A research report by the Hong Kong Exchange (HKEX) argued that fintech firms using cryptocurrency should be subjected “to the governance by the Securities Law”.
HKEX Finds Risks In Large-Scale Deployment of Blockchain In Securities Industry
The stock exchange of Hong Kong, Asia’s third-largest operator by market cap, published a report on fintech applications and related regulatory framework. Focusing on blockchain and AI applications in the securities industry, the paper explored how they could be integrated into trading, clearing, settlement, and regulation, in a feasible way.
The exchange’s Chief China Economist’s Office and Innovation Lab discussed how blockchain is regulated differently in different jurisdictions and found that the “principle of consistency requires that […] the issuance of digital currencies and digital funds must be governed under the existing securities regulatory framework”.
“The public fund-raising activities of shares issuance by issuers — which do so with merely a prospectus published on the Internet but without any underwriter nor compliance with the IPO registration procedures or strict disclosure requirements — must be rectified by subjecting them to the governance by the Securities Law.”
The report also found challenges for blockchain in private equity markets from a legal compliance perspective as e-certificates of ownership need to be approved by regulators as well as legal departments.
“To recognize equity rights and other corporate operations, regulators may need the help of multiple centers to enable related authoritative entities to participate in the blockchain for exercising their respective responsibilities and at the same time to enable information transparency and timely sharing.”
The authors also show concern about the risks of a large scale deployment of blockchain in the securities industry.
“As each node has a ledger of the whole chain, any successful hacking will not only expose data of the hacked node to theft but also expose all data in the full ledger to potential replication.”
As to the applications of blockchain in the securities industry, the document explained that its distributed, decentralized, encrypted, extensible, and programmable nature, have the potential of being used in post-trade clearing and settlement, as well as asset rehypothecation and in the private equity market.
Hong Kong Stock Exchange was recently on the news after Bitmain, one of the largest players in the crypto mining industry, filing for an initial public offering on the exchange and disclosing $2.5 billion revenue in 2017 alone, as well as gross profit of $1.2 billion and cryptocurrency holdings of approximately $105 million in cash.