Hong Kong virtual asset trading regulation will be implemented and retail trading will be protected in detail

On May 23, the Securities and Futures Commission of Hong Kong published the "Consultation Conclusion on Proposed Supervisory and Regulatory Provisions for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission" (hereinafter referred to as the "Consultation Conclusion").

According to the Hong Kong Securities and Futures Commission, it will publish in the Gazette on May 25, 2023 the "Guidelines for Virtual Asset Trading Platform Operators", "Guidelines on Combating Money Laundering and Terrorist Funding", "Guidelines on Stopping Money Laundering and Terrorist Funding for Licensed Corporations and Associated Entities of Virtual Asset Service Providers Licensed by the Securities and Futures Commission" and "Guidelines on Disciplinary Offences of the Securities and Futures Commission".

From May 25, the application forms for virtual asset trading platforms to apply for relevant licenses under the Securities and Futures Ordinance and the Money and Terrorism Funding Ordinance will also be published in the Gazette and applications will start to be accepted on June 1.

Detailed regulations to protect the rights of traders

Golden Finance reporter summarized the "Consultation Summary" published today, from which we can also glimpse the key contents of the various guidelines to be announced. The following are several key provisions on protecting the interests of exchange users:

1. In terms of preventing market manipulation and illegal activities, exchanges are required to formulate policies and monitoring measures to conduct independent reviews of suspicious price surges and immediately restrict or suspend trading after discovering manipulative activities or illegal activities.

2. What kind of people can become customers of Hong Kong virtual currency exchanges? According to the consultation summary: exchanges should implement various measures in the review of customers, such as checking IP addresses to prohibit customers from unauthorized countries or regions, and also have considerable measures to detect customers using virtual IP addresses.

At the same time, before opening an account, investors must first submit their real identity documents and financial status, and the exchange must examine whether they have received any virtual asset-related training, whether they have experience in virtual asset trading in the past, and whether their work is related to virtual assets in order to determine whether they are qualified to open an account.

3. In terms of protecting customer assets, exchanges are required to store 98% of customer virtual assets offline, except for a few cases approved by the CSRC.

Fourth, in terms of risk management, there should be monitoring to enable operators to prevent erroneous operations, block transactions by users, and cancel any unexecuted transaction instructions on the platform. In addition, trading platforms are required to maintain independent audits.

Dual license application only requires one combined application form

This consultation summary brings together 152 submissions received during the consultation period, from industry and professional organisations, professional and consulting firms, market participants and individuals, licensed corporations, individuals and other stakeholders.

Among the submissions, the majority of respondents agreed with the proposal to allow licensed virtual asset trading platforms to provide services to retail investors. The majority of respondents agreed to impose requirements on licensed virtual asset trading platforms to establish business relationships with retail clients. The majority of respondents agreed to the establishment of a token inclusion and review committee. The majority of respondents agreed that licensed virtual asset trading platforms should consider the general token inclusion criteria before including any virtual assets for trading. The majority of respondents supported the requirement for licensed virtual asset trading platforms to have insurance or compensation arrangements in place for the risks associated with the custody of client assets. Many respondents suggested that the SFC should allow third-party custodians to be appointed to custody client virtual assets given their extensive technical expertise. Respondents generally supported the SFC’s permission to allow licensed virtual asset trading platforms to provide virtual asset derivative trading services. Respondents generally welcomed the inclusion of anti-money laundering/terrorist financing requirements for virtual assets in Chapter 12 of the Anti-Money Laundering Guidelines for Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC.

In terms of license application, the SFC responded that, in terms of the scope of "providing virtual asset services", the system under the Anti-Money Laundering Ordinance will cover central virtual asset trading platforms that operate in a similar manner to traditional automated trading venues licensed under the Securities and Futures Ordinance. Such platforms usually use automated trading systems that can match customer trading instructions to provide virtual asset trading services to customers, and will provide additional custody services along with such trading services. Therefore, those who provide virtual asset services (such as over-the-counter virtual asset trading activities and virtual asset brokerage activities) but do not have automated trading systems and additional custody services will not fall within the scope of the system under the Anti-Money Laundering Ordinance. Given that the terms and characteristics of virtual assets may evolve over time, the classification of a virtual asset may change from a non-security token to a security token (or vice versa). In order to avoid violating the provisions of the licensing system and ensure the continuity of its business, virtual asset trading platforms apply for approval under both the existing system under the Securities and Futures Ordinance and the virtual asset service provider system under the Anti-Money Laundering Ordinance.

In terms of license application, the Hong Kong Securities and Futures Commission said it will adopt a simplified application procedure so that dual license applications only require the submission of a comprehensive application form. In terms of responsible officers, the officer may be approved under both the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance, so a virtual asset trading platform with dual licenses does not need to have four different responsible officers. Regarding the possible lack of talent with both virtual asset and traditional securities experience in the industry, the Securities and Futures Commission said it is willing to adopt a pragmatic approach, and details will be supplemented through more guidelines.