Sandboxes allow cryptocurrency firms special regulatory waivers for a limited period

SFC may eventually license cryptocurrency exchanges like Japan

Retail investors will not be allowed to invest and trade in cryptocurrency funds

Hong Kong’s Securities and Futures Commission (SFC) has announced new rules targeting funds that invest in digital currencies and related platforms. The securities regulator proposes a “sandbox” approach to cryptocurrency regulation in Hong Kong.

Crypto Infrastructure in HK

SFC’s Chief Executive Officer Ashley Adler made the announcement on Thursday, November 1, 2018, when speaking during the Hong Kong Fintech Week 2018. He stated that a sandbox approach was apt as it would allow the regulator to make the right decision regarding the issue of regulating cryptocurrency exchange operators. “Sandboxes” typically allow Fintech firms special regulatory waivers for a limited period of time.

Adler also said the commission was looking at the possibility of eventually licensing cryptocurrency exchanges following the footsteps of Japan. Without giving specifics or any timelines about the plan, Adler defended the sandbox approach saying cryptocurrency platforms have not yet attained the “requirements for a conventional exchange and it was too early to say how long the approach would last. Adler stated:

“If, and only if, we decide at the Sandbox stage that we should regulate, we would consider granting a license,[…] the platform would then be subject to intensive reporting and monitoring to ensure that strict internal controls operate as expected and investor interests are protected.”

The new proposed rules specifically target funds that invest in digital assets and the platform where they are traded. One of the main proposals is to require that funds investing over 10 percent of their assets in digital currencies be licensed by SFC, a decision that practically brings the end to the era where private equity funds operated in a ‘Wild West’ environment.

No Retail Investment for the Time Being

According to the rules, retail investors will not be allowed to invest in cryptocurrency funds and trading them, which now Adler says will remain to be the domain of expert investors. The law in Hong Kong recognizes a professional investor as anyone with two years’ experience and can invest at least HK$8 million ($1.02 million USD). Commenting on the development, the Chairman of the Hong Kong Securities Association stated:

“It will boost investor protection and hence attract more mainlanders to trade cryptocurrency assets in Hong Kong […] this will help Hong Kong to be among the top cryptocurrency trading centers worldwide because proper regulation is very important for attracting the big players.”

The Securities and Futures Commission said in February it would crack down on cryptocurrency exchanges were operating in the island without licensing or those that violated local securities laws.