The Hong Kong Securities and Futures Commission is the latest regulator to warn cryptocurrency exchanges against engaging in regulated activity and has again alerted investors to the potential risks of investing in initial coin offerings (ICOs) and cryptocurrency exchanges.

The SFC announced on 9 February 2018 that it has written to seven cryptocurrency exchanges warning them that they should not trade cryptocurrencies which may constitute "securities" under Hong Kong's principal securities legislation, the Securities and Futures Ordinance (SFO) without a licence. This follows a statement issued by the SFC in September 2017 which explained that where an ICO involves an offer to the Hong Kong public to acquire “securities” or participate in a collective investment scheme, registration or authorisation requirements may be triggered, and parties engaging in the secondary trading of such tokens may also be subject to the SFC’s licensing and conduct requirements.

The SFC has also revealed that it engaged with seven issuers of ICOs which have either confirmed compliance with the SFC's regulatory regime or have ceased to offer the relevant tokens to investors in Hong Kong.

The SFC's action comes after numerous complaints by investors, including allegations of market manipulation, misappropriation of assets and fraud. Ashley Alder, the SFC's CEO, stated: "We will continue to police the market and enforce when necessary, but we are also urging market professionals to do proper gatekeeping to prevent frauds or dubious fundraising and to assist us in ensuring compliance with the law." However, as the SFC itself acknowledges, its power to take action may be limited as it is unlikely to have jurisdiction over cryptocurrency exchanges and ICO issuers if they have no nexus with Hong Kong or do not provide trading services for cryptocurrencies which are "securities" or "futures contracts". In these circumstances, it is continuing to sound the warning bell and is urging investors to be wary of risks when investing in cryptocurrencies and ICOs, such as extreme price volatility, hacking and fraud.

Regulators and policymakers are continuing to grapple with the challenges presented by cryptocurrencies, particularly following the exponential growth in this area over the last 12 months. Similarly, cryptocurrency exchanges and ICO issuers are increasingly aware of the complex legal environment in which they operate and the serious consequences of straying into regulated activity. Regulatory enforcement action in one of the major financial jurisdictions would appear to be inevitable, but there is also cause for optimism. In a hearing before the US Senate Banking Committee on 6 February 2018, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) outlined their thoughts on the regulation of cryptocurrencies and blockchain technology. Whilst a cautious note was struck, the focus was on the need for better understanding of emerging technology and better, more coordinated regulation as opposed to a wholesale crackdown.