JAN 31, 2024
Hong Kong’s SFC bolsters investor protection with new insurance mandate
In an effort to fortify the cryptocurrency market and safeguard investors’ funds, the Hong Kong Securities and Futures Commission (SFC) has introduced a minimum insurance requirement of 50% for licensed cryptocurrency exchanges handling customers’ assets.
Guarding against insolvency risk
The move came to light through a statement published recently by OSL, one of Hong Kong’s licensed virtual asset trading platforms. It’s aimed at enhancing security measures, protecting users from potential security breaches or insolvency.
As part of that disclosure, OSL announced a two-year partnership with Canopius, an underwriter syndicate associated with Lloyd’s of London. Under this collaboration, OSL will provide insurance coverage for an impressive 95% of its users’ assets, surpassing the mandated 50%.
OSL emphasized its commitment to safeguarding regulated assets under custody, irrespective of the regulatory guidelines permitting virtual asset service providers (VASPs) to reduce insurance coverage to 50%.
Response to recent failures
This decision is grounded in the acknowledgment of the volatile market conditions and the series of cryptocurrency firm collapses witnessed in recent years. 2022 saw a number of high-profile crypto platform collapses, such as the demise of FTX.
HashKey Exchange, another licensed crypto exchange in Hong Kong, has also proactively secured its users’ assets by entering into a crypto insurance agreement with Hong Kong headquartered fintech firm OneDegree back in September. The insurer entered the digital assets space last July, expanding into the Middle East last month.
OneDegree’s arrangement with HashKey offers coverage ranging from $50 million to $400 million, extending beyond standard security breaches and insolvency to include server downtime, data back-up and load management incidents, ensuring comprehensive protection.
Broader regulatory efforts
The minimum insurance requirement is part of the SFC’s larger strategy to regulate the cryptocurrency industry in Hong Kong. While the Chinese autonomous territory enabled cryptocurrency trading for retail investors in August, only OSL and HashKey have obtained virtual asset trading licenses. Thirteen other entities are currently in the application process, undergoing rigorous due diligence checks, including comprehensive financial audits exceeding the scope beyond proof-of-reserve systems.
This insurance mandate represents a significant step toward enhancing investor confidence in the cryptocurrency market. As digital assets gain popularity, ensuring the security of customers’ funds has become paramount. The SFC’s proactive approach seeks to strike a balance between fostering innovation and safeguarding investors.
Products are also emerging that crypto users themselves can access. UK-based CryptoShield offers insurance protection directly to users that covers potential loss of funds on crypto platforms.
The cryptocurrency landscape in Hong Kong is evolving rapidly, with the SFC playing a pivotal role in shaping the regulatory environment. Regulators aim to establish a robust framework addressing potential risks and protecting market participants while embracing digital innovation.
As the regulatory landscape matures, more licensed crypto exchanges in Hong Kong may be required to meet the 50% minimum insurance requirement, further strengthening security measures and making the market a safer place for investors.