'I am fully aware that many in the FinTech world see regulation as an unnecessary or unwelcome brake on innovation. But what I hope to do ... is to calm some of these concerns,' said Ashley Alder, HK SFC's Chief Executive Officer. Photo: fintechweek.hk

With the crypto-currency industry attempting to assert itself as a mainstream investment product, Hong Kong’s Securities and Futures Commission (SFC) has announced it will create a framework for digital currency funds and crypto-currency exchanges.

The SFC plans to impose licensing conditions on firms managing portfolios investing in virtual assets, whether they are seen as securities or futures contracts. Prospective virtual asset trading platforms for Hong Kong will also be tested in a new SFC sandbox.

Ashley Alder, the SFC’s Chief Executive Officer, sought to play down concerns that the move would quash crypto-currencies in Hong Kong. “I am fully aware that many in the FinTech world see regulation as an unnecessary or unwelcome brake on innovation. But what I hope to do today is to calm some of these concerns,” he said at a keynote speech during Hong Kong’s FinTech week.

Specifically, the SFC will regulate funds investing more than 10% of a mixed portfolio in crypto-currencies, with only SFC qualified investors allowed to participate.

Alder did find the digital currencies difficult to pigeonhole, which made regulation a complex subject. “They have no intrinsic value and are generally not backed by physical assets. Not being guaranteed by any government, they are not currencies … The market for virtual assets is still very young and trading rules may not be transparent and fair. Outages are not uncommon, as is market manipulation and abuse,” he said.

While Asian governments have taken different approaches to regulation, observers feel this could mark an important turning point in Hong Kong.

“What these developments show is the increasing recognition that virtual assets will, eventually, be integrated into the global financial system … the regulatory landscape for virtual assets will look very different this time next year … any notion of virtual assets being ‘jurisdiction-less’ or the ‘Wild West’ is long gone,” Urszula McCormack and Jack Nelson, from law firm King & Wood Mallesons, wrote in a release following the SFC announcement.

For the SFC, regulation may also be seen as a necessary evil as investor sentiment remains robust in spite of this years’ crypto bear-run. “We do not have a lot of options here. We could rely on an interpretation of our remit as a narrow one, view the whole crypto world as unregulated and rely on investor education to warn the public of the risks. But maintaining the status quo may not be an option if in reality investors are left unprotected as crypto activities thrive,” Alder added.

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