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Hong Kong Regulator Indicates DeFi Projects Could Face Licensing and Regulation

Hong Kong’s Securities and Futures Commission (SFC) has revealed that decentralized finance (DeFi) projects could be subject to regulation and licensing requirements. Keith Choy, the interim head of intermediaries at SFC, said that DeFi activities would be subject to the same regulatory requirements as traditional financial activity if it falls within the scope of the Securities and Futures Ordinance (SFO).

DeFi Trading Platforms Must Comply with Type 7 Licensing Requirements

According to Choy, providing automated trading services is a regulated activity under the SFO. Therefore, if a decentralized platform allows trading in virtual assets that constitute securities or futures as defined under the SFO, the platform and operators must have a Type 7 license. Offering a collective investment scheme to the public in Hong Kong is also subject to authorization requirements.

Financial Stability and Transparency Concerns in DeFi

Issues of financial stability and limited transparency due to a lack of data and unregulated firms and activities are the primary concerns for DeFi regulators, Choy said. He also highlighted market integrity issues such as price oracle manipulation, front-running transactions, and investor protection concerns.

The SFC had issued a statement in December 2022 warning investors of the risks associated with virtual asset platforms. Hong Kong’s new licensing regime for virtual asset trading platforms is set to take effect in June 2023.

DeFi Under Scrutiny as Regulators Worldwide Seek to Regulate

A recent report from the French central bank proposed that DeFi projects may need to comply with governance and security standards. Additionally, the ACPR, which supervises banks and insurers in France, released a consultation paper calling for rules that would prevent intermediaries from selling high-risk products to retail investors. Such products are typically reserved for seasoned finance professionals. These moves demonstrate a growing trend of regulators seeking to regulate the DeFi space.