Nov. 6th: Hong Kong Licensing Requirement For Virtual Asset Exchanges

This is your daily roundup for Wednesday, November 6, 2019. Hong Kong’s SFC releases a position paper on virtual asset exchanges, Cash App restructures its bitcoin fees, and Nervos Network will launch its “Lina” blockchain next week.

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Hong Kong Crypto Exchange Position

Hong Kong’s Securities and Futures Commission (SFC) has released a position paper on virtual asset exchanges. The paper outlines custody, KYC, and a new licensing requirement for any virtual asset firm trading at least one security token. Decentralized and non-custodial trading platforms will not be reviewed by the SFC.

Under the new licensing conditions, regulated crypto exchanges can only offer products to professional investors. Exchanges must also obtain the SFC’s prior written approval for any plan or proposal to add any product to its trading platform and must provide monthly reports to the SFC. Only 2% of assets can be stored on hot wallets. Per the license requirement, exchanges must use a Hong Kong incorporated custodian that is a wholly owned subsidiary of the exchange.

An insurance policy must also cover the risks of assets held in both hot storage (full coverage) and cold storage (a substantial coverage) at all times. Lastly, the report says exchanges should take all reasonable steps to establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience, and investment objectives.

The regulator also issued a warning Wednesday to providers of cryptocurrency-based futures products targeting Hong Kong citizens without the proper paperwork. The SFC said it has not licensed or authorised any person in Hong Kong to offer or trade virtual asset futures contracts to date and remains unlikely to grant a license.

Cash App Bitcoin Fees

Square’s Cash App has started charging standalone fees for bitcoin purchases as high as 1.76 percent. The Cash App website now states “Cash App may charge a fee when you buy or sell bitcoin. If so, the fee will be listed on the trade confirmation before you complete a transaction.”

A Square spokesperson confirmed that Cash App is rolling out a new fee structure for bitcoin trades. Previously, fees were included in the spread. Now Square says it has broken fees out of the spread for user transparency. The 1.76 percent fee is still favorably for smaller bitcoin transactions when compared to Coinbase. Square reported bitcoin sales of $148 million for its Q3 2019.

Security Token Research Consortium

Mitsubishi UFJ Financial Group – Japan’s largest financial group and the fifth largest bank in the world by assets – is leading a 22-member Security Token Research Consortium to develop standards around security token management. Securitize is the only issuance platform provider that has joined the consortium. 

The group is pursuing ways to develop, offer and onboard financial transactions services using blockchain, with a focus on automatic settlement for securities and funds. It plans to develop a dedicated security token blockchain called “Progmat” to provide a platform for managing securitized assets, including trust functions to minimize counterparty risk.

Mitsubishi UFJ Financial Group is also developing a blockchain payments network with fintech company Alkami Technologies to be launched in the first half of 2020. The company is also participating in a blockchain proof-of-concept to streamline KYC processes with HSBC Singapore, OCBC Bank and the Info-communications Media Development Authority.

Nervos Network Launch

Nervos Network plans to launch its “Lina” blockchain next week on Nov. 16. It’s estimated that the startup raised $72 million in its three-week token sale. Investors included China Merchants Bank International (CMBI), Polychain Capital, Blockchain Capital, Hashkey, MultiCoin and Distributed Global.

According to co-founder Kevin Wang, the mainnet will enable users to build applications on their blockchain without facing the tradeoff between scalability and security. The company’s new CKByte token entitles holders to storage space on the blockchain, acting as an incentive mechanism for miners and acting as a resource management tool.

The company has established its significant presence in the Chinese developers’ community as some of the core team members are among the earliest ethereum developers in China.

EU Stablecoin Regulation

According to Reuters, a group within the EU presidency is working on a draft political declaration that will say the EU should regulate stablecoins in particular. The declaration is being developed in response to Libra, with a focus on how stablecoins should be regulated.

A source told CoinDesk “The statement is to highlight the need for a proper regulatory framework for those stablecoins and as a consequence, different ideas should be explored. One of them is the possibility of having something that is managed by the ECB [European Central Bank] and other central banks.” The declaration is expected to be adopted by the EU on Dec. 5, at the finance ministers’ next meeting