Overview of Crypto regulations

From June 1, 2023, all centralised virtual assets trading platforms operating in Hong Kong must have a license from the Hong Kong Securities and Futures Commission (SFC). In line with this, the SFC published the Consultation Paper on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed in February.

The requirements cover key areas such as safe custody of assets, know-your-client, conflicts of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering/counter-financing of terrorism and prevention of market misconduct.

Key proposals from the consultation include:

1. Consolidation of the new VASP regime with the existing Type 1 & 7 licensing regime for virtual asset trading platforms that list security tokens 
2. Retail investors to be able to access "eligible large-cap virtual assets"
3. Significant streamlining of the listing process for virtual assets
4. License applications must be submitted with an independent assessment report (prepared by competent, external, independent advisors) commenting on the design of the applicant's proposed policies.
5. Under a new licensing regime to take effect on 1 June 2023 (Note 1), all centralised virtual asset trading platforms carrying on business in Hong Kong or actively marketing to Hong Kong investors will need to be licensed by the SFC.

Details of how all of the above are to be implemented can be found in the consultation paper. 

According to SFC (Consultation Paper)
last revised 20 February 2023

The SFC’s proposed regulatory requirements for virtual asset trading platforms are based on the regulatory requirements of the existing regime under the Securities and Futures Ordinance (Note 2) and are comparable to those for licensed securities brokers and automated trading venues (Note 3). The SFC has also taken the opportunity to propose modifications to some requirements of the existing regime.

As part of the consultation, the SFC is seeking views particularly on whether to allow licensed platform operators to serve retail investors, and if so, the measures to be implemented in addition to the proposed range of robust investor protection measures, which include ensuring suitability in onboarding clients and token admission (Note 4).

“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle,” (Note 5) said Ms Julia Leung, the SFC’s Chief Executive Officer. “In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed.”

Operators of virtual asset trading platforms which plan to apply for a licence, including pre-existing platforms (Note 6), should begin to review and revise their systems and controls to prepare for the new regime. Those which do not plan to apply for a licence should start preparing for an orderly closure of their business in Hong Kong.

The SFC intends to publish lists on its website to inform the public of the different regulatory statuses of VA trading platforms, and will continue working with the Investor and Financial Education Council to enhance investor education for the Hong Kong public.