Cryptocurrency custody services company InVault, from Shanghai, has launched in Hong Kong just in time to take advantage of the special administrative region’s new rules for cryptocurrency exchanges and asset managers.
At the start of Nov 2018, Hong Kong’s Securities and Futures Commission (SFC) issued guidance on the regulatory standards expected of cryptocurrency exchanges, platform operators, and fund managers. It’s also working on a future “conceptual framework” for the regulation of “trading platform operators.”
Near Complete Insurance Cover is Now Required
As part of the new guidelines, cryptocurrency exchanges and asset holders must have comprehensive insurance for investors’ funds to prevent losses — which is where cryptocurrency custodial services for high-volume coin-holding businesses come into play. However, cryptocurrency businesses can also look to self-custody and hot wallet storage, as long as they have the required level of insurance. For exchanges storing cryptocurrencies online in “hot wallets,” this is 100% coverage. The regulator says:
''The SFC generally expects that the insurance policy would provide full coverage for virtual assets held by a Platform Operator in hot storage and a substantial coverage for those held in cold storage (for instance, 95%).''
InVault currently holds around one million ether in custody in mainland China and has announced it is the first custody service operator to enter the market in Hong Kong. The company is backed by venture capital fund Matrix Partners China which has invested nearly $6 billion in the crypto-storage business. It has reportedly gained a new “trust license” from the SFC allowing it to offer a fully automated service in the region as of December.
A Bridge Between Cryptocurrency and Traditional Asset Protection
InVault’s founder Kenneth Xu told the South China Morning Post (SCMP) that he believes trusted custodial services will provide a regulated “conduit” between the cryptocurrency space and traditional financial systems. He revealed that InVault is now in discussions with a number of insurers to provide the coverage required by the Hong Kong regulator as part of its services. Xu says the challenge for insurance companies is to accurately measure risk and price premiums accordingly.
InVault, and Xu, now expects much of the demand for its custody services to come from Hong Kong and also Singapore under new regulations.
Singapore’s regulators, the Monetary Authority of Singapore (MAS), discussed its approach to cryptocurrency classification and openness to cryptocurrency adoption at the Singapore Consensus 2018 September. MAS also revealed new regulation to cover cryptocurrency service providers last week.
Cryptocurrency custody services protect investor’s assets with physically secured storage for client’s private cryptocurrency wallet keys — which can often be forgotten, lost, stolen, and hacked. SCMP also refers to incidences of cryptocurrency exchange employees accessing and stealing from, client wallets.
The SFC’s new guidelines seek to protect investors in Hong Kong as well as adding some formal regulatory oversight to the burgeoning industry. SFC Chief Executive, Ashley Alder, said in the release revealing the new regulation:
''We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes.''