The Hong Kong Securities and Futures Commission (SFC) has issued a warning to all digital asset exchanges against engaging in illegal practices as they await their licenses.
In its statement, the SFC said it had observed some unlicensed exchanges engaging in improper practices and warned that they could face legal and regulatory consequences.
According to the regulator, some of the exchanges in the city-state have been falsely claiming to have submitted license applications. These false claims “give the public a false sense of assurance that the VATP (virtual asset trading platform) is in compliance with the SFC’s regulatory requirements.”
Hong Kong’s new exchange licensing regime kicked off on June 1 as the SFC started accepting applications for exchanges seeking to serve retail clients. Prior to this new regime, exchanges could opt into SFC licensing but were also allowed to operate without the permit. HashKey Exchange and its local rival, OSL, were the only two who had acquired the optional license. The two also became the first to receive the new SFC license last week.
SFC now warns exchanges against misrepresenting their licensing status.
“It is an offence for any person to make a fraudulent or reckless misrepresentation for the purpose of inducing another person to trade in virtual assets,” according to the regulator.
Under the city-state’s anti-money laundering laws, such misrepresentation is liable to a $1.3 million fine and imprisonment for seven years.
The regulator also warned exchanges against offering products and services that the new license doesn’t cover. These could include derivative products and savings, lending, and earning services.
Hong Kong exchanges have reportedly been setting up new entities to target the local market in preparation for the new licensing regime. However, some have continued to offer the same services through their global entities, a practice the SFC says is a criminal offense.
Lessons from Japan: Hong Kong is out to protect ‘crypto’ investors
The new license cements Hong Kong as a leading hub for digital asset trading. It comes at a time when other jurisdictions like the U.S. are becoming ever more hostile to the industry, with several players now exiting the American market. Hong Kong also boasts one of the world’s most advanced financial service industries, giving it an edge over most other hubs.
However, the new license comes at a steep cost, with some insiders revealing exchanges will have to fork out anywhere between $12 million and $20 million. This includes operating costs to meet SFC standards and direct costs like payments to consultants and insurance companies.
In July, Hong Kong exchanges started splurging millions of dollars months before the new regime took effect. Data from one firm showed that they were splashing up to $25 million to hire experienced digital asset professionals and rebuild their systems from scratch to meet new standards.
Some of the new key requirements include segregation of customer funds, smart contract audits, and state-of-the-art security. To insulate local investors against the collapse of global parent companies, Hong Kong also requires exchanges to store seed phrases and private keys locally.
Japan has proven to the world that such comprehensive and customized regulations are effective in protecting digital asset investors. When FTX collapsed, its Japanese subsidiary was unaffected as the country requires segregation of customer assets. Japan also requires 95% of assets to be held in cold storage, protecting investors from the prevalent exchange hacks.
Watch: What’s next for digital asset exchanges & investment?
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