Cryptocurrency exchanges in Hong Kong are taking steps to reorganise their operations by offering separate trading platforms for professional investors, as they heed calls from the securities regulator which is exploring a future licensing framework that would ultimately exclude retail traders.
Dave Chapman, executive director at Hong Kong-listed BC Group, said although the regulatory sandbox – a pilot scheme to test tokens and platforms – that the Securities and Futures Commission launched in November 2018 was not mandatory, moves by the SFC to exclude retail investors was sensible because of the high risk nature of virtual asset trading.
Chapman said the proposed rules to regulate cryptocurrency trading services was all encompassing as it would force out retail investors. “Targeting only professional investors make a lot of sense, [as] it is a high-risk investment and regulators do want to protect investors.”
Some cryptocurrencies have lost 80 per cent of their market capitalisation in the last year or so. Bitcoin, for example, was quoted at US$3,700 on Tuesday, down 80 per cent from its peak of US$19,000 in December 2017.
In light of such development, the BC Group has launched a new trading platform for professional investors called AnxOne, targeting family offices, hedge funds, fund managers and high net worth individuals, Chapman said.
Chapman said that ANX International, BC Group’s other trading platform that has been servicing retail investors since 2013, will continue to provide services in Hong Kong.
In the regulatory framework announced in November, the SFC said any licensing or authorisation for operating an exchange will be predicated only on security tokens that have been identified to the SFC. Currently, eligible and interested operators can enter a regulatory “sandbox”, and based on the outcome the SFC will then decide whether to issue a licence or not.
Chapman also said that Anxone will start trading these security tokens once a regulatory framework has been established in Hong Kong.
Unlike cryptocurrencies such as bitcoin, or bitcoin cash, which are also called payment tokens, security tokens pay dividends, share profits, pay interests or invest in other underlying assets that generate profits for their holders.
The company’s move comes after the Post reported earlier that Coinsuper, another cryptocurrency exchange in Hong Kong, was also rejigging its business model by launching a separate platform targeting only professional investors.
Given these developments, will retail investors be sidelined under Hong Kong’s future regulatory regime and will they have to assume all the risk?
Gaven Cheong, a partner at the law firm Simmons & Simmons, said that since the SFC currently has no jurisdiction over exchanges that only trade mainstream payment tokens such as bitcoin and ethereum, as they are not “securities”, the status quo should remain.
A person walks past an advertisement for Gemini, a cryptocurrency exchange founded by Cameron and Tyler Winklevoss in 2014, in New York. The cryptocurrency industry, which includes bitcoin and other similar digital forms of currency, is growing but is still struggling to achieve mass market use. Photo: EPA-EFEShare:
He added that however this may be subject to change.
As an example, for a licensed exchange operator, the SFC may impose a requirement that its consent is needed whenever the operator wanted to expand the universe of tokens that can be traded on its platform, regardless of whether these tokens are utility or security tokens,” said Cheong.
Utility tokens are unregulated digital tokens that provide access to an application or service through a blockchain-based infrastructure. The SFC does not propose to regulate utility tokens.
Leung Hoi Tak, counsel at law firm Ashurst, said given the current regulations in place, the SFC’s focus was on ensuring that the regulatory framework was first tested with regulated entities in a manner that ensures consumer protection.
“I do think that many exchanges have and will continue discussions with the SFC in relation to how they can run a compliant SFC-regulated exchange while maintaining retail investor-focused operations for non-security tokens,” said Leung.
As such, Tidebit, another cryptocurrency exchange that is majority-owned by Chen Ping, chairman of GEM-listed company Global Token, said it currently has no plans to launch a professional investor-only platform.
Tidebit has 43,000 users, according to Global Token financial report.
Terence Tsang, Tidebit’s chief operating officer, said he still views retail investors as a significant part of the cryptocurrency market development.
“Since the SFC mainly regulates those exchanges which trade tokens with securities features, ordinary retail investors can still trade mainstream cryptocurrencies like bitcoin or those utility tokens on global platforms,” he said.