Cryptocurrency traders in Hong Kong will have to prove they understand the assets they are buying and selling, disclose how much risk they are willing to take and must submit what digital assets they are trading if the guidelines in a new consultative paper go into effect.

The new proposals come ahead of enabling all retail investors in the city to invest in virtual assets starting in June of this year.

The approach described in a newly released consultation paper seems to centralize cryptocurrency trading oversight and to only allow potential virtual asset operators to make services available if they commit to scrutinizing retail traders by their trading ability and wealth credentials. Additionally, the tokens offered for trading must meet volume and integrity guidelines set by the Securities and Futures Commission, the city’s financial regulator.

“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle,” Julia Leung, the SFC’s Chief Executive Officer, said in a statement released with the paper.

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Retail investors would have to submit to having their knowledge of trading assessed and tokens traded would need to be reviewed and reported to an exchange’s board of directors on a monthly basis to ensure they meet “token admission criteria,” according to the paper. Further oversight would be included in the current Anti-Money Laundering legislation that is being expanded to include cryptocurrencies.   

The SFC proposes to allow trading of a wider range of crypto only if the coins are listed in current indices of trading institutions that are also players in the “traditional” finance world. Currently, Hong Kong only enables the trading of ETFs tied to Ethereum and Bitcoin trading on the Chicago Mercantile Exchange.

The virtual asset trading platform providers would need to submit “written legal advice in the form of a legal opinion or memorandum confirming that the virtual asset does not fall within the definition of ‘securities,’” to offer other coins, the proposal reads. 

Hong Kong regulators would also require trading platforms to conduct a “knowledge assessment” of potential retail traders and also obtain information that would “assess a client’s risk tolerance level and risk profile, [to] accordingly determine the client’s risk profile and assess whether it is suitable for the client to participate in the trading of virtual assets.”

It goes on to say that regulators would “set a limit for each client to ensure that the client’s exposure to virtual assets is reasonable, as determined by the platform operator, with reference to the client’s financial situation and personal circumstances.” 

In addition, the recommended regulations say that virtual asset trading operators would need to set up a board or committee that reviews each of the tokens being traded on the platform on a monthly basis, to determine if the volume and the volatility fall within “token admission criteria.” 

Hong Kong’s finance industry has until March 31 to deliver feedback on the 360-page proposal.

“In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed,” Leung said in the statement.