Regulating DeFi Projects in Hong Kong: An Overview

On April 12th, it was reported that Cai Zhonghui, the interim head of the Intermediary Department of the Hong Kong Securities and Futures Commission, stated at today’s “2023 Hong Kong Web3 Carnival” that the DeFi project needs to be regulated by SFC, and automatic trading services are also under SFC supervision. If virtual assets are involved in the central trading platform, a license also needs to be applied for; Some DeFi protocols are nominally decentralized, while in reality, a small number of developers hold a large number of governance tokens, requiring analysis of their substance rather than superficial claims.

Hong Kong SFC requires DeFi projects to be licensed and regulated, and DEX involving virtual assets also requires application for a license

The Intermediary Department of the Hong Kong Securities and Futures Commission recently made a statement regarding the regulation of DeFi projects. According to Cai Zhonghui, the interim head of the department, DeFi projects should be regulated by the SFC, and automatic trading services are also under SFC supervision. In addition, if virtual assets are involved in the central trading platform, a license also needs to be applied for. But what exactly does this mean for the future of DeFi in Hong Kong? Let’s take a closer look.

What is DeFi?

DeFi, short for decentralized finance, refers to financial applications built on blockchain technology that aim to provide financial services without the need for intermediaries or central authorities. This includes services such as lending, borrowing, trading, and insurance, among others. Unlike traditional financial systems, DeFi operates on a decentralized network of nodes that are run by individuals or organizations, rather than by a central authority.

The Need for Regulation

While the DeFi industry has grown rapidly over the past few years, it has also been plagued by numerous scams and security breaches. This has led regulators around the world to take a closer look at the industry, and Hong Kong is no exception. According to Mr. Cai, the SFC believes that DeFi projects need to be regulated to protect investors and maintain market stability.

What Does Regulation Mean for DeFi?

While some in the DeFi community believe that regulation goes against the principles of decentralization, others argue that it is necessary for the industry to mature and gain mainstream adoption. If DeFi projects are regulated by the SFC, they will be subject to the same rules and regulations as traditional financial institutions. This includes requirements such as KYC (know your customer) and AML (anti-money laundering) checks, as well as reporting requirements and audits.
In addition, if virtual assets are involved in the central trading platform, a license must also be applied for. This means that DeFi projects will have to adhere to the SFC’s licensing and compliance requirements, which can be a costly and time-consuming process.

Analyzing Governance Tokens

One of the challenges of regulating DeFi projects is that many of them are nominally decentralized, but in reality, a small number of developers hold a large number of governance tokens. This can give them significant control over the project, despite claims of decentralization. To effectively regulate DeFi projects, regulators will need to analyze the substance of governance tokens, rather than accepting superficial claims of decentralization.

Conclusion

The SFC’s recent statement regarding the regulation of DeFi projects in Hong Kong has sparked conversation and controversy within the industry. While some argue that DeFi should remain unregulated and decentralized, others believe that regulation is necessary for the industry to mature and gain mainstream adoption. Regardless of one’s stance on the matter, it is clear that DeFi is here to stay, and regulators will continue to grapple with the question of how best to regulate this new and rapidly evolving industry.

FAQs

1. What is DeFi?
– DeFi refers to decentralized financial applications built on blockchain technology.
2. Why is regulation necessary for DeFi?
– Regulation is necessary to protect investors and maintain market stability.
3. Will regulation harm the decentralization of DeFi?
– Some argue that regulation goes against the principles of decentralization, but others believe it is necessary for the industry to mature and gain mainstream adoption.