After the implementation of the VASP system, the SFC will, on the one hand, regulate the security token transactions conducted by virtual asset trading platforms in accordance with the current system under the Securities and Futures Ordinance (involving licenses 1 and 7), and on the other hand, it will also regulate the non-security token transactions conducted by virtual asset trading platforms in accordance with the VASP system under the Anti-Money Laundering Ordinance (involving VASP licenses). In actual operations, it is often difficult to determine whether a virtual asset is a security, and the characteristics of some virtual assets may change over time.
In order to avoid violating the provisions of any licensing system and ensure the continuity of business operations, the SFC requires virtual asset trading platforms (together with their proposed responsible officers and licensed representatives) to apply for approval under both the current system under the Securities and Futures Ordinance and the VASP system under the Anti-Money Laundering Ordinance to obtain dual licensing and approval. The SFC will provide simplified application measures for the dual licensing system. It is worth mentioning that the SFC's arrangement is consistent with the author's expectations when interpreting the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 in 2022. For license application and details, please read:
1. Effective in June this year! VASP license business interpretation and application details
2. Hong Kong VASP Compliance Guide | Detailed explanation of the Travel Rule that must be followed from June 2023, 6
1. Can Vasp licensed exchanges provide services to retail investors?
The SFC has confirmed that it will allow licensed platform operators to provide non-securities brokerage services to retail investors.
The service of cryptocurrency trading is subject to compliance with a series of appropriate investor protection measures, including business with customers.
measures in terms of establishment, token inclusion, token due diligence program and information disclosure.
1. Establish business relationships and knowledge assessment with customers
Regulators are ready to allow virtual asset trading platforms to accept business from retail investors, but require them to take steps to protect investors. One of the measures is to assess investors' understanding of virtual currencies. For example, check whether they have taken any courses, have relevant work experience, and how many times they have bought and sold virtual currency before. The point is, as long as they have bought and sold five or more times in the past three years, it cannot be assumed that they understand enough. Even if retail investors understand virtual assets, platforms still have an obligation to assess their risk tolerance.
In general, if a platform wants to accept retail investors, it must first prove that investors have sufficient understanding of the characteristics and risks of virtual currencies and assess their risk tolerance.
2. The platform needs to prepare general token inclusion criteria
If the platform wants to accept any currency for trading, it must do due diligence on it. Now regulators are relaxing the rules. The platform only needs to consider the regulatory status of virtual assets in Hong Kong, not around the world. For example, see whether this virtual currency is a security token in Hong Kong. However, the platform still has to ensure that its operations comply with the laws of all jurisdictions in which it does business.
Because if it is illegal in other places, it will still affect the platform's operating qualifications in Hong Kong.
2. Does every token need to submit a legal opinion?
The answer is no. Because it is too costly to submit a legal opinion for each virtual currency, the regulator has canceled the requirement for platforms to submit written legal opinions on each virtual currency. However, platforms still need to ensure that they are only operating non-securities tokens on their platforms, so during approval, regulators may require platforms to provide legal opinions on certain specific tokens.
3. Only “qualified large virtual assets” can be traded
Qualified large virtual assets refer to virtual assets that are simultaneously included in the indexes of at least two independent index providers.
At least one of the index providers specializes in providing traditional financial market indices. These indices must meet certain conditions to be recognized:
1) These indices must be investable, meaning that the virtual assets they include have sufficient liquidity.
2) The calculation method of the index must be objective and regular.
3) Index providers must have sufficient expertise and technical support to provide and review these indices.
4) The methodologies and rules for compiling these indices must be clearly documented, transparent and consistent.
According to this standard, Bitcoin and Ethereum clearly meet the requirements and can be opened to individual investors for trading.
4. Retail customers should not be allowed to trade stablecoins before a stablecoin regulatory regime is implemented
In addition to prohibiting trading platforms from offering securities-type virtual currencies to retail investors, regulators also stated that since the value of stablecoins may be unstable, there is a high risk of large-scale redemption. Before stablecoins are regulated in Hong Kong, they should not be included in the platform for retail investors to buy and sell. The Hong Kong Monetary Authority has issued recommendations on the regulation of stablecoins in January 2023.
It is expected that regulatory policies for stablecoins will be implemented in 2023/2024.
5. Do over-the-counter exchanges (OTC), market makers, and trusts need to apply for VASP licenses?
This question goes back to how the Hong Kong Securities Regulatory Commission defines virtual asset services. The following is its definition:
According to Schedule 3B of the Anti-Money Laundering Ordinance and the VASP Guidelines, virtual asset service (VA Service) related activities are defined as:Only virtual asset exchanges,Right now:
(a) providing, by electronic means, services that:
(1) The service:
A. Offers to buy or sell virtual assets are routinely made or accepted in a manner that creates or results in binding transactions; or
B. People frequently introduce or identify each other with the intention of negotiating or completing the sale of virtual assets, or they frequently introduce or identify each other with the reasonable expectation that they will negotiate or complete the sale of virtual assets in a certain manner, and negotiate or complete such sales in such a manner that a binding transaction is formed or results in the occurrence of a binding transaction; and
(2) in the provision of such service, client funds or client virtual assets are directly or indirectly held by the person providing the service; and
(b) any virtual asset trading activities and ancillary services provided by the platform operator to its customers that are conducted outside the platform, and any activities conducted in relation to virtual asset trading activities that are conducted outside the platform.
therefore,For (1) centralized virtual asset exchanges operating in Hong Kong, and (2) offshore centralized virtual asset exchanges that actively promote their services to Hong Kong investors, if engaged in the above-mentioned related activities, they all fall within the scope of virtual asset services. According to the Anti-Money Laundering Regulations 53 ZRD, any entity operating virtual asset services must obtain a VASP license from the SFC.
At present, in addition to the above virtual asset services,Other businesses such as OTC exchanges, market makers, futures contracts and derivatives have not yet been defined and there is no applicable law.However, it does not rule out that the Hong Kong Financial Services and the Treasury Bureau will subsequently include other virtual asset services by publishing an announcement in the Gazette.