SFC reminds crypto investors to be wary of unlicensed platforms in final month to apply under Hong Kong scheme

With Hong Kong in the final month for cryptocurrency exchanges to apply for a licence from the Securities and Futures Commission (SFC), the regulator has reminded investors of the risks of trading on platforms that have not yet been approved.

"The SFC strongly urges investors to trade virtual assets ONLY on SFC-licensed VATPs [virtual asset trading platforms] because they may leave themselves unprotected by trading on unlicensed platforms," the regulator said in a notice on Monday.

Four more crypto exchanges were added to the list of official VATP licence applicants last month, including the Binance-linked exchange HKVAEX and Singapore-based crypto derivatives platform Bybit. The SFC started publishing the list after a high-profile fraud involving the JPEX trading platform last fall that resulted in losses of HK$1.5 billion (US$192 million).

Under the city's virtual asset regulation that went into effect last year as an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, companies selling or marketing cryptocurrencies to Hong Kong residents must apply for a licence by February 29 or cease business in the city by June 1.

The SFC also encouraged investors with accounts on unlicensed exchanges to prepare to pull money out of those platforms by May 31, possibly by moving their virtual assets to a licensed exchange.

To date, there are only two licensed exchanges in Hong Kong: OSL and HashKey. Both applied for an earlier voluntary licence under rules that have been supplanted by last year's regulation. Last summer, both exchanges had their licences upgraded, allowing them to serve retail investors, a feature of the new scheme that had been barred under the previous licence.

Jason Chan, partner at Howse Williams, noted that while OSL and HashKey are not yet licensed under the new regime, "the SFC has already provided an interim solution of allowing retail investors to trade on these platforms".

In the months since, there has been some speculation about whether the new scheme was having the desired effect as scandals related to crypto platforms emerged. Following the JPEX scandal, another platform called Hounax was involved in a scam in which Hongkongers lost some HK$148 million (US$19 million).

There are currently 14 companies that have formally submitted their applications for a licence, the SFC list shows. Patricia Ho, the Hong Kong-based general council for blockchain company Scroll, said the number is what can be expected given the stringent requirements that must be met.

"Hong Kong has intended for a reasonably high bar for submission of application," Ho said. "It is therefore within expectations that only the most committed with the right level of resources would get to the application stage."

The rules in Hong Kong align with industry rules that have started to emerge in several global markets, including Europe and Japan. In some ways, Hong Kong's rules are even more stringent, such as the requirement for 98 per cent of customer funds to be kept in so-called cold wallets, compared with 95 per cent in Singapore.

Ho said after the deadline this month there could be more enforcement action against smaller platforms that try to continue operating in the city in legal grey areas. Bigger platforms, however, have already started blocking access from Hong Kong.

Some crypto platforms with ties to mainland China and Hong Kong have already split off operations from their global platforms. OKX launched an app just for Hong Kong last May. HKVAEX is also widely seen as Binance's play to continue serving the city.

The Hong Kong-based company has not confirmed ties to the world's largest crypto exchange, but the Post previously reported that Binance is behind it and the two share extensive resources.

Additional reporting by Xinmei Shen.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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