New regulation could lead to industry consolidation and greater institutional money, said panellists at ASIFMA’s annual conference in Singapore.
At Hong Kong FinTech Week last week, SFC (Securities and Futures Commission) chief executive Ashley Alder announced a new regulatory framework for virtual assets, accompanied by an official statement from the regulator. Alder had said that the regulator’s aim for the framework was to protect investors who are trading virtual assets.
In Singapore, panellists at the ASIFMA (Asia Securities Industry & Financial Markets Association) Annual Conference welcomed the SFC’s announcement.
Hugh Madden, co-founder and CTO for ANX International, a Hong Kong-based digital asset exchange, said that minimum requirements to obtain an SFC licence will lead to consolidation in the market as “unsavoury firms” leave the industry.
“We are very happy with the SFC decision,” he said. “We have been following best practices as laid out by ASIFMA with the expectation that SFC licensing is just around the corner, levelling the playing field. Other players that don’t follow best practices put us at a commercial disadvantage. We expect that there will be a quick consolidation and unsavoury firms will leave the market.”
Another panellist, Mark Brady, executive director at SFC-licensed asset management services provider Venture Smart Asia Limited, added that the new rules for fund managers are a positive development:
“We are glad the regulators are engaging and studying digital assets. There are some players in the industry that aren’t above board and we don’t want some bad apples to ruin it for everyone,” he said. “Clear guidance from the regulator is therefore necessary to get people to spend time and energy to develop adequate processes.”
The SFC’s approach brings virtual asset managers under its remit and imposes licensing conditions on all firms managing portfolios that invest over 10 percent of their gross assets in virtual assets. Only professional investors will be allowed to participate in these assets at first.
Assets typically falling under the SFC’s remit must be defined as “securities” or “futures contracts”, which excludes crypto funds that invest only in virtual assets and thus do not meet the SFC’s definitions. Alder said that this gap can be filled by focusing on existing regulatory frameworks for fund distribution.
With regard to regulating trading platforms, the SFC has released a conceptual framework for the potential regulation of exchanges. The regulator intends to place interested exchanges into a regulatory sandbox environment to observe their live operations and consider the effectiveness of proposed regulatory requirements through discussions and information gathering. The SFC will determine its suitability as a regulator for such trading platforms as a result of this exercise.
Madden said that Japan’s FSA (Financial Services Agency) embeds an adviser at each licensed entity giving it a better understanding of the market: “It is good to have the SFC do something similar,” he said.
According to a bulletin by law firm Herbert Smith Freehills, an exchange deemed appropriate for an SFC licence can expect clear commercial benefits: “A licence by the SFC would give a trading platform a clear competitive advantage over its unlicensed peers. It will act as an indicator to the market and investors that the operator is willing to adhere to a high level of standards and practices.”
The SFC’s approach to trading platforms differs from other regulatory approaches in the region in that it is currently an opt-in framework. According to Satoshi Izumihara, deputy director for international capital markets regulation for the international affairs office at Japan’s FSA, this approach holds a potential route for other regimes that are hesitant to invest in public regulation at this stage of the industry’s development.
“The framework encourages the industry to opt-in rather than impose the rules directly. The regulator is essentially trying to see if entities are competent enough to be regulated which gives them an incentive to up their processes since legitimate entities want the regulatory validation,” he said. “This also helps in getting more information from these entities. We are very interested in seeing what happens in Hong Kong.”
The rapid pace of innovation in the industry, the slower pace of establishing public regulation and the risks of cross-border regulatory arbitrage have meant that the FSA has preferred self-regulation by the industry over public regulation.
“We are not quite keen to come out with public regulation because the industry is still at quite an early stage. Given the risks of regulatory arbitrage, we are waiting to see what other regulators are doing at the moment. We want all the regulatory requirements to be aligned but at the moment that is too ambitious,” Izumihara added.
Also speaking at the ASIFMA conference, Bénédicte Nolens, Circle’s head of regulatory affairs for Asia & Europe and CCO for Asia, and a Hong Kong Fintech Association board member, said that the SFC circular on digital asset managers is an important step for attracting institutional money into the space.
“Funds with over 10 percent invested in digital assets need approval by the SFC but those with below that can proceed. This gives institutional money the opportunity to consider this asset class since these funds typically tend to have a mandate towards regulated activity. The SFC’s actions overall point to the fact that they understand that crypto asset are here to stay and that is an important acknowledgement.”
“Even as we move towards a digital economy, the digitalisation of financial services has been much slower and that is because of regulation acting as a barrier to entry for new players. The SFC’s move is an acknowledgement that they want new players to come into this space,” she added.