At the Hong Kong Fintech week, the Chief Executive Officer of the Securities and Futures Commission (SFC), Mr Ashley Alder, announced the rollout of a new regulatory framework for virtual asset trading platforms. The regulation of virtual asset trading platforms (and whether they should fall within the SFC’s regulatory oversight) has been a key regulatory priority for the SFC over the past year (please see the SFC’s 1 November 2018 statement here). The new regulatory framework applicable to in-scope virtual asset trading platforms (see further below) is set out in the SFC’s position paper released on 6 November 2019. The SFC also concurrently released a warning statement advising investors of the risks associated with the purchase of virtual asset futures contracts in Hong Kong.
Under the new framework, a centralised online trading platform in Hong Kong offering to trade at least one security token on its platform will require a licence for Type 1 (dealing in securities) and Type 7 (providing ATS) regulated activities. A platform operator trading only non-security virtual assets or tokens (e.g. those which do not meet the definition of “securities” or “futures contracts” under the Securities and Futures Ordinance) will fall outside of the framework. Accordingly, platform operators can effectively “opt-in” to regulation.
The SFC will impose the following licensing conditions (amongst others) on an in-scope virtual asset trading platform:
- that its services be offered to professional investors only;
- that the Terms and Conditions for Virtual Asset Trading Platform Operators be complied with (these cover, for example, safe custody of assets, KYC requirements, AML/CTF obligations and insurance requirements in respect of custody of virtual assets held in hot and cold storage – please see Appendix 1 to the position paper for further details); and
- that it adopts a reputable external market surveillance system (in addition to its own market surveillance policies and controls) to identify, monitor, detect and prevent any market manipulative or abusive activities on its platform.
It should be noted that if a platform operator offers to trade non-security tokens alongside security tokens, all aspects of its business (including those parts relating to the trading of non-security virtual assets or tokens) should meet the regulatory standards under the framework as the SFC’s supervisory powers will extend to all parts of its business.
Once licensed, the SFC will place the in-scope virtual asset trading platform operator in its Regulatory Sandbox and will closely supervise its business (e.g. frequent reporting, monitoring and reviews).
At this stage, the SFC will focus its efforts on trading platforms which provide trading, clearing and settlement services for virtual assets and those which have control over investors’ assets. The SFC will not accept licensing applications from (i) platforms which only provide a direct peer-to-peer marketplace for investors who retain control over their own assets (whether it be fiat currencies or virtual assets) or (ii) platforms which trade virtual assets for clients (including order routing) but do not provide automated trading services themselves.