Hong Kong Regulator Warns Against High Leverage Cryptocurrency Futures Contracts

The warning comes on the back of newly-detailed regulatory proposals to govern the wider virtual asset exchange industry. BeInCrypto reported earlier today on a speech given by SFC Chief Executive Officer, Ashley Alder during Hong Kong FinTech Week 2019.

Existing Regulations and Cryptocurrency

The SFC is looking to apply existing securities regulations, with a few tweaks, to the virtual currency exchange industry. Those exchanges offering at least one digital asset deemed a security or product considered a futures contract will be forced to register with the authority. Alder says this will make for an “opt-in” system. Those exchanges not wanting to be regulated can simply drop all assets deemed securities and futures products and continue offering their services without SFC oversight and safeguards. During the speech, Alder mentions specifically that Bitcoin “and other, more familiar crypto assets” are not considered securities. He also comments on the risks associated with high leverage futures contracts offered at some crypto-asset trading venues. Following the speech, the SFC published a clear warning against these futures contracts and the platforms offering them. The regulator writes:

“Investors are exposed to amplified risks due to the highly leveraged nature of virtual asset futures contracts. Moreover, the complexities and inherent risks of these products are likely to be difficult for the average investor to understand.”

The regulator continues, acknowledging the risk of market manipulation on platforms offering futures contract trading. It adds that the lack of regulatory oversight leads to incidents of malpractice, with some exchanges changing trading rules associated with still-open futures contracts.

Illegally Operating in Hong Kong

The warning also reminds investors that any platform offering such products may well be operating illegally in Hong Kong. If the futures contracts offered to meet the definition provided by the SFC, they must hold a license. The regulator adds:

“The SFC has not licensed or authorised any person in Hong Kong to offer or trade virtual asset futures contracts. Given the current risks associated with these contracts and in order to protect the investing public, the SFC would be unlikely to grant a licence or authorisation to carry on a business in such contracts.”

The document concludes by reiterating previous SFC investor warnings against cryptocurrency investment in general. It states that risks already inherent in the digital asset market are only amplified by using unregulated exchanges offering highly leveraged futures contracts. The SFC’s new proposals and warning, ultimately, shed little light on how it will approach virtual currencies going forward. In Alder’s speech, the CEO is clear to draw distinctions between stablecoin projects, like Facebook’s Libra, and assets lacking “intrinsic value” such as Bitcoin. He also acknowledges the need for coordinated action between domestic and international authorities to draw up new and more appropriate regulatory frameworks to govern the growing industry. On the other hand, exchanges offering Bitcoin and other digital currency trading can now receive a green light from the SFC if they offer at least one asset considered a security.

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