The Securities and Futures Commission of Hong Kong has introduced a landmark regulation requiring licensed crypto exchanges to maintain a minimum insurance coverage of 50% for customers' assets. This move comes as part of the regulator's commitment to safeguarding user funds and enhancing the overall security framework of the crypto industry in Hong Kong. Prominent exchanges, OSL Exchange and HashKey Exchange, have already taken steps to exceed this requirement, signing comprehensive insurance agreements to cover up to 95% and $50 million to $400 million worth of users' assets, respectively.


In a pioneering move, the Securities and Futures Commission (SFC) of Hong Kong has instituted a groundbreaking regulation that mandates licensed crypto exchanges to maintain a minimum insurance coverage of 50% for customers' assets under custody. This regulatory initiative is geared towards fortifying user protection and bolstering the overall security infrastructure within the crypto industry operating in the region.

The implementation of this insurance requirement signifies a pivotal step by the Hong Kong regulator to establish a robust risk management framework for crypto exchanges, acknowledging the evolving landscape and the need for stringent safeguards. The move aims to instill confidence among retail investors and users by ensuring that their digital assets are adequately protected against potential risks and vulnerabilities.

Leading the way in adhering to and exceeding these regulatory standards are OSL Exchange and HashKey Exchange. OSL Exchange, a licensed virtual asset trading platform, recently announced a two-year partnership with Canopius, a syndicate of underwriter Lloyds of London. This strategic collaboration enables OSL to provide insurance coverage of 95% for its users' assets, significantly surpassing the regulatory minimum. HashKey Exchange, another licensed crypto trading platform in Hong Kong, has also taken proactive steps by signing a comprehensive crypto insurance agreement with OneInfinity. This insurance coverage not only extends to users' assets but also encompasses incidents related to server downtime, data backup, and load management, offering a holistic protection framework.

As Hong Kong granted retail investors access to crypto trading in August last year, OSL and HashKey emerged as the first and only exchanges to secure virtual asset trading licenses. Currently, there are 13 entities in the process of applying for similar licenses, highlighting the growing interest and participation in the crypto space in the region.

The licensing process for crypto exchanges in Hong Kong involves stringent due diligence checks, including comprehensive financial audits that go beyond traditional proof-of-reserves. While the application fees are relatively modest, ranging in the hundreds of dollars, the overall expenditures for Web3 firms seeking licenses can amount to as much as $25 million. These costs primarily cover product development and team-building efforts, reflecting the commitment of market participants to comply with regulatory standards.

In summary, the introduction of the 50% insurance requirement by the SFC marks a significant stride towards fostering a secure and resilient crypto ecosystem in Hong Kong. Exchanges proactively exceeding these requirements contribute to elevating industry standards and ensuring a secure environment for users, reinforcing the region's commitment to responsible and forward-looking crypto regulation.

(DEREK ANDERSEN, COINTELEGRAPH, 2024)