Interpretation of the new SFC regulation: How to operate a licensed virtual asset exchange in Hong Kong?

Author: According to Health

Source: Zero Finance

On the evening of November 6, the Hong Kong Securities Regulatory Commission ("SFC") issued a position paper on the supervision of virtual asset trading platforms ("the position book"). The position book is mainly divided into four parts: the first part describes the SFC's regulatory policy for the virtual asset trading platform, the second part introduces the current global virtual asset development background and the SFC's policy change process for virtual asset supervision. The third part describes the virtual asset trading platform. The regulatory framework and licensing conditions, and finally elaborate on the future direction, and issued an appendix of more than 40 pages: "Licensing Conditions and Terms and Conditions for Operators of Virtual Asset Trading Platforms".


On November 1, 2018, the SFC issued the “Declaration on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators for Virtual Asset Portfolios”. For the virtual asset trading platform, the Statement sets out a conceptual framework and states that it will work with the virtual asset trading platform operator who is interested in and has demonstrated the rigorous standards it is committed to, and incorporates it into the SFC's regulatory sandbox. Consider issuing a license at an appropriate time to closely monitor the virtual asset trading platform. However, if the SFC considers that it is unable to adequately address the risks involved and does not ensure that investors will be protected, no license will be issued. After meeting with virtual asset trading platform operators and in-depth review of virtual asset trading technology, operations and other areas, SFC's previous "appropriate timing" seems to have arrived. The position paper issued this time clarifies the scope of supervision and the licensing conditions applicable to the virtual asset trading platform.

(1) As long as there is a securities-type token transaction, it belongs to the SFC regulatory scope.

The position book indicates that only the platform that provides securities-type virtual assets or token trading services to customers is covered by the SFC. SFC does not have the right to issue or supervise platforms that only buy or sell non-securities virtual assets or tokens. On the day of the release of the position book, SFC Chief Executive Odari said at the Financial Technology Week that Bitcoin is not a security. This means that if the virtual asset exchange only buys and sells bitcoin, it is not subject to SFC regulation in Hong Kong. Although the trading activities of non-securities tokens are not regulated by SFC, as long as they operate in Hong Kong and provide at least one trading platform for securities-based token trading on their platforms, they will fall within the jurisdiction of SFC. In other words, even if only one type of securities token is included in the virtual assets bought and sold on the platform, it is within the scope of this new regulation.

(2) 6 licensing conditions, 12 compliance requirements

The license issued by the SFC for the qualifying virtual asset trading platform is a license for Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities. Compared with the "Declaration" on November 1 last year, the position book issued by the SFC further clarifies the core principles and conditions for licensing. According to the position book, in order for the trading platform to apply for a license at SFC, the following six conditions must be met:

a. Services may only be provided to professional investors; b. Must comply with the “Terms and Conditions Applicable to Operators of Virtual Asset Trading Platforms”; c. Any new or accompanying services or activities or existing services must be provided for any Or a plan or proposal for a major change in the activity, with the prior written approval of the SFC;

d. Must obtain prior written approval from the SFC for any plans or recommendations to add any products to its trading platform;

e. A report must be provided to the SFC on a monthly basis for the business activities in the form prescribed by the SFC. The report must be submitted to the SFC within two weeks of the end of each calendar month and at the request of the SFC;

f. An independent professional company acceptable to the SFC must be appointed to conduct an annual review of the licensee's activities and operations and to prepare a report confirming that it has complied with the licensing conditions and all relevant legal and regulatory requirements. The first report must be submitted to the SFC within 18 months from the date of approval of the licence. Subsequent reports should be submitted to the SFC within four months of the end of each financial year and at the request of the SFC. .

Among them, the terms and conditions required by the platform operator to comply with the second licensing conditions are explained in detail in the appendix. They include a total of 12 important aspects of the virtual asset trading platform. The terms and conditions are: Robustness, operations, prevention of market manipulation and non-compliance activities, transactions with customers, custody of client assets, risk management, trading platform and network security, conflicts of interest, storage records, auditors, anti-money laundering/terrorist fundraising, continuous reporting / Notification of responsibilities, etc. In terms of protecting customer assets, for the security of investors' virtual assets, SFC requires trading platform operators to ensure that 98% of customer virtual assets are stored in online wallets (ie offline wallets), and online virtual assets held by online wallets must not exceed 2 % . In addition, platform operators need to have detailed procedures to handle specific events of virtual assets such as hard forks or air drops from an operational and technical perspective.

(3) All licensees will be included in the regulatory sandbox by SFC

For platforms that are willing and able to obtain licenses, SFC has developed a set of rigorous standards that are comparable to those applied to licensed securities brokers and automated trading venues. However, SFC also stated that even if the virtual asset trading platform is licensed and regulated by the SFC, the virtual assets traded on the platform are not subject to any recognition or offer applicable to the traditional sale of “securities” or “collective investment plans”. The regulations are registered in the regulations. SFC does not have other mandatory disclosure requirements applicable to non-securities virtual asset offers. In addition, once the platform successfully applies for the SFC license, all the business areas operated by the platform will be covered by the SFC, even if the securities-type token trading activities only account for a small part of the overall business of the platform.

At the same time, all licensees will be included in the regulatory sandbox by SFC and will be closely and strictly monitored for a period of time. This is also a further continuation of the contents of the "Declaration" on November 1 last year.

(4) Some platforms do not apply for a license is their free choice

SFC systematically elaborated on the scope of supervision, licensing conditions and regulatory framework of the virtual asset trading platform in the position book, but did not require all virtual asset trading platforms to apply for a license. This is because SFC has realized that some platforms may think that SFC's regulatory requirements are too heavy and that they prefer to operate completely unregulated business, so they will not apply for a license to SFC under the new regulatory framework. SFC said that this is their free choice, as long as they can ensure that the virtual assets traded on their platforms are not "securities" or "futures contracts" under the Securities and Futures Ordinance. However, if the trading platform is lucky, selling or trading in securities-type virtual tokens or virtual asset futures contracts in Hong Kong without obtaining an SFC license or license may violate the Securities and Futures Ordinance (Chapter 571) or Gambling Ordinance (Chapter 148). In case of violation of these regulations, the relevant personnel may be prosecuted and even subject to corresponding criminal sanctions.

(5) Category 3 trading platforms that are not accepted for licensing

In addition to the clarification of the licensing conditions and regulatory framework, the position book also pointed out at least three types of trading platforms that cannot apply for a license to SFC, namely: a. Directly provide peer-to-peer trading services, but investors always maintain their own assets. Control; b. Perform virtual asset transactions for clients but fail to provide automated trading services;

c. According to section 116 of the Securities and Futures Ordinance, the SFC refuses to grant a licence unless the applicant for the licence is a suitable candidate.


With regard to the regulation of blockchain and virtual assets, Hong Kong has always been at the forefront of the world. SFC's regulatory guidelines for virtual assets, especially virtual asset trading platforms, have also kept pace with the changes in the market. The earliest SFCs' regulatory guidelines for virtual assets are similar to those in most parts of the world, and how to be regulated by existing regulatory regimes by clarifying the nature of various virtual assets and certain activities involving those assets. This requires the regulatory authorities to be very clear about the nature and classification criteria of virtual assets, and to classify them according to the terms and characteristics of each token. But the crypto-asset market is in rapid development, and the terms and characteristics of each token will evolve over time. Therefore, in order to clarify the position on the regulatory side, the SFC issued a number of statements and circulars at the time to strengthen investor education and take regulatory action against those suspected of having committed misconduct. Includes, September 5, 2017, "Statement on First-Generation Token Issues", December 11, 2017, Circular to Licensed Corporations and Registered Institutions – About Bitcoin Futures Contracts and Investments Related to Cryptographic Currency Products and February 9, 2018, "The Securities Regulatory Commission warns investors against cryptocurrency risks".

However, virtual asset trading platforms are gradually finding ways to operate outside the scope of SFC and other regulators in Hong Kong. In response to the changes, SFC adopted a new regulatory approach on November 1, 2018, which will involve the virtual asset activities of many investors into the scope of supervision.

At that time, the SFC stipulated that regardless of whether the virtual assets constituted “securities” or “futures contracts”, the investment portfolio was wholly or partially invested in virtual assets. As long as the virtual assets were used as investment targets, the fund managers and distributors were required to obtain authorization and be included in the supervision. . This approach allows investors to be protected at the fund management level and at the distribution level. However, for the virtual asset trading platform, there was no clear regulatory policy at the time, and only the “conceptual framework that may regulate the operators of virtual asset trading platforms” was formulated.

After a lapse of one year, the global virtual asset market is no longer the same. Although the ICO boom has declined, STO and IEO have increased significantly. The concept of stable currency has attracted the attention of global central banks and financial regulators, including various bitcoin derivatives such as bitcoin futures, options and swaps. Virtual assets have already emerged. Gradually extend to financial markets, and within the scope of certain securities regulation. At the same time, more and more traditional financial institutions and Internet companies are entering this market, and the entire virtual asset ecosystem is steadily expanding and becoming more complex.

In this context, SFC once again issued a regulatory guidance document for the virtual asset trading platform and began accepting license applications for virtual asset trading platforms that are willing and able to comply with the licensing guidelines and continue to comply with the regulations.

In the view of SFC, the wholesale license for some virtual asset transactions enables investors to easily distinguish between regulated and unregulated platforms, and to a certain extent protect the interests of investors.

Fu Rao, a senior researcher at the Hong Kong International Institute for New Economics, said in an interview with the media that although it is only a position book, this document can be described as a matter of fact, even a hard fork or airdrop that is unique to virtual assets ( Airdrop) has also been regulated. It can be said that although the new regulations are derived from the regulatory experience of traditional transactions, they have adapted and updated the new asset form of “virtual assets”, which finally makes this regulatory document look more rigorous and comprehensive. .

He also believes that the content of the position book indicates that Hong Kong has indirectly recognized the STO. Beijing Zhide Law Firm also wrote that for the domestic blockchain and practitioners in the traditional industry, the launch of the new regulations in Hong Kong means that the STO program has an alternative to the judicial region in addition to the United States. The article said that a compliant and commercially successful STO needs to consider not only legal requirements, but more importantly, the choice of trading structure, intermediaries and trading platforms. For example, a trading platform with sufficient market depth is often STO business. The core element of success.