Hong Kong Regulator Proposes Limited Crypto Trading for Retail Investors

The SFC of Hong Kong has proposed a plan to permit retail investors to trade crypto assets, albeit with restrictions. Kaiko’s blog states that only tokens classified as “large-cap” and featured in two approved indices will qualify for trading.

It’s uncertain what the SFC considers as “large-cap,” but the proposal limits the crypto assets available for retail trading. The evaluators are considering the most liquid tokens, such as Bitcoin, Ethereum, and Litecoin, even though some indices include low-liquidity altcoins.

Market capitalization alone is insufficient to measure the value of tokens. In traditional finance, liquidity is a crucial criterion for index construction, and it should be a critical consideration. Having sufficient liquidity is necessary to support an efficient and robust market. The SFC’s new proposal should adopt a more robust approach to index construction that accounts for liquidity alongside market cap.

CoinGecko and other sites may rank OKB, the OKX exchange token, highly, but its liquidity metrics and market cap rule it out of consideration. Sufficient liquidity is crucial for effective trading, making liquidity metrics a critical factor to consider.

The SFC’s proposal is good for crypto’s future as it allows retail investors to enter the market. Nonetheless, certain tokens may be of inferior quality in fundamentals and liquidity due to the new SFC regulations.

Concerns about Liquidity

Bitcoin Cash, Polkadot, and Litecoin have raised concerns about their liquidity, which may affect their eligibility as large-cap assets. Meeting the liquidity criteria is crucial for ensuring efficient and effective trading. Despite concerns about its liquidity, three of the top five crypto indices include Bitcoin Cash. A more comprehensive approach to index construction that accounts for liquidity alongside market cap is necessary.

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The SFC’s proposal is a positive development for crypto regulation in Hong Kong, but more work is needed to ensure that only high-quality tokens are available for retail investors. Refining the proposal can help build investor confidence and safeguard the market’s integrity.

The author’s views are for reference only and shall not constitute any investment advice. Please ensure you fully understand and assess the products and associated risks before purchasing

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