More than two months ago, cryptocurrency regulations in Hong Kong loosened considerably, allowing retail traders back into the market. However, as it turns out, the Securities and Futures Commission (SFC) has recently identified increased improper activities being carried out by some unlicensed virtual asset trading platforms (VATPs). Not only are these practices deceptive, but they endanger investors. The regulator raised four main concerns and their implications for both VATPs and retail investors.
SFC Warns against Improper Practices
In its latest warning, the SFC drew attention to several important issues concerning cryptocurrency trading in Hong Kong. The first issue pertains to false information about applying for a cryptocurrency license in the special administrative district. The second concerns companies that do not comply with local regulations, and the third is about firms opening their branches in Hong Kong despite lacking the necessary authorizations. Finally, the fourth issue is a warning explicitly directed at retail investors.
A deceptive trend that was identified involves certain VATPs falsely announcing that they have applied for licenses from the SFC, giving a false impression of their compliance with regulatory norms. Although quite a few companies are applying for licenses in HK, only one firm has been fully authorized to offer retail trading to local investors.
"It is an offense for any person to make a fraudulent or reckless misrepresentation for the purpose of inducing another person to trade in virtual assets. The SFC will take into account any misrepresentation made by an unlicensed VATP in considering its fitness and properness to be licensed should it eventually submit license applications to the SFC," the SFC highlighted.
VATPs, that were operational in Hong Kong before 1 June 2023, were given a transitional period to adjust to the new regulations. Despite this, the SFC observed some VATPs initiating new entities and launching products and services which may not necessarily adhere to the latest legal and regulatory standards. Actions have been observed, such as introducing virtual asset derivatives or schemes branded as 'savings' or 'earnings', which are not sanctioned under the new rules. The SFC raises concerns about the genuine intent of these VATPs to conform to the set regulations.
Besides the newly initiated entities, the SFC has alerted about older established entities of VATPs that continue to operate without licenses in Hong Kong. Engaging in such unlicensed activities is criminal. Such entities need to either acquire an SFC license or close their operations.
"These established entities will also need to apply for SFC licenses, or they should proceed to close their business in Hong Kong. Conducting unlicensed activities in Hong Kong is a criminal offense," the regulator added.
SFC Alerts Retail Investors
Some VATPs misleadingly claim to have filed for an SFC license or express intentions to do so in the future, but this is not always the truth. The SFC warns of the inherent risks associated of trading on an unregulated platform, emphasizing the potential loss of all investments in the event of mishaps, such as hacks or misappropriations. For clarity on a platform's licensing status, investors should consult the SFC's official list of virtual asset trading platforms, which can be found here.
The increasing activity of unregulated and potentially dangerous entities comes as no surprise. As Hong Kong reopens to cryptocurrencies , interest in the industry is growing significantly. The cryptocurrency exchange, OKX has attracted 10,000 users to its local mobile app in just one month. Large exchanges such as Gate.io entered the local market long before the regulations went into effect, wanting to be first in onboarding local traders.
