Nov 01, 2018 (China Knowledge) - Risk management plays a crucial part in every aspect of the financial industry. With the rise of new technologies being deployed in the finance sector, one that should particularly stand out to regulators is cryptocurrencies and virtual assets, said Ashley Alder, CEO of the Hong Kong Securities and Futures Commission (SFC) during his keynote speech at the Hong Kong Fintech week.
Cryptocurrencies and virtual assets are products that should be paid significant attention to due to their nature. That is, these products have no physical value, they are typically not asset-backed and have no guarantees from any government. Yet, these products have attracted investment of hundreds of billions and regulators must pay close attention to them to protect investors’ interests.
Some issues that the crypto market faces today include cryptocurrency exchanges that serve as an exchange for cryptocurrencies; like a brokerage for securities, but still run their own book which could potentially lead to conflicts of interest.
Another issue inherent with cryptocurrencies and virtual assets is, their anonymous use leading to their potential use in terror-financing and money laundering. This problem has also been raised in the G20 summit of finance ministers.
The core issue for regulators today is, that they must determine if they have jurisdiction over the crypto and virtual asset market, as presented by Mr. Alder. Some countries have decided they have jurisdiction over them such as the U.S. and are actively regulating cryptocurrencies. Some, who have decided they have no jurisdiction, are currently developing new regulations. However, most are still taking a "wait-and-see" approach which is insufficient.
Currently, the Hong Kong SFC has decreed that their licensees must notify them when they want to launch products involving cryptocurrencies. However, the SFC also notes that they currently have no control over firms which purely engage in cryptocurrencies and virtual assets. In his speech today, Mr Alder announced that the security commission will be releasing new regulations and guidelines to further regulate virtual assets market.
The Hong Kong SFC noted that investors typically gain access and exposure to the cryptocurrency and virtual asset market through funds. Thus, there will be new frameworks developed for fund managers who want to delve into the crypto market. However, this still places cryptocurrency-only firms and fund managers out of their reach. Therefore, the SFC will also be issuing new standards when firms distribute crypto funds. Essentially, only qualified investors will be allowed to participate in this market.
In addition, SFC will also be launching new experimental program to determine how crypto exchanges should be regulated. This initiative is currently still in the sandbox-stage but will allow the SFC to closely observe the daily activities of crypto exchanges. The basic guiding the commission has is that these exchanges should adhere to the same standards of conduct and resilience brokerages are subject to.
Further details on the new regulations will be announced later today.
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