The “Digital Currency Innovation Lab” by Hawaii’s Department of Commerce, Division of Financial Institutions (DFI), and the Hawaii Technology Development Corporation (HTDC) will give “selected” firms a two-year reprieve from Hawaii’s state money transmitter license requirement, according to a press release shared Tuesday, as the state begins to develop new cryptocurrency legislation.
Hawaiian regulators have launched a digital currency sandbox initiative that exempts participating crypto companies from Hawaii’s infamous double-reserve requirement.
It may also mark the beginning of the end for perhaps the most restrictive state-level crypto licensing regimes left in the U.S.
DFI never banned crypto businesses from Hawaii. But when the regulator decided in 2017 that companies hold just as much fiat as their clients held crypto – the “double-reserve” requirement – previously licensed crypto companies, including Coinbase, fled the state arguing that the mandate was irrational, untenable and bad for consumers.
DFI now appears to recognize that its bar was too high. In the sandbox initiative’s FAQ, HTDC writes that DFI “wanted to address the concerns” of businesses who could not meet the regulatory requirements.
A DFI spokesman confirmed that the sandbox does away with the double reserve requirement.
DFI pledged not to take action against sandbox participants, the press release said.
“DFI is leveraging its statutory authority to provide an innovative way to introduce digital currency issuers into the State of Hawaii, while ensuring the safety of our consumers”, Iris Ikeda, Commissioner of Financial Institutions, said in the press release.
Ikeda further stated that the sandbox would allow regulators to “craft legislation that is conducive to cryptocurrencies development in Hawaii.”
Hawaii’s sandbox is not a regulatory free-for-all, according to the press release. Prospective companies must apply for entry via HTDC and pay a $500 application fee, plus $1,000 for each participating term. Companies have until May 1 to apply.
Hong Kong Regulator to Treat Some Crypto Exchanges Like Brokers
Hong Kong’s securities watchdog is to treat cryptocurrency trading platforms like traditional brokers if they offer security tokens, according to its second round of regulatory guidance for the industry.
The Securities and Futures Commission (SFC) released its position paper on virtual asset exchanges Wednesday, announcing a new licensing scheme that it said is not dissimilar from the one applied to Hong Kong’s security brokers and automated trading venues.
Any virtual asset firm trading at least one security token falls under the regulator’s purview. Applications for peer-to-peer (P2P) exchanges – such as decentralized exchanges (DEX) or non-custodial trade platforms – will not be reviewed by the SFC.
Under the new licensing conditions, regulated crypto exchanges can only offer products to “professional investors” as defined by the SFC. Firms may also only alter products or services following approval by the regulator and must have an existing relationship with an independent auditing firm, filing annual reports on exchange activities. Exchanges must further file monthly reports to the commission.
Hot wallets – crypto storage with live connections to the internet – may not hold more than 2 percent of an exchange’s total funds. While exchanges are mandated to have insurance for all assets in the event of a breach or hack, the SFC states.
Anti-money laundering (AML) and know-your-customer (KYC) procedures are cited as a chief concern, with the SFC saying exchanges must take steps to “establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience and investment objectives.”
Upon the granting of a license, firms enter into the SFC Regulatory Sandbox which the regulator says brings more exacting reporting and monitoring standards.
The regulator also issued a warning Wednesday to providers of cryptocurrency-based futures products targeting Hong Kong citizens without the proper paperwork. The SFC said it “has not licensed or authorised any person in Hong Kong to offer or trade virtual asset futures contracts” to date and remains “unlikely to grant a licence or authorisation to carry on a business in such contracts.”
Crypto derivative providers like BitMEX and OKEx already restrict access to their products in Hong Kong.
Passed in November 2018 and updated this October, the SFC’s first crypto licensing scheme, concerning funds that invest 10 percent or more of their portfolios in crypto, has only given the green light to one fund in the past year.
