Hong Kong’s SFC Plans Regulatory “Sandbox” Proposal for All Bitcoin Exchanges


Chief Executive Ashley Alder, who works with the Securities and Futures Commission (SFC) in Hong Kong, recently proposed a new solution for cryptocurrency regulations called a “sandbox.” In a post on The Block, this solution is “a mechanism for developing regulation that keeps up with the fast pace of innovation.” The use of this type of mechanism is often beneficial to fintech firms because it offers them a limited time to apply regulatory waivers as they determine a more permanent ruling.

At the moment, the only way that crypto assets are governed by the SFC is with a classification of “securities” or “futures.” By joining in on the new regulatory sandbox, the exchanges agree to monitoring by the SFC, maintaining their cooperation with compliance efforts. This could give them a better reputation for their security amongst consumers and investors in Hong Kong.

In a statement, Alder said,

“The measures announced today allow us to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both.”

Speaking on crypto trading, he added, “Outages are not uncommon as is market manipulation and abuse. And there are also, I am afraid, outright scandals and frauds.”

Based on Alder’s comments, the public will most likely hear more about a “new exploratory approach” later on Thursday, discussing the ways that crypto exchanges could also be regulated. Participation in the sandbox is option, but, “Those exchanges that want to be regulated by us will be set apart from those that don’t,” he said.

When speaking at a fintech conference in Hong Kong, Alder added,

“This is essentially an opt-in approach for exchanges and platform operators, and they will first explore the conceptual framework with us in a strict sandbox environment.”

The SFC’s new rules would require any fund with at least 10% of their assets in cryptocurrency to comply, and these funds will need to be licensed as well.

Any company that decides to join the sandbox will have several restrictions. They will not have the ability to offer financial incentives, and they will not be able to trade futures or derivatives. Compliance with fair treatment rules is be required, and each exchange or firm will need to show their work towards reducing manipulation in the market.

With Bitcoin’s 10-year anniversary just passing, investors should expect other jurisdictions to establish their framework and oversight as well. However, each authority will also need to make some decisions of their own on handling cryptocurrency. Urszula McCormack, who is a partner for Hong Kong law firm King & Wood Mallesons, said, “Realistically there are two possible ways forward — regulate or ban — and it’s a smart move that Hong Kong has chosen to regulate.”

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