The Securities and Futures Commission (the “SFC”) in Hong Kong is in the process of introducing a comprehensive framework to regulate virtual assets (including cryptocurrency, crypto-asset, digital token, etc.) related activities. In December 2022, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 was passed by the Legislative Council to introduce, among other things, a licensing regime for virtual asset service providers.

Under the new licensing regime to take effect on 1 June 2023, all centralised virtual asset trading platforms (the “VATPs“) carrying on business in Hong Kong or actively marketing to Hong Kong investors will need to be licensed by the SFC. VATPs must satisfy the fit and proper test and comply with the anti-money laundering and counter-terrorist financing (AML/CTF) requirements, as well as other regulatory requirements on investor protection. On 20 February 2023, the SFC launched the anticipated consultation on the proposed detailed regulatory requirements for operators of virtual asset trading platforms.

It is proposed that licensed VATPs shall comply with, among other things, the Guidelines for Virtual Asset Trading Platform Operators (the “VATP Guidelines“), which are based on the existing regulatory requirements applicable to SFO-licensed platform operators, and particularly, the Terms and Conditions for VA Trading Platform Operators (the “VATP T&C“), including safe custody of assets, know-your-client, AML/CFT, conflicts of interest, admission of virtual assets for trading, prevention of market manipulation, accounting and auditing and risk management.

In the consultation, the SFC is seeking the public’s views on certain regulatory requirements, which are additions or variations to the existing requirements in the VATP T&C, including but not limiting to:-

(a) whether to allow licensed VATPs to serve retail investors, and if so, what investor protection measures are required;

(b) proposed requirements for insurance / compensation arrangement; and

(c) trading in virtual asset derivatives.

With the understanding that platform operators currently licensed under the Securities and Futures Ordinance may need time to revise their systems and controls to meet some of the new requirements under the proposed VATP Guidelines, the SFC has proposed to provide a 12-month transitional period to VATPs which are pre-existing (i.e. in operation in Hong Kong prior to 1 June 2023 with meaningful and substantial presence).

Interested parties are encouraged to submit their comments on the proposal under consultation on or before 31 March 2023.