Protecting investors

Unlike the outgoing system, the retail-friendly rules taking effect in June will be mandatory, meaning all exchanges doing business in Hong Kong will eventually need to get licensed.

Hong Kong regulators said they hope to move quickly on issuing the first licenses.

Some crypto businesses say the switch is not expected to disrupt day-to-day operations as authorities allow a one-year transition period.

HashKey and OSL, the two existing licensees, told AFP they will apply for fresh licenses and grow their retail presence.

"There's a very significant need in the market to have platforms that are easily accessible... but are also properly managed and properly regulated," said Michel Lee, HashKey Group's executive president.

"This new regime adds a lot more clarity as to what you're getting, what's the safety standard you will be provided with."

With the memory of FTX's collapse still fresh, Hong Kong regulators said the new rules aim to "provide robust investor protection and manage key risks".

One safeguard is that exchanges can only provide "large-cap virtual assets"—such as bitcoin and ethereum—to retail investors, and must set up internal committees to decide which cryptocurrencies to offer.

Retail clients also have to undergo knowledge tests and risk profiling before they can trade—though it remains unclear what level of knowledge is deemed enough.

Meanwhile, products like stablecoins and crypto derivatives are off-limits for retail investors for the time being.

"The new regulations are meant to protect investors better," said Castellano, the legal scholar.

"It's wise to have a cautionary approach."

© 2023 AFP