One year after launching a trailblazing licensing scheme for cryptocurrency fund managers, Hong Kong’s securities regulator has issued few and far between.

According to a Reuters report on Nov. 5, the licenses introduced by Hong Kong’s Securities and Futures Commission (SFC) in October 2018 have apparently led to few approvals, with reporters succeeding to independently identify just one licensee.

Crypto funds said to lack experience and support

While confirming the numbers remains difficult in light of the SFC’s policy of discretion — it declined Reuters’ request for comment and does not publicly announce license approvals — industry experts have indicated that the barriers for market participants remain high.

Hong Kong-based Diginex, operator of a cryptocurrency “fund of funds” is reported to have won approval for a license back in June, with CEO Richard Byworth stating the firm believes it “vital to be regulated to build trust with our clients but also in the industry.”

Gaven Cheong — a partner law firm Simmons & Simmons, which advised Diginex on its SFC application, told Reuters:

“Last year there was a lot of excitement but since then we haven’t seen much activity. Not many new managers in this area have the background, experience or support to mount such an undertaking, and this has meant that many applications never even get started.”

Unnamed sources told Reuters the stringent nature of the licensing and broader regulatory framework had pushed some Hong Kong crypto funds offshore.

Regulator not obstructive, industry sources consider

Yet others have a different perspective, believing it is not the regulation per se but rather the time needed for funds to develop the required systems for custody, audit and cybersecurity. Rocky Mui, a partner at Hong Kong law firm Clifford Chance, stated:

“My take is it is more an operational and infrastructure issue, than the regulator being obstructive.”

As usual, high volatility and particularly last year’s “crypto winter” are cited as factors that spook applicants, with blockchain investment firm Kinetic Capital partner Jehan Chu arguing that:

“Poor returns in 2018 scared large institutions away from allocating to crypto funds, causing those who survived to shelve their licensing plans. As institutional investors step into the market, crypto funds will dust off their licensing applications and take a fully regulated approach.”

As reported, the SFC launched its fund licensing scheme together with guidance on regulatory standards back in October 2018, yet did not formalize a statutory framework at the time.

A formalized document was published this October, which includes a requirement for fund managers to maintain liquid capital of a minimum of 3 million HK dollars ($383,000) — and its variable required liquid capital — as well as to appoint a functionally independent custodian.