Hong Kong’s financial watchdog has issued a warning to cryptocurrency firms that they should not use the word ‘bank’ or any similar terms in their names or marketing materials. The Securities and Futures Commission (SFC) said that such practices could mislead the public into thinking that these firms are licensed or regulated by the authorities, when in fact they are not.
Cryptocurrencies have been gaining popularity and acceptance in recent years, as more people and businesses adopt them as a form of payment, investment, or speculation. However, the regulatory landscape for crypto exchanges, the platforms that facilitate the trading and exchange of cryptocurrencies, is still unclear and evolving.
The SFC said that it has noticed an increasing number of crypto-related platforms and service providers that have adopted names or logos that resemble those of legitimate financial institutions. Some of these firms have also claimed to offer banking services or products, such as deposits, loans, or debit cards, without having the necessary authorization or approval.
Tekedia Mini-MBA edition 14 (June 3 – Sept 2, 2024) begins registrations; get massive discounts with early registration here.
Tekedia AI in Business Masterclass opens registrations here.
Join Tekedia Capital Syndicate and invest in Africa’s finest startups here.
The SFC warned that these firms may be violating the Banking Ordinance, which prohibits any person from using the word ‘bank’ or any derivatives thereof in relation to any business carried on in Hong Kong, unless they are a licensed bank or an authorized institution. The SFC also said that it may take regulatory action against these firms if they are found to be engaging in any activities that pose risks to investors or the financial system.
One of the main challenges for crypto exchanges is to comply with the bank ordinance requirements, which are the rules and regulations that apply to banks and other financial institutions. These requirements aim to ensure the safety and soundness of the financial system, protect the interests of customers and investors, and prevent money laundering and terrorist financing.
However, crypto exchanges are not banks, and they operate in a different way. They do not hold or issue fiat currency, they do not offer deposit or lending services, and they do not have a central authority or intermediary. They rely on cryptography and blockchain technology to verify and record transactions, and they use digital wallets to store and transfer cryptocurrencies.
Therefore, some of the bank ordinance requirements may not be relevant or applicable to crypto exchanges or may pose significant challenges or costs for them to comply. For example, crypto exchanges may have difficulty in meeting the capital adequacy requirements, which are based on the risk-weighted assets of banks. Crypto exchanges may not have a clear way to measure or manage the risks associated with cryptocurrencies, which are volatile and subject to hacking or theft.
Another example is the customer due diligence requirements, which require banks to verify the identity and background of their customers, and to monitor their transactions for suspicious activities. Crypto exchanges may face challenges in implementing these requirements, as some of their customers may prefer to remain anonymous or pseudonymous, and some of their transactions may be encrypted or decentralized.
Therefore, there is a need for a clear and consistent regulatory framework for crypto exchanges, that takes into account their unique features and risks, and that balances the objectives of innovation, competition, and consumer protection. Some jurisdictions have already taken steps to regulate crypto exchanges, such as Japan, Singapore, Switzerland, and Malta. These jurisdictions have introduced licensing schemes, registration systems, or sandbox regimes for crypto exchanges, that set out specific rules and standards for them to operate legally and safely.
However, there is still a lack of global coordination and harmonization among regulators, which may create uncertainty and inconsistency for crypto exchanges that operate across borders. There is also a need for more research and dialogue among stakeholders, including regulators, industry players, academics, and consumers, to understand the benefits and challenges of crypto exchanges, and to develop best practices and guidelines for them.
The SFC urged investors to exercise caution when dealing with crypto-related firms and to check whether they are licensed or registered with the relevant authorities before engaging in any transactions. The SFC also reminded investors that crypto assets are highly volatile and subject to hacking, fraud, and cyberattacks, and that they may not have any legal protection or recourse if they suffer losses.
Crypto exchanges are an emerging and innovative form of financial intermediation that offer new opportunities and challenges for the financial system. They need to meet the bank ordinance requirements that are relevant and appropriate for their business model and risk profile. They also need to adapt to the changing regulatory environment that seeks to foster innovation while ensuring stability and security.