Hong Kong’s Securities and Futures Commission (SFC) recently revealed that it sent letters to seven cryptocurrency exchanges, warning them that some of the tokens they listed could be classed as securities, as defined in the Securities and Futures Ordinance (SFO). Without a license, these cryptocurrency exchanges aren’t allowed to trade these tokens.
The SFC didn’t disclose the names of the cryptocurrency exchanges, but revealed they are either based in or connected to Hong Kong, and among the top 20 by trading volume. After the announcement, most of the contacted exchanges either confirmed they didn’t trade these tokens, or delisted said tokens.
The regulator notes that it may take further action against cryptocurrency exchanges that don’t comply, and against those who are “repeat offenders.” Moreover, it revealed that it wrote to seven initial coin offering (ICO) issuers, most of which confirmed they were complying with the region’s regulations.
Those who didn’t, per the SFC, ceased to offer their tokens to Hong Kong-based investors. The regulator warned it is closely monitoring the ICO space, and will “not tolerate any violations of the securities laws of Hong Kong.”
SFC’s Chief Executive Officer Ashley Alder stated:
“We will continue to police the market and enforce when necessary. But we are also urging market professionals to do proper gatekeeping to prevent frauds or dubious fundraising and to assist us in ensuring compliance with the law."
The regulator further revealed that investors have complained they were unable to withdraw fiat currencies from accounts they had opened at cryptocurrency exchanges. Some complaints even claimed the exchanges misappropriated their funds, or manipulated the market. Others pointed to technical breakdowns that led to significant losses.
Regarding ICO issuers, various complaints alleged they were unlicensed or were engaging in fraudulent activities. In response to these complaints, the SFC’s Executive Director, Julia Leung, warned that if investors aren’t prepared to lose their funds, they shouldn’t invest in ICOs.
"If investors cannot fully understand the risks of cryptocurrencies and ICOs or they are not prepared for a significant loss, they should not invest. Investors who store their fiat currencies and cryptocurrencies with unregulated cryptocurrency exchanges should be aware of the risks of hacking and misappropriation of assets."
Investors were also warned about the price volatility ICO-related tokens may have, the dangers of being hacked, and fraud. When any of these occur, it may be hard for the regulator to take action and recover the funds.
Further, it may not have jurisdiction to protect investors if the exchanges or ICO issuers have no nexus in Hong Kong.