Hong Kong's retail investors will be allowed to trade larger coins on exchanges licensed by the Securities and Futures Commission, providing safeguards such as knowledge tests, risk profiles and reasonable limits on exposure are put in place, the regulator says.
The commission did not specify which large-capitalization tokens will be allowed for retail investors. Instead, it said the coins should be included in at least two acceptable, investible indexes from independent providers, one of which should have experience in the traditional financial sector. But it also didn't specify particular crypto indexes as a reference point for a taxonomy of allowable tokens.
Bitcoin and ether, the two biggest digital assets by market value, are likely to be listed by Hong Kong platforms, an SFC spokesperson said. The onus would be on exchanges to monitor listed assets to ensure they qualify for trading by individual investors.
The general token admission criteria suggested by the SFC include the supply, demand, maturity and liquidity of a virtual asset like its market capitalization; average daily trading volume; track record (for example, issued for at least 12 months except for security tokens); whether other platform operators also provide trading for the asset; the availability of trading pairs such as fiat currency to virtual asset; and the jurisdictions where the digital assets have been made available for trading.
The watchdog believes setting a hard cap for retail investors' exposure to the assets may not be appropriate due to different personal circumstances like net wealth and lack of flexibility for changes in market prices.
A compensation arrangement approved by the SFC such as third-party insurance should be in place for a licensed platform operator to provide coverage for risks associated with the custody of client virtual assets from hacking or default, the commission said.
Platform providers should not store more than 2 percent of their client virtual assets in hot wallets and should not deposit, transfer, lend, pledge, repledge or otherwise deal with or create any encumbrance over these assets, the regulator said.
The consultation period will end on March 31, and the objective is to allow retail trading in the new licensing regime for crypto exchanges due on June 1.
Pre-existing platforms prior to June will have a 12-month transitional period for compliance.
