News Risk Management 14 Feb 2018

Hong Kong:Securities and Futures Commission warns of cryptocurrency risks

14 Feb 2018

Yet another Asian regulator has expressed reservations about cryptocurrencies. Hong Kong's Securities and Futures Commission (SFC) issued a statement on Friday alerting investors to the potential risks of dealing with cryptocurrency exchanges and investing in initial coin offerings (ICOs).

This was not the first time the SFC had warned of cryptocurrency risks. Following a cautionary statement on ICOs released last September, the SFC has taken regulatory action against a number of cryptocurrency exchanges and issuers of ICOs. It has sent letters to seven exchanges in Hong Kong or with connections to Hong Kong, warning them that they should not trade cryptocurrencies which are "securities" as defined in the Securities and Futures Ordinance (SFO) without a licence.

Most of these cryptocurrency exchanges either confirmed that they did not provide trading services for such cryptocurrencies or took immediate rectification measures, including removing relevant cryptocurrencies from their platforms, noted the SFC, which may take further action against those which disregard its orders and those which are repeat offenders.

The SFC has also written to seven ICO issuers. Most of them confirmed compliance with the SFC's regulatory regime or immediately ceased to offer tokens to Hong Kong investors. The SFC said it will continue to closely monitor ICOs, and will not tolerate any violations of the securities laws of Hong Kong.

"We will continue to police the market and enforce when necessary," said Mr Ashley Alder, the SFC's Chief Executive Officer. "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."

Investors have complained to the SFC that they were unable to withdraw fiat currencies or cryptocurrencies from their accounts opened with cryptocurrency exchanges. Some complainants claimed that cryptocurrency exchanges had misappropriated their assets or manipulated the market, or that technical breakdowns of the exchanges' platforms caused them significant losses. Several complaints against ICO issuers alleged unlicensed or fraudulent activities.

"If investors cannot fully understand the risks of cryptocurrencies and ICOs or they are not prepared for a significant loss, they should not invest," said Ms Julia Leung, the SFC's Executive Director of Intermediaries. "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 are also urged to be wary of the increased risk of extreme price volatility, hacking and fraud when investing in cryptocurrencies and ICOs, and using services of cryptocurrency exchanges. Where these occur in an online environment, victims may have difficulty pursuing action against cryptocurrency exchanges or fraudsters to recover losses.

The SFC may not have jurisdiction over cryptocurrency exchanges and ICO issuers if they have no nexus with Hong Kong or do not provide trading services for cryptocurrencies which are "securities" or "futures contracts". However, if there is suspicion of fraud, the SFC could refer cases to the Police for investigation.

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