Howard Marks

@howardmarks

Hong Kong Demands Regulation From Crypto Exchanges

February 11th 2018

No one should be surprised by this latest turn for cryptocurrency exchanges. On Friday, Hong Kong’s Securities and Futures Commission (SFC) announced that it sent seven letters to different cryptocurrency exchanges, warning that certain tokens listed on their exchanges could be securities, as defined by Hong Kong’s Securities and Futures Ordinance (SFO), and that these tokens should not be traded without a license.

The SFC did not disclose which exchanges they contacted, but they did indicate that these exchanges are located in or connected to Hong Kong. In response, most exchanges stated that they did not trade the tokens in question or removed them from their exchange. Alongside these letters to exchanges, the SFC warned seven ICO issuers that their tokens were seen as securities. Similarly, most confirmed compliance or ceased token sales to Hong Kong residents.

Those that didn’t respond to the SFC should be wary: it is likely that the SFC will take further action should their warning be ignored, and those consequences will surely be far more severe. The SFC will not tolerate securities laws violations in Hong Kong.

What does this latest warning mean? Which coins will no longer be accepted on Hong Kong exchanges? No tokens were named, but it is likely that the majority of altcoins will be removed from these exchanges, leaving only those used for payment like Bitcoin and Ether.

In a statement, the SFC’s Chief Executive Officer Ashley Alder said, “[the SFC] will continue to police the market and enforce when necessary, but we are also urging market professionals to do proper gatekeeping to prevent frauds or dubious fundraising and to assist us in ensuring compliance with the law.”

The SFC does not have jurisdiction outside of Hong Kong or over exchanges and ICOs that do not trade securities, so ICO issuers and exchanges outside Hong Kong need not immediately worry about this warning except for the fact that it will force them to exclude Hong Kong participants from the sale of securities.

This isn’t SFC’s first warning regarding security tokens. On September 5th last year, the SFC issued a statement that many ICO tokens have properties that mark them as securities, and are thus subject to regulation and are “required to be licensed by or registered with the SFC irrespective of whether the parties involved are located in Hong Kong, so long as such business activities target the Hong Kong public.”

After that milder warning, it looks like Hong Kong is finally taking serious steps towards regulation, though it’s worth noting that the SFC does not seem intent on protecting investors. Julia Leung, the SFC’s Executive Director of Intermediaries, said, “if investors cannot fully understand the risks of cryptocurrencies and ICOs or they are not prepared for a significant loss, they should not invest.”

This news comes at a time when regulation is now on the tip of every tongue when the conversation is crypto. On February 8, Japanese regulators announced their intentions to further police crypto exchanges, and Korea has implemented know-your-customer rules to its crypto exchanges, ending anonymous trading, which is a step in the right direction. The US SEC and CFTC testimony in front of Congress earlier this week on cryptocurrencies also marks a shift in the conversation.

The next phase is clear. Every sign points in one direction: cryptocurrency exchanges must be, and will be, regulated.

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