The Hong Kong Stock Exchange (HKEX) believes that legal frameworks around finance and cryptos should be the same.
The world’s sixth largest stock exchange in its research paper looks at the need for regulators to keep up with the pace of financial technologies. And if they lag behind, the existing laws of finance should be applicable to the companies in the FinTech space, based on their resemblance with the traditional services. Blockchain, for instance, could be brought inside the space of investment, trading, clearing, and settlement. Similarly, issuing digital assets on blockchain could be governed by an existing securities regulatory framework.
“Despite the difference in Fintech regulations among countries,” HKEX added, “the principle of consistency generally applies, i.e. financial services with the same nature are subject to the same regulations under the existing legal framework, so as to maintain fair competition, ensure regulatory effectiveness and prevent regulatory arbitrage.”
Crypto innovations can improve a system as much as it can hurt it. The HKEX paper takes instances from other countries and their blockchain testing labs. Known as “supervisory sandbox testing,” the process aims to minimize risks by deploying blockchain and crypto innovation among a privately-governed network of users with minimal adaption requirements and regulatory restrictions. A full-scale deployment ensues only after the crypto product passes on the serviceability, the security, and the regulatory front.
Noting that supervisory sandbox practices are only limited to the banking sectors in its current format, the HKEX report recommends that these testing models should be extended to non-banking sectors such as blockchain and cryptos as well. Excerpts:
“Given that Fintech Supervisory Sandbox (FSS) is timely and flexible in making a regulatory response to market innovations, it can encourage Fintech innovations and minimize the negative impact of regulatory uncertainties with effective risk prevention and control. It is, therefore, the most suitable regulatory tool for Fintech.”
The HKEX research paper proposes that Hong Kong regulators establish an effective regulatory technology (RegTech) system by incorporating more use cases of AI and big data. The system would include a better, face recognition-enabled KYC process, sentiment monitoring, and identifying corporate relationships.
In the context of crypto and blockchain startups, a working RegTech system would allow them to approach legalities and auditing faster than usual. They would be able to put their business papers, including “registration information, annual reports, notices/announcements and information on its shareholders/legal persons and connected companies,” online to seek approvals in a timely fashion.
“There are now some business search engines (e.g. “Handshakes”) in the market which can help regulators analyze the nexus of commercial transactions and relationships in the financial market,” the HKEX paper added.
“These business search engines can analyze public information of listed issuers faster and in greater depth with the help of technologies, providing the accurate connections between companies and discovering possible insider dealing. This would be the primary application of big data in RegTech.
Featured image from Shutterstock.