New Regulations Launched: Interpreting the “Transitional Arrangements” for Hong Kong Virtual Asset Trading Platforms

New Regulations for Hong Kong Virtual Asset Trading Platforms have been launched to clarify the "Transitional Arrangements".

Authors: Gilbert Ng, founder of consulting firm Mura, and Chris Lee, founder and partner of TKX Capital and former CFO of Huobi and OKEx.

Background

The Hong Kong Securities and Futures Commission (SFC) released a circular on the evening of May 31, 2023, announcing the latest VATP virtual asset trading platform licensing manual and transition arrangements for the licensing system, ahead of the June 1 application deadline for VATP licensing.

Transition Arrangements for Trading Platforms

1. Non-securities token trading platforms that have “real business operations and genuine business premises” in Hong Kong prior to June 1 can continue to operate for 12 months from June 1. Trading platforms that begin operating in Hong Kong after June 1 need to obtain an SFC license before they can operate, without any transitional period. Considerations for “real business” and “genuine business premises” include:

a. Whether the trading platform is a Hong Kong company;

b. Whether it has an office in Hong Kong;

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c. Whether the trading platform is managed and controlled by Hong Kong employees;

d. Whether key personnel are based in Hong Kong;

e. Whether there are independent Hong Kong customers and genuine trading volumes;

f. Other evidence that the platform is operating in Hong Kong.

Note that simply having a Hong Kong company registration but with employees not based in Hong Kong is not sufficient. And employees need to have been based in Hong Kong before June 1. The transition arrangements only apply to non-securities token trading platforms, and there are no transitional arrangements for securities token trading platforms. That is, all securities token trading platforms need to obtain an SFC license after June 1 before they can operate.

2. Trading platforms with transitional arrangements can be considered for licensing from June 1, 2024, if they meet the following conditions:

a. Submit a complete license application to the SFC by February 29, 2024;

b. Provide evidence that the trading platform has complied with all licensing regulations and has been accepted by the SFC.

3. In addition, the transition arrangements also include “regulated individuals,” namely licensed representatives (ROs) and/or responsible officers (ROs). Individuals who have already performed relevant functions on a trading platform before June 1 can also have individual transitional arrangements and continue to perform their duties as ROs or ROs for 12 months from June 1, 2023 (if they do not hold a license as an RO or RO). These ROs and ROs can be considered licensed ROs and ROs from June 1, 2024 if they meet the following conditions:

1. These RO and LR must submit a complete (individual) license application to the CSRC before February 29, 2024.

2. These RO and LR must have performed related functions of RO and LR in the exchange before June 1, 2023.

3. It can be proved and accepted by the CSRC that these RO and LR have the ability to comply with the regulatory requirements of licensed exchanges.

4. It is worth noting that in the license application process, if the CSRC finds that the application is incomplete or there are any application problems that can be resolved, the CSRC will return the application for the applicant to resolve the problem, rather than directly rejecting the application. Therefore, applicants who are qualified for the transition period should submit their applications as early as possible, rather than waiting until February 29, 2024, to have sufficient time to solve CSRC problems.

5. As for the responsible personnel, because the CSRC believes that the exchange will not be a small-scale operation, it is recommended that the number of responsible personnel may need to be more than the basic regulations.

6. In addition, the CSRC recommends that VATP apply for licenses together with the No. 1 and 7 licenses. The reason is that the nature of security coins and functional coins can change at any time, and applying for both licenses can ensure the smooth operation of the exchange. The two licenses are submitted together on a comprehensive application form.

Summary of VATP License Manual

7. The CSRC’s definition of operation in Hong Kong depends on whether the exchange is “actively marketing to the Hong Kong public.” That is, if an exchange, regardless of its place of registration, promotes to the Hong Kong public, then the exchange must obtain a license. This can include various situations, such as: frequently contacting Hong Kong investors or the public and promoting services to the Hong Kong public, conducting mass media plans targeting Hong Kong investors, and conducting online activities targeting Hong Kong investors. When deciding whether the exchange is “actively promoting” its services to the public, the CSRC will consider the overall nature of the business activities, considering factors such as:

a. Whether the service has a detailed promotion plan;

b. Whether the service is promoted through direct promotion channels, such as advertising in Hong Kong media, broadcasting, or other online “sales” technologies, to conduct extensive publicity (on the contrary, if the service is obtained passively, such as in the form of “self-selection”, it may not belong to active promotion).

c. Whether the promotion is conducted in a planned manner and whether it follows a plan or procedure to show that it is a continuous service rather than a single promotion;

d. Whether the service is aimed at the Hong Kong public, for example, written in Chinese and denominated in Hong Kong dollars;

e. Whether the service is actively sought by customers.

8. In addition, any licensed exchange operating outside Hong Kong must ensure full compliance with all local laws and regulatory requirements.

9. A licensed exchange will need to provide the SFC with monthly reports on its business activities, in a format specified by the SFC and providing all information required by the SFC. The SFC also has the power to make enquiries of the exchange about any matter concerning the exchange, and the exchange must give true and complete answers.

10. A licensed exchange will need to engage an independent professional firm to conduct an annual audit of its business, including compliance processes, systems, security, etc. The first audit report should be submitted within 18 months from the date of licensing approval.

11. All other services or businesses besides the exchange require the approval of the SFC, and a licensed exchange can only operate one centralized exchange.

Licensing Requirements

12. The basic requirements for licensing have been outlined in many different articles before, so they will not be repeated here. Only special or important matters are highlighted. All directors, responsible officers (ROs), responsible officers (LRs), managers-in-charge (MICs), and ultimate beneficial owners (UBOs) must pass the SFC’s “fit and proper” test. The relevant industry experience of ROs, LRs, and MICs should be in supervised activities in Hong Kong or other countries. Work experience in non-compliant environments can also be accepted if it is exempted (from licensing requirements). If it is related to financial technology technology and exchange platform technology, it can also be considered for acceptance. It is worth noting that at least one RO should be resident in Hong Kong.

13. The financial requirement is HKD 5 million in paid-up capital, HKD 3 million in liquid assets, plus 12 months of operating expenses. Therefore, the exchange needs to submit an estimate of operating expenses and revenue to the SFC.

14. The trust company used to safeguard client assets cannot engage in any other business and can only act as a single custodian of client assets.

15. There is no mandatory requirement for data centers and storage centers to be located in Hong Kong, but all data centers and storage centers used must be approved by the SFC.