Hong Kong’s crypto rules offer level playing field: OSL

Hong Kong on June 1 introduced cryptocurrency trading guidelines for retail investors under a new set of licensing rules for what are referred to as virtual asset trading platforms. 

“Hong Kong’s comprehensive virtual assets regulatory framework follows the principle of ‘same business, same risks, same rules’ and aims to provide robust investor protection and manage key risks,” said Julia Leung, chief executive officer of the city’s Securities and Futures Commission (SFC) on May 23.

Gary Tiu, executive director and head of regulatory affairs at Hong Kong-based crypto exchange OSL, said the new trading rules for retail investors are a good reference for other markets to study.

Forkast’s Jenny Ortiz-Bolivar spoke with Tiu about the company’s plans under the new rules for retail trading. OSL is one of only two digital assets trading platforms in Hong Kong licensed to offer services to professional investors. The following Q&A has been edited for clarity and length.

See related article: Hong Kong to be digital asset rules sandbox for China, says former city regulator

Jenny Ortiz-Bolivar: You’re one of only two licensed digital assets trading platforms in Hong Kong so how do you view the effect of the regulatory changes on the city’s crypto industry and globally?

Gary Tiu: This is a very big moment, a big milestone for Hong Kong, not just for the industry, but also for investors. Retail investors have been looking at the regulated industry but unable to participate for the last two years. Now, all the protections that Hong Kong has built – client asset protection, capital requirements, insurance requirements, and cyber security controls – are going to be available to retail investors. It’s a very good day for retail investors, without a doubt.

Ortiz-Bolivar: Under existing rules, you are licensed to provide digital assets trading to professional investors but with the new rules covering retail investors, will you be applying for that license? If yes, when do you expect to have the license approved?

Tiu: OSL’s position in the market is unique because we are already licensed by the SFC under the existing regime. So, we are required as a matter of formality and also as part of the effort to consolidate all the regulated industries in Hong Kong, where we will also be applying for a license under the new law. But in the meantime, we are business as usual.

[Editor: Following this interview, OSL confirmed by email on Thursday that it had applied to the SFC to upgrade its license to include retail trading of cryptocurrencies.] 

Ortiz-Bolivar: The new guidelines also have included requirements on anti-money laundering and countering financing of terrorism, also known as AML/CFT, what’s your reading of them?

Tiu: As a licensee in Hong Kong we are already required to comply with the strictest AML controls that are equally applicable to licensed intermediaries and banks here. AML controls applying to the regulated digital asset industry are pretty much going to be the norm going forward. AML is typically the first step on the regulatory ladder, even in other evolving markets. So we see [AML] applying across the board to other platform operators or digital asset platform operators in Hong Kong. That’s how things should go.

But what sets Hong Kong apart is also the fact that, on top of AML, the Hong Kong regime will apply capital requirements, client asset segregation requirements, and all the good investor protections that we previously talked about. So we have an equal playing field in the Hong Kong market. That’s certainly a good thing for Hong Kong and for investors. I think it will also be a very important reference point for other markets to study as well.

Ortiz-Bolivar: Hong Kong has long been a gateway to mainland Chinese markets, giving overseas participants access to the mainland and vice versa, have you seen a lot of interest from mainland clients? 

Tiu: Definitely. We have seen a lot of interest, not just from the mainland but also from other parts of the world. Hong Kong has always been a very international market, as an international financial center. We see investors, issuers, and many financial institutions using Hong Kong as a hub to participate in financial activities. 

So, I think investors and institutions from the mainland definitely have always been very active in Hong Kong, within the legal framework that we have in place. When it comes to digital assets, there are naturally going to be more legal constraints as this is quite well known. But as a potential gateway for permissible legal activities and financial activities, Hong Kong will definitely continue to play that role.

Ortiz-Bolivar: How do you see the landscape for crypto trading platforms shaping up over the next year in the city? 

Tiu: We definitely expect to see broader user adoption of digital assets as a method or as one of the channels for asset allocation for investors across the board, not just professional investors, but for retail. We also expect more institutions participating. In the last 12 to 18 months, we have already seen many institutions in Hong Kong taking steps to participate. We have seen a very noticeable increase in pace and also in the number of Hong Kong-based institutions looking to enter the scene. So, it’s definitely good for the industry as a whole. It’s good for investors in terms of having more channels and opportunities, and also better security and investor protection. So, in all of those respects, very, very positive.

Ortiz-Bolivar: With this new regime, crypto companies are definitely looking at Hong Kong. Is OSL ready for more competition?

Tiu: We’re always ready for more competition. That’s healthy for the space. It’s healthy for innovation and will be a good thing for investors to have more to choose from. We have been positioning ourselves for the last few years not just as a direct B2C operator. We also support [clients] through our B2B capabilities, whether through tech servicing or through omnibus structure where other license intermediaries can use us for background support in servicing their B2C clients. We definitely welcome more players in the space.

Ortiz-Bolivar: What do you think will be the crypto challenges for Hong Kong in the next 6 to 12 months?

Tiu: There will be a challenge for platform operators and industry to come up with more diverse products for investors. With the retail client base coming onto the scene, it is even more important for us to make sure that we cover a broader range of products across the risk spectrum. It’s our job as an industry to also come up with products that also allow investors to take more defensive positions in their asset allocation.

But that’s also one of the most exciting areas because coming up with more products translates into more revenue opportunities for platform operators, product issuers and distributors.

See related article: Hong Kong’s new crypto rules covered by China state TV in rare move from Beijing