China has been a prominent player in global regulation of digital assets for some time, including as a member of the Financial Action Task Force (FATF), which was until recently chaired by Mr. Xiangmin Liu. Under Mr. Liu, among the important recommendations issued by the FATF to its 39 member states is the so-called ‘Travel Rule’ for virtual asset service providers (VASP) transacting with each other for underlying beneficiary clients.
In addition, the Hong Kong Securities and Futures Commission (SFC) announced its digital asset licensing framework just under a year ago. On 21 August 2020, it granted its first approval-in-principle (AIP) for licence to conduct Types 1 (dealing in securities) and 7 (automated trading systems) regulated activities to OSL Digital Securities Limited, a wholly-owned subsidiary of BC Technology Group (SEHK stock code 863.HK).
This is a game changer for traditional finance as we know it today — not just for trading platforms, but also for traditional financial product issuers, investors and companies and businesses looking to raise funds in the capital markets.
It’s also a very positive step for both the Hong Kong and global digital assets market and financial services as a whole. Because of the SFC’s unique integrated framework, clients of a Hong Kong licensed digital asset trading platform will enjoy all the safeguards they have become accustomed to in traditional finance, and can also take comfort in additional protections under the regime that have been tailored-made for the new asset class.
For example, two of the most commonly cited concerns for investors are counterparty risks and client asset protection. To address this, the Hong Kong framework raises the liquid capital requirements for operators well beyond the levels required for traditional licensees, requiring licensees to segregate client funds and digital assets, strictly limit hot wallet usage, and have in place appropriate insurance coverage over virtually all client assets held.
This transparent and multiple-layered investor asset protection will set the standard for what investors can begin to expect in the new era of regulated digital asset trading.
The SFC is one of the first major regulators in the world to formally recognise the role of virtual assets within its existing framework, and to take steps to integrate it as a into the mainstream financial system. The SFC has shown that it is a global leader and has the technical expertise to regulate this asset class.
In addition to the more obvious investor protection measures, applicants that hope to be granted a license within the new Hong Kong framework will also need to adhere to strict cybersecurity and compliance controls and protocols as part of their systems and controls. Once again, as an operator of a trading platform for a new asset class, requirements on operations, compliance and systems and controls are expected to be fit for purpose and appropriate for the asset class.
When we began building OSL two years ago, security, performance and compliance were built into the DNA of the company and we ‘self-regulated’ to existing financial industry standards in preparation for what we saw as the inevitability of licensing in major jurisdictions such as Hong Kong.
While the license will naturally allow digital assets such as Bitcoin and Ethereum to be traded, we are even more excited to be at the forefront of opening a new ecosystem for digital assets, and new channels for capital raising, financial products and investments — e.g. STOs, or security tokens.
With our license (once granted), it will be far easier for regulated entities to trade with OSL, as we will be licensed in the same way they are. Today, licensed entities that want to trade against non-licensed entities in virtual assets face many regulatory hurdles — including cybersecurity risks, counterparty, money laundering and reputational risks.
The Hong Kong licensing regime allows regulated players to enter the digital asset market safely as it provides investor protections that are highly recognisable by traditional financial institutions, professional investors, and institutional clients.
Similar to the experience of travelling on a new high speed rail system, we believe institutional clients are ready to embark on a new way to safely and confidently trade digital assets within a new standard-setting licensed infrastructure.
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