Dual licensing for virtual assets trading platforms now effective in Hong Kong SAR

The new regime requires VATPs to obtain a license from the SFC to operate a virtual asset exchange in the Hong Kong Special Administrative Region (SAR).

The dual licensing regime is a major milestone for the virtual asset industry in Hong Kong SAR, creating more certainty and enhancing regulatory transparency in this fast-paced industry.

Dual licensing arrangement

The dual licensing arrangement combines and streamlines the two separate regulatory regimes previously governing virtual asset trading in Hong Kong SAR: the Securities and Futures Ordinance (Cap. 571) (SFO) and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO). It allows potential VATPs to submit a single consolidated application for a dual licence, reducing the administrative burden for VATPs. An individual appointed as a responsible officer under one regime may also be appointed concurrently as a responsible officer under the other regime.

The dual licensing regime is a major milestone for the virtual asset industry in Hong Kong SAR, creating more certainty and enhancing regulatory transparency in this fast-paced industry.

Regulatory guidelines

The SFC has recently published guidelines setting out the regulatory requirements applicable to VATPs:

• Guidelines for Virtual Asset Trading Platform Operators
• Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers)
• Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities and Futures Commission for Associated Entities of Licensed Corporations and SFC-licensed Virtual Asset Service Providers

It has also issued a licensing handbook (38-page / 645KB PDF) for VATPs. Together, the guides and handbook detail the application procedure and the relevant ongoing obligations for these VATPs.

What are the key requirements for getting a licence?

To obtain a license, VATPs will have to demonstrate compliance with various requirements, including:

• Fitness and Properness Requirement – The applicant, responsible officer, and the licensed person must demonstrate to the SFC that they are ‘fit and proper’ to be licensed.

• Financial Soundness – VATPs must at all times maintain paid-up share capital of not less than HKD 5million and should maintain assets in Hong Kong SAR which are sufficiently liquid and are equivalent to at least 12 months of the actual operating expenses calculated on a rolling basis.
• Operations – A token admission and review committee should be set up to consider and decide whether certain virtual assets should be admitted, suspended or withdrawn from trading on the platform.

There are also requirements on other aspects of a VATP operation including requirements relating to compliance with the conduct of business principles; the prevention of market manipulation and abusive activities; dealing with clients; custody of client assets; management, supervision and internal controls; cybersecurity; conflicts of interest; record keeping; auditors; and ongoing reporting and notification obligations.

Will there be retail access to virtual asset trading?

While the SFC had previously been sceptical about allowing retail access to virtual asset trading services, the recent guideline shows that VATPs could also provide trading services to retail investors. Licensed VATPs will first have to put in place a range of investor protection measures covering onboarding, governance, disclosure and token due diligence and admission before providing trading services to retail investors.

Read more about SFC’s comments on this regime in its recently released consultation conclusion (380-page/4.23MB PDF) on proposed regulatory requirements for licensed VATP operators.

Co-written by Sara Chan of Pinsent Masons.