HK SFC proposed regulatory requirements for virtual asset trading platform operators.
Follows HK Treasury Dec. 2022 update on passage of AML/CFT bill 2022, see #106110.
Regulatory Requirements
Guidelines for virtual asset trading platform (VATP) operators cover topics such as safe custody of assets, know-your-client, AML/CFT, admission of virtual assets for trading.
Consulted on whether to allow licensed platform operators to provide services to retail investors, general token admission criteria as well as specific token admission criteria.
Also VA derivatives including type of derivatives, target investors, and business model.
AML/CFT guideline for licensed firms and SFC-licensed virtual asset service providers.
Transitional arrangements and implementation details for the AML ordinance virtual asset service providers regime, which shall come into effective on Jun. 1, 2023.
Effectiveness
Consultation is open for opinions which shall be submitted by Mar. 31, 2023.
May 23, 2023 Conclusions
On May 23, 2023, HK SFC issued consultation conclusions on the proposed regulatory requirements for virtual asset trading platform operators licensed by HK SFC.
Respondents generally supported the proposed requirements for licensed VA platforms.
Key comments relate to retail access to licensed platforms, criteria for admission of tokens, compensation arrangements for risks associated with custody of client assets.
Trading in virtual asset derivatives, implementation details, transitional arrangements.
HK SFC has modified, clarified some of proposed requirements based on the feedback.
The revised regulatory requirements will take effect on Jun. 1, 2023.
May 25, 2023 Guidelines
On May 25, 2023, HK SFC publishedGuidelines for virtual asset trading platform operators, to ensure platforms operate in a manner that is compliant with regulations.
Platforms are required to be licensed by SFC and are subject to Securities and futures ordinance (SFO), they are expected to comply with all applicable laws and regulations.
SFC will check if operators are fit and proper to be licensed, considering factors such as financial status, experience, competence, reputation, character, reliability, integrity.
Platforms are required to establish, maintain effective risk management policies and procedures, including cybersecurity, market, credit, liquidity, and operational risks.
Platforms should have robust policies and procedures for custody of virtual assets, including safeguard of client assets, manage private keys, handle hard forks, airdrops.
Should have systems in place to prevent market manipulation and misconduct, should also have effective surveillance systems to detect, report suspicious transactions.
Platforms should manage conflicts of interest to ensure fair treatment of clients, this includes avoiding preferential treatment and disclosing any conflicts to clients.
Should keep sufficient financial resources to support operations, fulfill responsibilities.
Encouraged to have insurance coverage for risks associated with virtual assets.
Platforms should provide clear and comprehensive information to clients about services and fees, should have procedures for handling complaints and disputes from clients.
May 31, 2023 Licensing Handbook
On May 31, 2023, HK SFC issued licensing handbook for virtual asset trading platform operators, for VATP operators who are seeking to be licensed by the HK SFC.
VATPs must meet licensing conditions and ongoing compliance requirements set by the AML ordinance; have strong governance structures and operational capabilities.
HK SFC will monitor VATPs' compliance with licensing conditions and conduct regular inspections, VATPs must report any significant breaches or non-compliance to HK SFC.
HK SFC also issued circular on transitional arrangements of the new licensing regime.
VATPs operating before Jun. 1, 2023 can continue to provide services for 12 months without breaching licensing requirements, provided they have a substantial presence.
Pre-existing VATPs can be deemed licensed from Jun. 1, 2024 if they meet certain conditions, including submitting completed online license application by Feb. 29, 2024.
VATPs are encouraged to apply for dual licenses under both the SFO and the AMLO to ensure business continuity as the classification of virtual asset may change over time.
On the same day, HK SFC issued circular on implementation of new licensing regime.
From Jun. 1, 2023, applicants can submit application forms, supplements, questionnaires, notifications, regulatory filings, annual returns to HK SFC via WINGS.
Operators shall use specific electronic forms to submit financial returns, documents.
Jun. 2023 Professional Development
On Jun. 1, 2023, HK SII reported the formation of a virtual asset working group to help develop the respective CPT program and examination to support this new licensing regime for market practitioners; further details to follow soon.
Aug. 2023 Warning Against Unregulated VATPs
On Aug. 7, 2023, HK SFC issued a warning against unlicensed VATPs engaging in improper practices, reminded investors of the risks of trading on unregulated VATPs.
Found unlicensed VATPs falsely claimed to have submitted license applications to HK SFC and set up new entities to provide VA services in Hong Kong.
Also continued to launch new services and products under their existing entities that may not comply with the applicable legal and regulatory requirements.
Reminded established entities of unlicensed VATPs that they should apply for HK SFC licenses/proceed to close their business in Hong Kong, according to new VA regime.
Will take into account whether past non-compliant activities could have reasonably been avoided, when considering unlicensed VATPs' license applications.
Warned investors that unlicensed VATPs may mislead the public by claiming to have submitted applications, they may lose entire investment held on unregulated VATPs.
In Oct. 2023, HK SFC and HK police established VATP working group, see #186824.
Mar. 2024 Deadline Passed
On Mar. 1, 2024, HK SFC reminded deadline for virtual asset trading platforms (VATPs) to submit license applications to the HK SFC in Hong Kong was Feb. 29, 2024.
VATPs that did not apply for a license must cease operations in HK by May 31, 2024.
Unlicensed VATPs must obtain a HKSFC license to resume operations in Hong Kong or actively market their services to Hong Kong investors, as unlicensed activity is illegal.
