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Hong Kong Moves Forward with Consultation Paper on Virtual Asset Trading Platform Operators

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On 20 February, Hong Kong's Securities and Futures Commission (SFC) released a consultation paper on the proposed regulatory requirements for virtual asset trading platform operators (“VA trading platforms”).

With a new licensing regime set to commence on 1 June, the consultation paper confirms that all centralised VA trading platforms carrying out business in Hong Kong (or actively marking services to Hong Kong investors) must be licensed and regulated by the SFC. Licensing will be required irrespective of whether the VA trading platform provides trading services on security tokens.1

The consultation paper can be found here.2 Pertinent points for VA trading platforms to consider are summarised below.

For more information on these developments or their implications for your business, please contact Michael Brevetta (Head of Compliance, Conduct, and Regulatory Risk) at [email protected]

Pragma Points

VA trading platforms can soon target more retail investors

Under the existing licensing regime, retail investors were permitted only a limited scope of digital asset products. The consultation paper acknowledges that the industry has matured to a point where a greater range of virtual asset products can be safely and responsibly offered to the masses.

The SFC proposes to permit both institutional and retail investors access to trading services provided through licensed VA trading platforms. However, such platforms must agree to comply with investor protection measures relating to customer onboarding, governance, token due diligence, token admission, and product disclosures.3

SFC to consider removing prohibition on virtual asset derivatives

Currently, VA trading platforms are prohibited from offering, trading, or dealing in virtual asset futures contracts or related derivatives. However, growing institutional interest in these products has prompted the SFC to reconsider this position.

As such, the regulator is requesting industry feedback to understand market demand, product offerings, and business models. The information they receive will be part of a separate exercise to finalise their position and formulate necessary policies.4

VAPT Guidelines proposed

All VA trading platforms must comply with the Guidelines for Virtual Asset Trading Platform Operators (“VAPT Guidelines”).

Covering both licensing and conduct requirements, the VAPT Guidelines are modifications to existing requirements that consider previous industry feedback.5

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  • Licensing requirements (e.g., fit and proper staff, individual and corporate competency, continuous professional training)
  • General principles for conduct (e.g., honest and fair dealing, reliability and security of trading platform)
  • Financial soundness (e.g., liquidity, minimum paid-up share capital, accounting standards)
  • Operations (e.g., establishing a token admission and review committee, due diligence on virtual assets, order recording and handling procedures, smart contract audits, preventing and detecting unauthorised or improper activities)
  • Prevention of market manipulative and abusive activities (e.g., policies and controls for trading activity surveillance)
  • Dealing with clients (e.g., disclosures, marketing, investor assessment, know-your-client processes, exposure limits, written agreements, contracts and account statements)
  • Custody of client assets (e.g., safeguarding keys, proper recordkeeping, hot and cold storage, segregating client money, disclosures, ongoing monitoring, insurance)
  • Management, supervision, and internal control (e.g., responsibilities of senior management, segregation of duties, risk management, customer complaint process, anti-bribery)
  • Cybersecurity (e.g., compliance with regulations, robust governance, contingencies)
  • Conflicts of Interest (e.g., restrictions on proprietary trading, employee dealings)
  • Recordkeeping (e.g., form, location, timelines)
  • Auditors (internal and external)
  • Ongoing reporting/notification obligations (e.g., SFC notifications and submissions)

Travel rule requirements

From 1 June, VA trading platforms must ensure compliance with virtual asset transfer requirements (the “travel rule”), which include obligations to obtain, record, and submit information about the originators and recipients of virtual assets.6

Transitional period for VA trading platforms already licensed by the SFC

From 1 June, new VA trading platforms are prohibited from commencing operations in Hong Kong until they are licensed by the SFC.7

However, for VA trading platforms licensed by the SFC before 1 June, the consultation paper proposes a 12-month transitional period for them to apply for a new license and meet the additional/amended requirements found in the VAPT Guidelines.8

To be eligible for this transitional period, the VA trading platform must be in operation in Hong Kong before 1 June and with “meaningful and substantial presence.” Those unsure of their eligibility are encouraged to contact the Fintech unit of the SFC well before the start of the new licensing regime to discuss.9

By 1 June 2024, all VA trading platforms must either be deemed to be licensed or granted a new license to continue operations in Hong Kong.10

Compliance begins now

Although final regulatory requirements are in progress, the SFC has provided enough clarification for VA trading platforms to move forward.

In addition to providing thoughtful feedback to the SFC by 31 March (online at https://apps.sfc.hk/edistributionWeb/gateway/EN/consultation/comment?refNo=23CP1 or by email at [email protected]) VA trading should continue taking steps to be (re-)licensed and compliant.

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For more information on these developments or their implications for your business, please contact Michael Brevetta (Head of Compliance, Conduct, and Regulatory Risk) at [email protected]

Footnotes

Paragraph 14

https://apps.sfc.hk/edistributionWeb/api/consultation/openFile?lang=EN&refNo=23CP1

Paragraph 23-27. Consumer protection in Paragraph 28-52

Paragraph 58-60

Paragraph 15 and 20

Paragraph 65

Paragraph 81

Paragraph 69

VA trading platforms already licensed by the SFC can operate in Hong Kong during the non-contravention period of 1 June 2023 to 31 May 2024. Thereafter, they will be subject to a deeming arrangement from 1 June 2024.

During the non-contravention period, these VA trading platforms must apply for a new license. Those who cannot demonstrate compliance to the VAPT Guidelines will not be eligible for the deeming arrangement and must close its business by 31 May 2024 or three months after the issuance of a notice (whichever is later).

Those who do not intend to apply a new license must begin taking steps to close its business in Hong Kong by 31 May 2024. See Paragraph 74-8.

Paragraph 82 and 83


Date: April 03, 2023

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