Hong Kong regulators warn incoming firms against ‘light touch’ approach

Hong Kong regulators have given a heads-up to firms looking to set up regional operations to prepare for tight regulations against the widely publicized lax rules.

Eddie Yue, Chief Executive of the Hong Kong Monetary Authority (HKMA), revealed at the Bloomberg Wealth Asia Summit that the country would impose strong guard rails to protect investors from bad actors looking to take advantage of the city’s ambitions.

Hong Kong has been looking to establish itself as the leading hub for digital assets in Europe since the start of 2023, as it seems to free the local industry from a regulatory chokehold. Since the announcements, swathes of digital currency firms have indicated a keen interest in obtaining licenses from the city’s financial regulators.

“Our regulation will be tight,” said Yue. “We will let them create the ecosystem here, and that actually brings a lot of excitement. But that doesn’t mean light-touch regulations.”

The collapse of Terra and Three Arrows Capital (3AC) in early 2022 saw Hong Kong’s regulators switch stances toward digital currencies. The “unfriendly stance” led to several firms exiting the region for new jurisdictions like the United Arab Emirates and the Caribbean.

Analysts are unsure of the strictness of Hong Kong’s future rules for the industry, but Julia Leung, Chief Executive of the Securities and Futures Commission (SFC), remarked that they would straddle the fine line between investor protection and attractiveness for service providers.

Hong Kong is set to release the guidelines for digital currency exchanges seeking registration before the end of May. The guidelines are based on existing finance laws with extensive input from the academia and industry stakeholders via a consultative process.

All eyes are firmly set on a new licensing regime expected to take effect in June that experts say will allow retail investors to trade approved digital assets.

“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle,” said Leung.

Hong Kong’s warm embrace

Currently, Hong Kong’s posture toward digital currencies can be described as friendly, given a range of initiatives launched by the region’s administrators.

The government has urged banks in the region to offer financial services to the incoming digital currency providers, clarifying that there is no existing ban against such services. However, banks are urged to conduct proper due diligence and avoid a “one-size-fits-all” approach in offering their services to incoming firms.

“A ‘risk-based approach’ means that the banks should differentiate the risk levels of customers and apply proportionate CDD measures without adopting a ‘one-size-fits-all’ or de-risking approach,” said the HKMA in a blog post.

Lise Li: BSV Blockchain in China