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What will happen if Hong Kong bans retail investors from trading crypto?

Hong Kong is poised to ban small investors from buying cryptocurrencies, while making exchanges get licences. Industry experts discuss how this might play out.

Hong Kong is poised to ban small investors from buying cryptocurrencies, while making exchanges get licences. Industry experts discuss how this might play out.

Retail investors in Hong Kong should not be permitted to trade cryptocurrencies, while the city’s crypto exchanges should be required to obtain licenses to operate, according to the results of a recent public consultation.

The three-month consultation — which included feedback from the industry as well as members of the public — was conducted by Hong Kong’s Financial Services and Treasury Bureau and will help shape an amendment bill that will be introduced to the territory’s Legislative Council in the 2021-22 legislative session, according to the government.

If the bill is passed and comes into force, it could force retail investors to adopt alternative higher-risk trading methods, such as using offshore and totally unregulated crypto services, some industry observers say. But others believe that the cryptocurrency market needs more regulation and that these rules could benefit crypto-related products and proxy markets, such as for crypto ETFs.

“There were not many surprises from what the original consultation published a couple of months ago,” said Henri Arslanian, PwC’s global crypto leader, in an interview with Forkast.News. “Probably the biggest disappointment in the broader crypto ecosystem was the fact that retail investors would not be allowed to trade with regulated exchanges.”

Crypto trading would be only for professional investors

According to the legislative proposals: “with reference to the opt-in regime, we [FSTB] propose to empower the SFC [Securities and Futures Commission] to impose and vary as need be, licensing conditions, on licensed VASPs [virtual asset service providers], and implement regulatory requirements.” These requirements include professional investors only.

A professional investor means an individual or corporation having a portfolio of not less than HKD 8 million, or about US$1 million. Under the proposed rule, only about 7% of the territory’s population would have enough money to qualify as “professional investors,” and the remaining 93% would be banned from trading crypto.  

“If we tell investors they are not able to trade using regulated platforms that have proper risk management, compliance and security, they may do it in other venues that are definitely higher risk, not only for them but for the broader ecosystem,” Arslanian told Forkast.News. “So, I think there’s a bit of disappointment to see that the SFC didn’t have at least a roadmap to show how they can open it up, although they mention that the rules may change and they may open up to retail investors in the future.”

Why others think regulation for crypto is overdue

Some insiders think regulations are needed for the over-hyped crypto market.

“With the hype around meme coins, and sharks ready to take profits, the crypto downturn is already imminent,” said Toya Zhang, chief operating officer of AAX, a crypto exchange platform. “It is unhealthy for the crypto space, once again proving that the market needs proper guidance and regulation to protect investors from chasing the bubble and to protect the healthy crypto from being demonized.”

Others say that regulation is inevitable for every growing industry.

“It’s good to see that the industry, that the regulators in the industry are working together on the additional regulation additional framework for the industry to get more structure, so I think it is a normal process,” said Charles d’Haussy, managing director of Consensys APAC, in an interview with Forkast.News. “People might have different views on this topic, but it’s really showing how the industry is maturing actually.”

Can regulation be good for business?

Some industry insiders see opportunities in Hong Kong’s new legislative proposal.  

Henry Chong, chief executive officer of Malaysia-based digital securities exchange Fusang, said retail investors in Hong Kong might circumvent the ban and look to “proxy crypto.”

“For instance, buying stocks of companies that demonstrate cryptocurrency-related services or which have directly invested into cryptocurrency, such as Tesla or MicroStrategy. This is highly likely to also include crypto ETFs in the future,” Chong said. “No doubt investors in Hong Kong will be quick to get on a similar bandwagon, if these are readily available. In a nutshell, it’s a boon for related products and proxies, like crypto ETFs.”

But the proposed bill keeps open the possibility for retail investors to trade crypto in Hong Kong — someday. “The SFC will continue to monitor the market and reconsider its position as the market becomes more mature in future,” the consultation paper said.

“The SFC did express the possibilities to open up the crypto market to non-private investors after a certain period of observation. We hope that SFC will permit exchanges to serve retail users,” said AAX’s Zhang.

Justin Solomon also contributed to this report

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