SFC Fintech Advisory Group member, has emphasized that while “the bar is set high,” it’s for a “good reason.”
Applying existing financial institution standards to crypto industry
The SFC has published a consultation paper that suggests whether licensed VASPs should serve retail investors, and what standard of investor protection measures should be imposed. Anti-Money Laundering (AML) and Know Your Customer (KYC) policies were also discussed.
Gazmararian explained that the SFC’s approach is to ask VASPs to apply the same standards that existing financial institutions, like huge banks and huge asset managers, have to comply with.
These high standards might pose challenges for the crypto industry in Hong Kong over the short term, Gazmararian said. She pointed out that crypto businesses are often in the startup phase, and many have funding but not hundreds of millions.
“To comply with the framework does incur significant costs,” she added, citing the need for local VASPs to have insurance, independent assessment reports, and store crypto in cold storage. “A criticism has been if you’re a startup crypto company, how do you even get started? Is that going to stifle the industry?”
With a solid regulatory framework in place, Gazmararian believes more well-capitalized financial firms will be willing to help promising startups get off the ground.
“I think companies that do get the license are going to be upholding the most stringent standards so the bar is set high, but I think for good reason,” Gazmararian said.
Hong Kong’s relationship with crypto
Hong Kong has an on-again-off-again relationship with crypto. Before China outlawed all crypto-related activities in 2021, the Asian financial hub was the early home to several crypto startups, including the now-defunct FTX, which left for the Bahamas after the ban. Now, Hong Kong is again welcoming crypto businesses, only this time with more regulatory clarity.
The SFC encouraged individuals, corporations, and crypto firms to review the 361-page consultation paper and provide feedback. The securities regulator wants these entities to share their views and point to things that may have been missed because they are “absolutely focused” on getting everything right, Gazmararian explained. Submissions for feedback on the consultation paper closed on March 31.
During its government-backed fintech week late last year, Hong Kong indicated its intention to legalize crypto retail trading and introduce a licensing regime for digital asset providers.
The plan took more shape in February when the city published draft rules that would allow individual investors to trade certain major cryptocurrencies starting June 1.
Companies are already responding to the city’s shift in attitude. As of February this year, the Department for foreign direct investment had received “expressions of interest” from over 80 virtual asset-related companies from both mainland China and abroad in establishing a presence in Hong Kong. KuCoin, one of the world’s largest crypto exchanges, already said last year that it would open an office in the city.