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The rumor that "the Hong Kong Securities and Futures Commission will allow retail investors to trade cryptocurrencies on June 1" has officially been announced today. On February 20, 2023, the Hong Kong Securities and Futures Commission’s official website published a consultation on the proposed regulations applicable to virtual asset trading platform operators, seeking market opinions on a number of issues, in particular: whether licensed platform operators should be allowed to provide services to retail investors; if permitted, in addition to the proposed series of appropriate investor protection measures (including ensuring suitability and token inclusion when establishing business relationships with customers), what other measures should be implemented. The deadline for submission of opinions is March 31, 2023. The Hong Kong Securities and Futures Commission stated that under the new licensing system that will take effect on June 1, 2023, all central virtual asset trading platforms that operate in Hong Kong or actively promote to Hong Kong investors will need to be licensed by the Securities and Futures Commission. The Hong Kong Securities and Futures Commission plans to publish several lists on its website to list the regulatory status of various virtual asset trading platforms to the public, and will continue to cooperate with the Investor and Financial Education Committee to strengthen investor education for the Hong Kong public. The consultation document shows that the Hong Kong Securities Regulatory Commission mainly consulted industry-related institutions and individuals on 10 major issues. Golden Finance has summarized these 10 questions, and the following quote is "Hong Kong Securities Regulatory Commission's proposed regulatory provisions for virtual asset trading platform operators". Question 1: Do you agree that licensed platform operators should be allowed to provide services to retail investors, provided that they adopt appropriate investor protection measures as recommended? Please state your views. A. Proposal to allow retail investors to use licensed virtual asset trading platforms 23. The virtual asset market was still relatively new when the SFC introduced the current regime under the SFO in 2018. Given the new concept of the licensing framework, the SFC considered at the time that even though the regime already had adequate safeguards in place to protect investors, it was prudent to restrict licensed virtual asset trading platforms under the SFO to only provide services to professional investors, at least initially. 24. In this regard, the SFC notes that there are mixed public opinions on whether retail investors should be allowed to use the services provided by licensed virtual asset trading platforms. Some argue that allowing retail investors to use such services may rationalise trading in virtual assets, which are mostly valueless and susceptible to volatility and market manipulation. However, many argue that denying retail investors access to licensed virtual asset trading platforms may in turn harm investors, as this may drive them to trade on unregulated overseas virtual asset trading platforms that are easily accessible online; and if any of these unregulated virtual asset trading platforms go bankrupt, retail investors will find it difficult to recover any losses. This has been demonstrated in the recent collapse of a number of unregulated virtual asset trading platforms, where investors were unable to withdraw their assets and suffered significant losses. 25. The current system under the Securities and Futures Ordinance has been in place for several years, and there are currently two virtual asset trading platforms licensed under the Securities and Futures Ordinance. Over the years, the SFC has formulated a number of virtual asset policies to gradually allow retail investors to invest in virtual assets on a limited basis. In January 2022, the SFC allowed retail investors to access a small number of regulated virtual asset-related derivatives traded on traditional exchanges for the first time. Subsequently, in October 2022, the SFC established an authorization system for virtual asset futures exchange-traded funds (virtual asset futures ETFs), and to date, the SFC has authorized three virtual asset futures ETFs under the system. Therefore, retail investors in Hong Kong can already indirectly access virtual assets through regulated products. 26. At the same time, the landscape of the virtual asset market has changed dramatically. More international financial institutions and service providers (such as traditional custodians) have entered this space and are building institutional-grade infrastructure for this purpose. In Hong Kong, a number of licensed brokerages and fund managers are now providing virtual asset-related services to investors under the supervision of the SFC. As financial institutions enter the market, they are gradually changing the virtual asset sector by introducing policies and procedures, systems and control measures that are similar to those in the mainstream financial sector. 27. In light of the above factors, and having balanced the importance of investor protection for retail investors, the SFC proposes to allow all types of investors (including retail investors) to use trading services provided by licensed virtual asset trading platform operators, provided that the relevant platforms comply with a series of appropriate investor protection measures set out in paragraphs 28 to 52 below.
Question 2: Do you have any comments on the proposed general token inclusion criteria and specific token inclusion criteria? (III) Due Diligence and Inclusion Criteria for Tokens 38. Today, there are thousands of actively traded virtual assets. In this regard, the SFC wishes to emphasise that virtual assets themselves are not regulated by the SFC, meaning that the SFC has never audited or reviewed the offer and promotion documents for virtual assets. This is very different from traditional financial products offered to the public, which are usually subject to the authorisation or registration regimes of the regulators in the respective jurisdictions. In view of this, the SFC intends to adopt a more cautious approach by introducing a set of objective criteria that licensed platform operators must follow when determining whether they can offer a particular virtual asset to retail clients. 39. If a licensed platform operator (whether licensed under the existing regime under the Securities and Futures Ordinance or the Virtual Asset Service Provider regime under the Anti-Money Laundering Ordinance) makes an offer to the Hong Kong public for virtual assets that meet the definition of "securities" under the Securities and Futures Ordinance, which may constitute a violation of the investment offer regime17 or the prospectus regime18 under Hong Kong's securities laws, the licensed platform operator should not make such an offer. General Token Inclusion Criteria 40. The SFC wishes to emphasise that licensed platform operators have the ultimate responsibility for conducting reasonable due diligence on virtual assets before including them for trading and ensuring that they comply with the token inclusion criteria. Licensed platform operators should also monitor included virtual assets on an ongoing basis and ensure that they continue to comply with the relevant criteria. Platform operators should consider the following non-exhaustive general factors when including virtual assets for trading: a) The background of the management or development team of the virtual asset; b) the regulatory status of virtual assets in various jurisdictions where platform operators provide trading services, and whether such regulatory status will also affect the regulatory responsibilities of platform operators; c) The supply and demand, market maturity and liquidity of the virtual asset, including its market capitalization, average daily trading volume, track record (e.g. issued for at least 12 months, excluding security tokens), whether other platform operators also provide trading for the virtual asset, whether there are relevant trading packages (e.g. fiat currency against virtual assets), and in which jurisdictions the virtual asset is available for trading; d) The technical aspects of the virtual asset, including the security infrastructure of its blockchain protocol, the size of the blockchain and network (particularly its resilience to common attacks (e.g. 51% attacks)), the type of consensus algorithm, and the risks associated with code defects, violations and other threats involving the virtual asset and its supporting blockchain, or the operating practices and procedures applicable to them; e) The content of the virtual asset promotion materials issued by the issuer should be accurate and not misleading; f) The development of the virtual asset, including the results of any projects related to it as contained in its white paper (if any), and any significant events in the past related to its history and development; g) Market risks of virtual assets, including high concentration of virtual asset holdings or control by a small number of individuals or entities, price manipulation and fraud, and the impact of broader or narrower adoption of the virtual asset on market risk; h) legal risks associated with virtual assets, including any pending or potential civil, regulatory, criminal or law enforcement actions related to their issuance, distribution or use; and i) Whether the utility provided by the virtual asset, the novel use cases it enables, or the technological, structural, or cryptoeconomic innovation it demonstrates appears to be fraudulent or grossly inappropriate. Criteria for inclusion of specific tokens 41. In addition to the general token inclusion criteria, licensed platform operators who intend to offer virtual assets to retail customers should also ensure that the virtual assets they select are eligible large-scale virtual assets and meet the following specific token inclusion criteria. 42. The following specific token inclusion criteria are necessary conditions that licensed platform operators must meet when including certain virtual assets for retail trading, but they are not sufficient conditions and cannot be the only basis. Licensed platform operators must comply with the above general token inclusion criteria (which set out the broader considerations for including tokens) and perform the additional due diligence listed below. Eligible large virtual assets 43. “Eligible Large Cap Crypto Assets” means crypto assets that are included in at least two “Accepted Indices” published by at least two independent index providers19. 44. “Accepted Index” means an index with a clearly defined objective to measure the performance of the largest virtual assets in the market and which meets the following criteria: a) The index should be investable, which means that the relevant component virtual assets should have sufficient liquidity. b) The index should be calculated in an objective and rules-based manner. c) Index providers should have the necessary expertise and technical resources to construct, maintain and review the index compilation methodology and rules. d) The index methodology and rules should be well documented, consistent and transparent. 45. Licensed Platform Operators should ensure that at least one of the two indices is launched by an index provider that has experience in publishing indices for traditional non-crypto asset financial markets, such as an index provider that has launched indices tracked by index funds approved by the SFC. 46. The SFC understands that a qualified virtual asset that a licensed platform operator has included for trading may subsequently cease to be a component of the Acceptable Index referred to in paragraph 44 above. If an included virtual asset is no longer a component of an Acceptable Index, the licensed platform operator should assess whether it should continue to allow retail clients to trade the virtual asset. For example, the licensed platform operator should consider whether there is any material adverse news, whether the virtual asset itself has liquidity issues that cannot be resolved in the short term, and whether there are other considerations that necessitate the suspension of trading in the virtual asset or restricting retail clients to selling their positions. The SFC wishes to emphasise that licensed platform operators must continue to fulfil their responsibilities to monitor all included virtual assets. 47. Please refer to paragraph 7.6 of the Virtual Asset Trading Platform Guidelines for the detailed token inclusion criteria that eligible large-scale virtual assets need to meet.
Question 3: If the SFC intends to allow retail investors to use licensed virtual asset trading platforms, what other regulations do you think should be implemented from the perspective of investor protection? Additional token due diligence required 48. Before including any virtual asset for trading, licensed platform operators, in addition to complying with the general and specific inclusion criteria, should also conduct reasonable due diligence in the following areas: a) Licensed platform operators should ensure that their internal controls, systems, technology and infrastructure21 are able to support and manage any specific risks associated with virtual assets. b) Licensed platform operators should conduct smart contract audits for virtual assets on blockchains with smart contract layers22, unless the platform operator can justify its reliance on smart contract audits conducted by independent auditors. Such audits should focus on examining whether there are any security vulnerabilities or concerns in the smart contract layer. c) Licensed platform operators should obtain and submit to the SFC a legal advice in the form of a legal opinion or memorandum in respect of virtual assets (except for virtual assets offered only to professional investors) and confirm that the relevant virtual assets do not fall within the definition of “securities” as referred to in the Securities and Futures Ordinance. 49. For details, please refer to paragraphs 7.7 to 7.9 of the “Guidelines on Virtual Asset Trading Platforms”. 50. Licensed platform operators who intend to offer virtual assets that meet the general token inclusion criteria but do not meet the specific token inclusion criteria for retail investors to trade should submit a proposal to the SFC for discussion. After reviewing the proposal, the SFC may decide on a case-by-case basis whether to allow the trading of such unclassified virtual assets. (IV) Disclosure Duty 51. Licensed Platform Operators should disclose sufficient product information (as set out in the following non-exhaustive list) to enable clients to assess the merits of their investments: a) The price and trading volume of the virtual asset on the platform, such as the price and trading volume in the past 24 hours; b) Background information about the virtual asset management team or developer; c) the date of issuance of the virtual asset; d) a brief description of the terms and characteristics of the virtual asset; e) Link to the official website of the virtual asset (if any); f) A link to the audit report of the virtual asset smart contract (if any); and g) If virtual assets have voting rights, how will the licensed platform operator handle these voting rights? 52. For details, please refer to paragraph 9.28 of the “Guidelines on Virtual Asset Trading Platforms”.
Question 4: Do you have any comments on the proposal to allow a combination of third party insurance and funds allocated by a licensed platform operator or a corporation within the same group of companies as the licensed platform operator? Do you have any other suggestions? Question 5: Do you have any proposal on how the licensed platform operator should allocate such funds (e.g. transfer to the licensed platform operator's corporate account, or set up an escrow arrangement)? Please explain in detail the arrangement you propose and how the protection provided by the arrangement can provide the same level of protection as third party insurance. Question 6: Do you have any suggestions on which technical solutions can effectively mitigate the risks associated with the custody of clients’ virtual assets (especially those held in online storage)? B. Proposed provisions regarding insurance/compensation arrangements 53. Currently, licensed platform operators under the Securities and Futures Ordinance must always have insurance that covers the risks associated with holding client virtual assets in online storage (full coverage) and the risks associated with holding client virtual assets in offline storage (substantial coverage, e.g. 95%)23. 54. However, we have learned that industry players face practical difficulties in complying with these requirements because many insurers are unwilling to provide coverage for the risks associated with online storage, and even if insurers are willing to provide such insurance, the required premiums are not commercially viable. Some people also expressed that it is difficult to comply with the requirement to purchase insurance “at all times” because the amount of virtual assets they are keeping is constantly changing, while the coverage of insurance is generally fixed and not reviewed frequently. 55. In view of the above reasons, the SFC proposes to amend the current insurance regulations as follows: a) Licensed platform operators should have a compensation arrangement approved by the SFC to provide an appropriate level of protection against risks associated with the custody of client virtual assets (e.g. incidents of platform hacking, or default by the licensed platform operator or its associated entities). Such arrangements should include third-party insurance, or funds set aside in trust by the licensed platform operator or a corporation in the same group of companies as the licensed platform operator and designated for the relevant purpose, or both. b) Licensed platform operators should monitor the total value of client virtual assets in their custody on a daily basis. If a licensed platform operator detects that the total value of client virtual assets in its custody exceeds the protection limit under the compensation arrangement approved by the SFC, and the operator expects this situation to continue, the operator should notify the SFC and take remedial measures as soon as possible to ensure compliance with the relevant compensation requirements. c) If a licensed platform operator allocates its own funds or funds of a corporation in the same group of companies as the licensed platform operator to comply with the relevant requirements, it should ensure that such funds are held in trust and earmarked for the relevant purpose. Such funds should also be segregated from the assets of the licensed platform operator, its associated entities or corporations in the same group of companies as the licensed platform operator. 56. The SFC also welcomes industry comments on the proposed requirements for insurance/compensation arrangements. The SFC also welcomes industry proposals on how the risks associated with the custody of client virtual assets (particularly those held in online storage) can be mitigated at the technical level. 57. For details, please refer to paragraphs 10.22 to 10.26 of the “Guidelines on Virtual Asset Trading Platforms”.
Question 7:
If a licensed platform operator can provide virtual asset derivatives trading services, which business model would you recommend? What type of virtual asset derivatives would you recommend for investors to buy and sell? What type of investors would be the target? C. Transactions in virtual asset derivatives 58. Under the current regime under the Securities and Futures Ordinance, licensed platform operators are not allowed to sell, trade or deal in virtual asset futures contracts or related derivatives24. 59. The SFC understands that there is growing interest in the sale of virtual asset derivatives, especially to institutional investors. The SFC understands that virtual asset derivatives play an important role as an interface between the virtual asset sector and traditional financial markets, especially in enabling institutional investors to hedge risks more effectively. 60. Nevertheless, the SFC hopes to gain a clearer understanding of the business model and types of virtual asset derivatives that licensed platform operators may initially adopt and the market demand through this consultation, and then conduct an independent review and formulate policies accordingly.
Question 8: Do you have any suggestions on how to improve the Virtual Asset Trading Platform Guidelines while incorporating other provisions in the Virtual Asset Trading Platform Terms and Conditions? D. Other adjustments to current regulations to be included in the Virtual Asset Trading Platform Guidelines 61. The SFC has also considered the industry’s comments on the current requirements imposed on licensed platform operators under the Securities and Futures Ordinance in the form of licensing conditions (including the Virtual Asset Trading Platform Terms and Conditions) and proposed to make the following adjustments when incorporating the relevant requirements into the Virtual Asset Trading Platform Guidelines: a) The SFC will not incorporate the “Security Tokens”25 requirement in the Virtual Asset Trading Platform Terms and Conditions into the Virtual Asset Trading Platform Guidelines. Under the requirement, only security tokens that meet the following criteria can be listed for trading on platforms: (i) asset-backed; (ii) approved, deemed qualified or registered by regulators in comparable jurisdictions; and (iii) with a 12-month post-issuance track record. When the requirement was implemented in 2019, it was intended to prevent platforms from listing tokens from fraudulent initial coin offerings (which are similar to traditional securities investments and often offer investors incentives by promising profits or returns from the underlying project). Given that market conditions have changed significantly, in particular with the emergence of tokenized securities, the requirement may no longer be applicable in certain circumstances. The SFC therefore proposes to remove the requirement. Going forward, licensed platform operators should comply with the general token inclusion criteria under the Virtual Asset Trading Platform Guidelines and the guidelines on the distribution of security tokens to be issued by the SFC in due course (see paragraph 7.5 of the Virtual Asset Trading Platform Guidelines). b) Currently, licensed platform operators under the Securities and Futures Ordinance are required to facilitate clients to exercise voting rights arising from their ownership of virtual assets26. The SFC recognises that compliance with this requirement is operationally difficult. Therefore, the Virtual Asset Trading Platform Guidelines provide that licensed platform operators are only required to disclose to clients how they will handle the relevant voting rights (see paragraph 9.28(g) of the Virtual Asset Trading Platform Guidelines). c) Licensed platform operators are no longer required to submit legal advice in the form of a legal opinion or memorandum in relation to virtual assets intended for sale, unless the virtual assets are sold to retail investors27 (see paragraph 7.9 of the Guidelines on Virtual Asset Trading Platforms). d) We propose to provide for exceptions to the proprietary trading requirements, whereby licensed platform operators may engage in back-to-back trading outside the platform28 or proprietary trading in limited circumstances permitted by the SFC on a case-by-case basis (see paragraph 13.2 of the Guidelines on Virtual Asset Trading Platforms). e) If the virtual assets are only sold to professional investors, the licensed platform operator only needs to notify the SFC in advance before planning to add or remove the relevant products on its trading platform, and no approval from the SFC is required. If the virtual assets are sold to retail customers, the previous practice will be followed, that is, the licensed platform operator should seek the SFC's approval in advance before including the virtual assets for trading (see paragraphs 16.3 to 16.4 of the "Guidelines on Virtual Asset Trading Platforms").
Question 9: Do you have any comments on the requirements on virtual asset transfers or any other requirements in Chapter 12 of the Anti-Money Laundering Guidelines for Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC? Please state your views. "Guidelines on Combating Money Laundering and Counter-Terrorist Financing (Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC)" 62. In general, the Virtual Asset Trading Platform Guidelines cover all requirements governing the conduct of licensed platform operators. Just as we will prepare separate guidelines on AML/CTF requirements for licensed corporations and their associated entities, we recommend that licensed platform operators should follow separate guidelines that set out requirements governing all AML/CTF matters arising from the business activities of licensed platform operators. In this regard, the SFC has drafted a separate chapter (Chapter 12) of the existing Guidelines on Anti-Money Laundering and Counter-Terrorist Financing (Applicable to Licensed Corporations) (the “Anti-Money Laundering Guidelines for Licensed Corporations”). In view of this, the "Anti-Money Laundering Guidelines for Licensed Corporations" will be renamed as the "Anti-Money Laundering and Counter-Terrorist Financing Guidelines (Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC)" ("Anti-Money Laundering Guidelines for Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC"), and the "Guidelines on Anti-Money Laundering and Counter-Terrorist Financing Issued by the Securities and Futures Commission for Associated Entities" will also be revised to cover associated entities of licensed platform operators. 63. In view of the money laundering and terrorist financing risks arising from the unique characteristics of virtual assets, licensed platform operators need to comply with the existing anti-money laundering/terrorist financing requirements set out in the Anti-Money Laundering Guidelines for Licensed Corporations, as well as the additional anti-money laundering/terrorist financing requirements for virtual assets included in Chapter 12, which are based on the Anti-Money Laundering Ordinance and the latest standards and guidelines issued by the FATF as reference30. We also refer to the current or proposed anti-money laundering/terrorist financing requirements in other jurisdictions (such as the United Kingdom and Singapore). Some of the key requirements set out in Chapter 12 are detailed below. A. Virtual Asset Transfer 64. In 2019, the FATF began advocating for the importance of applying the wire transfer requirements set out in FATF Recommendation 16 to virtual asset transfers in a modified form (i.e., the transfer rules). The primary purpose is to prevent bad actors and designated persons from making arbitrary electronic transfers of virtual assets and to detect abuse. The FATF also reiterated the need for jurisdictions to implement the transfer rules as soon as possible to address the “sunrise problem”31. 65. The special requirements for virtual asset transfers under section 13A of Schedule 2 to the AMLO (applicable to “financial institutions” as defined in the AMLO32) will come into effect on 1 June 2023. The SFC has set out detailed guidance in Chapter 12 on its supervisory requirements in relation to this statutory requirement, including: a) When a licensed platform operator acts as a remittance institution for virtual asset transfers, it must obtain and record the required remitter and beneficiary information and submit such information promptly and securely to the beneficiary institution (see paragraphs 12.11.5 to 12.11.16 of Chapter 12); b) when a licensed platform operator acts as a receiving institution, it is required to obtain and record the required information submitted by the remitting institution or intermediary institution (see paragraphs 12.11.19 to 12.11.20 of Chapter 12); c) Licensed Platform Operators should conduct due diligence on virtual asset transfer counterparties (i.e. remittance institutions, intermediaries or recipients involved in virtual asset transfers) to identify and assess the money laundering/terrorist financing risks involved so as to apply risk-based anti-money laundering/terrorist financing measures (see paragraphs 12.13.1 to 12.13.13 of Chapter 12); and d) Licensed Platform Operators should obtain and record the necessary information from their clients (who may be remitters or recipients) when conducting virtual asset transfers between non-custodial wallets33, and take reasonable measures to minimize and manage the money laundering/terrorist financing risks associated with such transfers (see paragraphs 12.14.1 to 12.14.3 of Chapter 12 for details). 66. Paragraphs 12.7.6, 12.8.1 to 12.8.3 of Chapter 12 also contain provisions on identifying suspicious transactions and conducting sanctions screening on all persons involved in virtual asset transfers. 67. In addition, licensed corporations that are not licensed platform operators may also face similar money laundering/terrorist financing risks when operating businesses related to virtual assets, and they may also operate businesses that may give rise to money laundering/terrorist financing risks related to virtual assets. In such cases, they should refer to the relevant provisions in Chapter 12.
Question 10: Do you have any comments on the CSRC Disciplinary Penalty Guidelines? Please state your views. Guidelines on Disciplinary Penalties by the Securities and Futures Commission 68. In addition to the “Guidelines on Virtual Asset Trading Platforms” and the “Guidelines on Anti-Money Laundering for Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC”, we will also publish the “Guidelines on Disciplinary Penalties for Virtual Asset Service Providers under the Anti-Money Laundering Ordinance”, the text of which is at Appendix D.
The full text of the Hong Kong Securities and Futures Commission's "Consultation Paper on Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission" is as follows: https://sc.sfc.hk/TuniS/apps.sfc.hk/edistributionWeb/api/consultation/openFile?lang=TC&refNo=23CP1 | 
