In an effort to regulate the seemingly unregulate-able, Ashley Alder, chief executive officer of the Hong Kong Securities and Futures Commission (SFC), announced new and “creative” guidelines for cryptoasset fund managers and exchanges operating in the territory, during an address yesterday.

Due to the novelty, and thus difficulty in regulating cryptoasset exchanges, the SFC will offer a so-called sandbox arrangement. Exchange platforms will be able to self-identify to the body in a seeming quid pro quo that will allow them to operate, while being monitored, outside of a specific regulatory regime; whereby “no formal regulatory approval will be given to an [exchange] operator.”

In scrutinizing such sandboxed entities, the SFC hopes to “discover, with a high level of confidence, if it would be appropriate for them to be regulated by the SFC.” A licence could then be granted based on the findings during this discovery period, Alder said.

Alder explained the move, saying:

We are not yet sure that virtual asset trading platforms are in fact suitable for regulation. They are technically, structurally and qualitatively different from traditional stock and futures exchanges. Our aim here is to explore how they might be regulated and then form a more definitive view after this exploratory stage.

Fund Managers Won’t Get a Pass

With respect to funds dealing with cryptoassets, the SFC plans to regulate those “one way or another” by putting into effect wide-ranging qualifications to both mixed funds (traditional and cryptoasset), and “pure” or all-cryptoasset funds.

To wit, fund managers dealing with 10% or more of cryptoassets, as well as all-cryptoasset funds which are required to register with the SFC as brokers, will be subject to crypto-specific “new requirements.” These guidelines specify that brokers are only to target professional investors who understand the asset’s volatility; are to conduct due diligence on behalf of their clients; and adequately inform clients of details and risks associated with any funds they deal with.

Hong Kong of Outsized Importance

Hong Kong is a large and important piece of the cryptoasset industry, with an influence greater than its small geographical size. Some of the world’s biggest cryptoasset exchanges, like Bitfinex, operate out of the territory; and Bitmain, the cryptocurrency mining manufacturer, recently filed its public offering there as did its competitors.

The need for regulators in Hong Kong to act, combined with this stature in the cryptoasset industry, is precisely the dilemma provoking such experimentation. The situation is not lost on Alder:

In Hong Kong we now have a sizeable population of investors who have an interest in trading virtual assets through unregulated trading platforms. At the same time, there is a growing demand for funds which invest in virtual assets. We do not have a lot of options here.