Hong Kong is set to tighten regulations on cryptocurrencies, with plans to put exchanges, traders and other related companies under the oversight of the Securities and Futures Commission.

With less stringent rules on digital currencies than mainland China, where all crypto-related commercial activities are effectively banned, Hong Kong has become a thriving market for initial coin offerings. But growing concerns over fraud and money laundering have prompted the regulator into action.

According to the SFC’s guidelines, investment funds will be required to obtain a license if more than 10% of the assets they manage are made up of bitcoin or other cryptocurrencies, and will be allowed to sell related products only to professional investors.

Under the voluntary scheme, exchanges will be able to test virtual currency products or services temporarily in a “regulatory sandbox” before deciding on whether to seek a license.

The proposed regulations, which are to be implemented in stages, will also mean that companies can only issue ICOs for tokens that fulfilled SFC’s requirements. For instance, the tokens must have existed for at least 12 months.

In February, the SFC sent warning letters to seven local exchanges after receiving complaints from investors claiming they had been unable to withdraw fiat or cryptocurrencies from their accounts. Certain exchanges were accused of misappropriating assets or manipulating the market.

In March, the commission ordered Black Cell Technology to halt its ICO and charged the company with conducting unauthorized promotional activities.

Hong Kong’s actions reflect a growing trend. The Group of 20 leading economies is considering ways to regulate virtual currency assets as part of the global fight against money laundering.

As a financial center closely linked to mainland China, Hong Kong is taking steps in the right direction with measures like requiring identity verification for transactions, said Daisuke Yasaku of the Daiwa Institute of Research.

But the “cost of regulations will be high,” he warned.

Depending on the design of its platforms, an exchange can be required to report frequently to the authority and subject to rigorous inspections and monitoring, Yasaku pointed out.

“The requirements of the SFC initiative may prove too burdensome for some operators”, said Timothy Loh, who manages a law firm in the territory. Some will decide not to join the new framework in order to maintain their current shares in the market.

Some argue that higher trading costs also risk discouraging institutional investors from entering the market, dampening hopes that their presence will help stabilize it. The counter argument is that tighter regulations may lead to greater investor confidence over the long run.

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