The recent amendment that now requires all cryptocurrency asset trading platforms operating or targeting local investors in Hong Kong to apply to the Securities and Futures Commission (SFC) for licenses may have generated murmur in some quarters but a blockchain security company executive says it is necessary.

Elsa Madrolle, the Managing Director, International at CoolBitX blockchain security company thinks the plan to regulate the exchanges is nothing but one of the remaining gaps to close before Hong Kong can be fully aligned with the recommendations of the Financial Action Task Force (FATF).

The SFC chief, Ashley Alder, announced the new proposed rules that would replace a voluntary framework introduced in 2019 and affect all cryptocurrency trading platforms whether trading securities or not at the start of the Hong Kong Fintech Week. The proposal is supposedly part of efforts to tighten Hong Kong’s cryptocurrency framework and stop trading platforms from operating away from the regulatory radar. But there have been concerns that the new framework may affect cryptocurrency businesses in Hong Kong and impact the city’s position as a crypto hub.

“The Hong Kong SFC stated that as a FATF member, they are under the obligation to align themselves with FATF AML guidelines, which includes regulating or licensing of all VASPs,” says Madrolle from the company founded by Michael Ou which created an FATF Travel Rule solution called Sygna Bridge. “This includes the need to “widen the net across centralised platforms”, which is what the new framework seeks to do but including all cryptocurrency exchanges under the HK SFC’s purview. By doing so, the SFC is likely to mirror the FATF’s definition of cryptocurrency exchanges as Virtual Asset Service Provider (VASP), by referring to them as “non-security token platforms”, which is a broader definition than “exchanges”.”

The FATF’s September 2019 evaluation deemed Hong Kong to be “largely compliant” with its guidance, but not yet fully compliant with the travel rule, Madrolle adds, hence the existing gaps between its current regulatory framework which the consultation and subsequent legislation will seek to close.

The proposed change comes amidst the global race for jurisdictions to become FATF-compliant by the June 2021 deadline when a second 12-month review of countries’ Travel Rule frameworks will elapse and the need for further updates to its standards may be assessed. It will see Hong Kong join the ranks of Japan, Singapore, and South Korea, who currently lead at the forefront of global cryptocurrency regulation, albeit with different individual regulations and political objectives.

Rather, Madrolle suggests that VASPs in Hong Kong should see the proposal as an opportunity to actively participate in various working groups to provide feedback and voice out their concerns. “As the proposal still needs to go through the legislative process, this will give VASPs time to understand and implement the requirements, although they would need to start considering what it will mean to be regulated or licensed, with implications such as developing a compliance department and finding a travel rule solution provider to fulfil their regulatory obligations,” she said.

Also sharing a similar view is the CEO of brokerage technology solutions and liquidity provider Broctagon, Don Guo, who deemed the SFC’s move as positive for an industry that was lacking regulatory consensus even though it may seem an immediate knock to the local crypto industry. Guo says the landscape has typically been fragmented and Hong Kong’s move to “establish a mainstream-like environment for participants looking to trade crypto” is encourraging.