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Hong Kong- a new Digital Asset licensing Asian mainstay?

After much anticipation, the new licensing regime for Virtual Asset Trading Platforms (VATPs) has finally taken effect in Hong Kong on 1 June 2023.

This development marks a significant milestone in the government's efforts to foster the orderly and sustainable growth of the crypto community in the region. The new regime, overseen by the Securities and Futures Commission (SFC), introduces a comprehensive framework that aims to regulate and provide oversight to centralised VATPs operating in Hong Kong.

The two-tier framework of the new licensing regime consists of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the Guidelines for Virtual Asset Trading Platform Operators (VATP Guidelines). The AMLO, Hong Kong's first virtual asset-specific legislation, establishes a broad regulatory framework for VATPs under the supervision of the SFC. The VATP Guidelines, on the other hand, provide detailed implementing details of the regulatory framework.

One of the primary objectives of the new licensing regime is to fill the regulatory gap in the oversight of crypto assets trading. Previously, only centralised VATPs that provided trading services in security tokens were regulated by the SFC under the Securities and Futures Ordinance (SFO), leaving the trading of non-security tokens outside the scope of regulatory scrutiny. With the implementation of the new regime, trading of non-security tokens will now be subject to regulation. It's worth noting that the SFC encourages VATP operators to apply for dual licenses under both the SFO and the VATP regimes to ensure business continuity and compliance with licensing requirements.

The new licensing regime covers licensed providers that offer virtual asset services. Currently, the only regulated virtual asset service under the AMLO is the operation of a VATP, which involves binding sales and purchases of virtual assets and the handling of client money and virtual assets. It's important to note that the regime excludes peer-to-peer platforms that only facilitate bid and offer discussions without directly trading or supporting the trading of virtual assets.

The definition of "virtual assets" under the AMLO encompasses most forms of cryptocurrencies in the market. However, it excludes central bank digital currencies, securities or futures contracts, stored value facilities, limited-purpose digital tokens, and other forms that the SFC declares as not being virtual assets. This definition likely excludes non-fungible tokens (NFTs) as well, which are unique and indivisible representations of rights over arts and collectibles.

The new licensing regime imposes various regulatory requirements on VATPs to ensure investor protection and market integrity. Some key requirements include robust onboarding procedures, establishment of a token admission and review committee, disclosure obligations, token admission criteria, insurance/compensation arrangements, prohibition of proprietary trading, and adherence to anti-money laundering and counter-financing of terrorism (AML-CFT) requirements.

VATPs must conduct thorough knowledge and suitability assessments of investors before providing trading services, impose exposure limits, establish a token admission and review committee to determine the criteria for admitting or withdrawing virtual assets for trading, and ensure adequate disclosure of product information to clients. The regime also requires VATPs to have insurance or compensation arrangements approved by the SFC to cover the custody of clients' virtual assets and comply with AML-CFT requirements, including the Travel Rule.

Transitional arrangements have been put in place for pre-existing VATP operators that were operating in Hong Kong before 1 June 2023. These operators will have a one-year transitional period to either apply for a license or wind down their virtual asset trading operations in an orderly manner. The determination of "meaningful and substantial presence" will be based on factors such as place of incorporation, physical office space, management location, user base, and trading volume in Hong Kong.

VATP operators are encouraged to apply for dual licences under both the SFO and the VATP regimes to ensure compliance with licensing requirements and to continue their business operations seamlessly. The SFC has streamlined the application process to facilitate a smooth transition for existing operators and to attract new operators to establish their presence in Hong Kong.

The implementation of the new licensing regime in Hong Kong has the potential to position the city as a leading hub for digital asset trading in Asia. By providing a regulated and secure environment for virtual asset trading platforms, Hong Kong aims to attract institutional investors, retail investors, and virtual asset businesses, fostering the development of the local crypto ecosystem.

The new regime aligns Hong Kong with international standards and best practices in regulating virtual assets. It demonstrates the government's commitment to promoting innovation while safeguarding investors and maintaining financial stability. By establishing a clear regulatory framework, the regime aims to enhance market confidence and protect the interests of participants in the virtual asset trading space.

However, challenges and uncertainties still exist in the evolving landscape of virtual assets. Regulatory developments, technological advancements, and market dynamics will continue to shape the future of the crypto industry. It will be crucial for Hong Kong to stay nimble and responsive to these changes, continuously updating its regulatory framework to adapt to emerging risks and opportunities.

In light of these regulatory developments, SAXE Global will closely monitor the situation and provide the latest information on the new licensing regime for Virtual Asset Trading Platforms in Hong Kong. As a trusted source of industry insights and updates, SAXE Global remains committed to keeping its clients and stakeholders informed about the evolving landscape of virtual assets and the regulatory changes that shape it.

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