The Hong Kong Stock Exchange (HKEX) has released a new report detailing why cryptocurrency and blockchain should come under new regulation based on existing regulatory frameworks.

Drafted by the Chief China Economist’s Office and Innovation Lab at HKEX, the report recommends rethinking of the use of blockchain and artificial intelligence (AI) applications to come under the security industry and not just in the banking, Internet finance and digital currencies sphere where it is now mostly deployed.

HKEX hopes that “trading and clearing and settlement businesses, asset rehypothecation business and private equity market” will be greatly impacted if both technologies are getting the nod.

It says the unique strengths of decentralization, transparency, and efficiency that blockchain possesses will be beneficial to trade transactions and also reduce cost.

Further, the report says the technologies will “magnify or expose new forms of financial risk.” To this end, it advises continuously “upgrading” regulatory frameworks to keep pace with disruption and avoid the emergence of “possible regulatory loopholes.”

HKEX notes that different interpretations of their significance have prompted different jurisdictions to set divergent regulatory targets for oversight of the sector.

Overall, the report proposes that whether offered in a “virtual or real environment […] financial businesses of the same nature should be subject to the same regulation,” to “ensure fair competition and prevent regulatory arbitrage.”

This is broadly defined as the “consistency principle” in financial regulation, and the report specifically advises bringing digital currency and digital funds under the purview of the existing securities regulatory framework:

“The public fund-raising activities of shares issuance by issuers – which do so with merely a prospectus published on the internet but without any underwriter nor compliance with the IPO registration procedures or strict disclosure requirements – must be rectified by subjecting them to the governance by the Securities Law.”

As reported in September, “insider sources” have recently suggested that HKEX is eyeing takeovers in the blockchain sector as part of a change in business strategy, reportedly prompted by stalling trading links with exchanges in China amid worsening U.S.-China trade relations.

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