Hong Kong-based OSL, part of BC Group, said on Thursday it had become the first cryptocurrency firm to apply for a digital asset exchange license from the Securities & Futures Commission (SFC).
Hong Kong hosts dozens of cryptocurrency exchanges, including some of the world’s largest, and the SFC on Wednesday published new rules, among the first of their kind, that allow exchanges to opt into regulation. Market participants said few others are expected to follow OSL’s lead, however.
Market watchdogs worldwide have been debating whether and how they should regulate the cryptocurrency exchange industry, with many choosing initially to focus on investor protection concerns.
The new rules stipulate, among other requirements, that a licensed exchange must provide services to professional investors only, have an insurance policy to protect clients in case assets are lost or stolen, and carry out due diligence into the cryptocurrencies traded on their exchanges.
“We congratulate the SFC on announcing its digital asset licensing regime and are proud to be the first applicant,” said Wayne Trench, chief executive of OSL, which provides digital asset brokerage, exchange and custody services for institutions and professional investors.
Many other exchanges in Hong Kong said they welcomed the rules, but few are expected to apply.
“We believe that a handful of exchanges will take the invitation to opt-in into SFC’s regulation plan, however, we do not expect to see a large number of exchanges rushing into the regulation net,” said OKEX, one of the world’s largest exchanges, said in a note.
OKEX, which has a significant presence in Hong Kong, nontheless described the rules as “a positive move for the overall cryptocurrency industry”.
Some hedge funds and family offices trade cryptocurrencies but retail investors make up the bulk of trading at most large exchanges.
“This framework is in a space where big exchanges will find it difficult to comply without losing too much of their business – a major strategic decision to take – while many smaller exchanges will find it difficult to comply from a practical perspective,” said Hoi Tak Leung, counsel at law firm Ashurst.
There are approximately 3,000 cryptocurrencies in the world with a total market cap of $200 billion-$300 billion according to estimates from industry data provider CoinMarketCap. These can be traded on over 200 cryptoexchanges.
Ashley Alder, the SFC’s chief executive, said in a speech on Wednesday that the SFC could not regulate all cryptocurrencies and cryptocurrency exchanges without new legislation, as bitcoin for example, did not count as a security under current rules.
Instead the SFC proposed that exchanges can opt into regulation by allowing trading of at least one security on their platform.