Hong Kong Securities Regulatory Commission releases position paper on supervision of virtual asset trading platform [Simplified Chinese]

Original source: https://www.sfc.hk/web/TC/files/ER/PDF/20191106%20Position%20Paper%20and%20Appendix%201%20to%20Position%20Paper%20(Chi).pdf

Position book

Supervising virtual asset trading platforms

Part 1—Supervision Policy of the SFC on Virtual Asset Trading Platforms

1. The Securities and Futures Commission (SFC) announced on November 1, 2018 a set of conceptual frameworks that may regulate virtual asset trading platforms, and stated that the SFC will consider whether it is appropriate to advise the platform based on its existing powers Operators license and regulate them.

• 19 days, 44 policies are favorable, the blockchain industry is accelerating into the fast lane
• Forbes: Will the IRS Kill Cryptocurrency Trading
• Monthly Report | Blockchain policy released in November, supervision and support

2. After issuing the announcement, the SFC met with the operator of the virtual asset trading platform to discuss their business and explain the regulatory requirements of the SFC. After an in-depth review of the technical, operational and other aspects of virtual asset trading, the SFC concluded that certain central platforms that provide securities and non-secure token transaction services will be suitable for the framework set out in this position paper Regulated.

3. The SFC has therefore adopted a set of strict regulatory standards for virtual asset trading platforms similar to those applicable to licensed securities brokers and automated trading venues. And major regulatory concerns in terrorist financing, market manipulation, accounting and auditing, risk management, conflicts of interest, and acceptance of virtual assets for trading. The SFC will only grant licenses to platforms that meet expected standards.

4. However, it must be clarified that the SFC does not have the authority to license or regulate platforms that only trade non-secure virtual assets or tokens. Since such virtual assets do not belong to the "Securities" or "Futures Contracts" under the Securities and Futures Ordinance, the business operated by these platforms does not constitute a "regulated business" under the Ordinance. This explains why under the current regulatory framework, only platforms that provide securities virtual assets or token transaction services to customers are under the supervision of the CSRC.

5. Once a platform that chooses to include securities-type virtual assets or tokens in the trading range is licensed, investors can easily distinguish between regulated and unregulated platforms. This is the new regulatory framework described in this position paper. A big feature. However, the SFC understands that many virtual assets are highly speculative and volatile, and many do not have any real value, whether they are traded on regulated or unregulated platforms. Investors should only participate in virtual asset transactions if they fully understand and have the ability to manage the risks involved.

6. The SFC also wishes to state that even if the virtual asset trading platform is licensed and regulated by the SFC, virtual assets bought and sold on the platform are not applicable to the traditional sale of "securities" or "collective investment plans" Subject to any recognition or prospectus registration provisions. There are no other mandatory disclosure requirements in Hong Kong that apply to non-secure virtual asset offers. In addition, even if the virtual assets traded on a licensed platform are securities tokens, as long as the tokens are only sold to professional investors7, they will not be subject to the investment offer approval process and prospectus registration system in Hong Kong.

7. It must also be noted that although Sections XIII and XIV of the Securities and Futures Ordinance allow the Securities and Futures Commission to take action on market misconduct in the securities and futures market, this does not apply to licensed virtual asset trading platforms. Reasons Such platforms are not recognized securities or futures markets, and the relevant virtual assets are not "securities" or "futures contracts" listed or traded on that market.

8. There are currently dozens of virtual asset trading platforms in Hong Kong, which have caused serious concerns in terms of investor protection. Some platforms may decide not to apply for a license from the SFC under the new regulatory framework. This is their free choice, as long as they can ensure that the virtual assets traded on their platform are not "securities" or "futures contracts" under the Securities and Futures Ordinance. They may argue that the regulatory requirements of the SFC are too onerous and that they would rather run completely unregulated businesses. In view of the restrictions on the regulatory powers of the SFC, the SFC could have decided to suspend any regulatory countermeasures for the increasingly popular virtual asset trading platform in order to deal with the booming virtual asset industry more fully after the new legislation is enacted. However, even in the face of inherent restrictions, the SFC's decision to take action now is clearly in the public interest, allowing investors to choose to buy and sell on platforms that agree to be subject to the framework regulation and supervision currently adopted by the SFC.

9. Although some of the regulatory gaps identified in this document can only be resolved by means of amendments, the SFC has developed a set of platforms suitable for licensed securities brokers and automated trading venues for platforms that are willing and able to obtain licenses. Similar standards. However, the SFC will continue to monitor market developments and work with the Hong Kong Government to explore whether legislative changes are needed in the long run.

10. The regulatory standards described above are detailed in Part III of this document. The SFC welcomes platform operators who are committed and capable of complying with licensing guidelines and ongoing ethics requirements to apply for a license. Licensed platforms will also be included in the regulatory sandbox of the SFC and will be closely and rigorously monitored for a period of time.

11. The main licensing conditions include stipulating that the platform operator can only provide its services to professional investors, it must formulate strict inclusion criteria to screen virtual assets that can be bought and sold on its platform, and provide services only to customers who fully understand the virtual assets. . In addition, platform operators will have to use a reputable external market surveillance system to complement their own market surveillance policies and controls. The platform operator should also ensure that the insurance purchased for the risks involved in the custody of virtual assets takes effect at all times.

12. The adoption of the new regulatory framework will enable the SFC to formulate its future regulatory strategy through close monitoring interactions with the evolving and rapidly developing industry.

Part II-Background

A. Global environment

13. Virtual assets express value in digital form, also known as “cryptocurrency”, “cryptoasset” or “digital token”. The total market value of global virtual assets is currently estimated to be between US $ 200 billion and US $ 300 billion, with about 3,000 digital tokens and more than 200 virtual asset trading platforms8. Despite a period of extreme volatility in 2019, there is no indication that the virtual asset market will decline.

14. Although the initial coin offering (ICO) boom seems to have subsided, other forms of virtual asset fundraising activities have been favored. For example, security token offering (STO) generally has the attributes of traditional securities sales, but it involves the use of blockchain technology to express asset ownership or economic rights in digital form. Initial exchange offerings (IEOs) have also increased significantly. IEO generally involves the use of blockchain technology to exclusively launch the first issue and sale of tokens on a virtual asset trading platform. It is reported that the total funds raised by the IEO in the second quarter of 2019 exceeded US $ 1.4 billion.

15. At present, there is another type of virtual asset commonly called "stablecoin". Stablecoins often claim to have a mechanism that seeks to back them up with fiat currencies, commodities or a basket of cryptocurrencies to stabilize the value of the currency. These virtual assets have attracted significant regulatory attention from central banks and financial regulators around the world, especially if such virtual assets are intended for global adoption.

16. Other virtual asset investment products also came into being. Since 2017, large-scale exchanges in the United States have successively sold bitcoin futures, and these exchanges are regulated by the Commodity Futures Trading Commission. The SFC also noted that other forms of virtual asset derivatives (including cryptocurrency options, swaps and CFDs) have increased. These are just a few examples. It can be seen how the field of virtual assets is gradually extending to financial markets and entering the scope of certain securities regulatory systems.

17. In addition, with more and more traditional financial institutions and service providers entering the market, the ecosystem of virtual assets is expanding steadily and becoming more complex, providing services comparable to traditional mainstream financial institutions. For example, multiple traditional custodians are looking into providing crypto custodian services or technology solutions. In order to meet the needs of virtual asset companies, the four major accounting firms have expanded their services to this area. Large-scale insurance companies and insurance brokers are increasingly open to providing insurance protection and services to the virtual asset industry. Furthermore, many traditional financial institutions are studying the use of private blockchains to develop their own cryptocurrencies for real-time and cross-border fund transfers.

18. The CSRC elaborated in detail the risks involved in virtual assets in its "November 1 Statement", part of which was due to the inherent nature of virtual assets. Relevant risks include the risk of money laundering, terrorist financing, fraud, volatility, liquidity, and market manipulation and violations. The statement also highlights the specific risks inherent in operating a virtual asset trading platform. Because some platforms are designed to deliberately depart from the scope of any regulatory system, they are not subject to any regulatory standards. These platforms not only have serious inadequate protection for investors, they have also attracted significant attention in terms of safe custody of assets and network security. The operation of the platform is interrupted from time to time. From time to time, there have been reports that the platform has been hacked and investors have suffered significant losses. In addition, the trading rules of the platform may lack transparency and fairness.

19. In recent years, international standard-setting bodies have been closely monitoring and discussing how to deal with the risks involved in virtual assets. Although the Financial Stability Board's assessment still indicates that virtual assets have not brought significant risks to global financial stability, various securities regulators have now reached consensus that virtual assets pose policy issues related to investor protection. Although the advisory report issued by the International Organization of Securities Commissions (International Organization of Securities Commissions) in May 2019 did not make a conclusion on whether crypto assets belong to the regulatory scope of securities regulators, the report has been published on the virtual asset trading platform Jurisdictions with legal regulatory authority in their trading activities have listed a number of key considerations and suggested a series of corresponding measures.

20. Different securities regulators have adopted different countermeasures. Some jurisdictions prohibit virtual asset activities, while others have established special regulatory regimes for such activities. Many jurisdictions take a more nuanced approach, such as classifying tokens into categories and specifying which categories fall within the scope of their existing system. Some jurisdictions still adopt a wait-and-see attitude.

B. SFC's regulatory approach to virtual assets

21. The public can trade virtual assets through several channels, including ICOs, investment funds, central trading platforms, and OTC counters. Like other securities regulators in major jurisdictions, the SFC's initial approach was to clarify how virtual assets and certain specific activities involving those assets would be regulated by its existing regulatory regime. This policy needs to be classified according to the terms and characteristics of each token, and the relevant terms and characteristics may evolve over time. In this regard, the CSRC issued multiple statements and circulars to clarify its position on supervision, strengthened investor education and took regulatory actions against persons suspected of misconduct. Following these measures, Hong Kong's ICO activity has decreased, and in some cases, issuers have cancelled ICO transactions. Securities tokens have also been removed from the virtual asset trading platform, and Hong Kong investors have been refused to participate in ICOs or conduct ICO transactions on the virtual asset platform.

22. However, operators of virtual asset trading platforms have found ways to operate outside the regulatory framework of the SFC and other regulators in Hong Kong. There are currently dozens of virtual asset trading platforms with operations in Hong Kong, including some of the world's larger platforms. Some platforms provide trading of virtual asset futures contracts, and such contracts involve extremely high risks due to unstable volatility and high leverage.

23. The SFC decided in November 2018 to adopt a new set of policies to seek to include some of the virtual asset activities involving a large number of investors into its regulatory scope in accordance with its existing powers.

24. The first part of this policy addresses the management and distribution aspects of funds that invest wholly or partly in virtual assets. If the SFC licensed investment organizer company intends to invest more than 10% of its mixed portfolio in virtual assets, it must comply with the additional requirements set out in the November 1 Statement16. The SFC also set out in another circular17 the standards that a licensed corporation distributing virtual asset funds should meet. The comprehensive effect brought by the above measures is that investors' rights can be protected at the fund management level or distribution level or at both levels.

25. The second part deals with the central virtual asset trading platform, which is the subject matter surrounding this document. The regulatory framework recommended by the Council in the "November 1 Statement" is a central virtual asset trading platform that applies to virtual assets operating and trading in Hong Kong that includes at least one security token.

26. After issuing the announcement, the SFC met with the operator of the virtual asset trading platform to learn about their operations and explain the regulatory requirements of the SFC. The SFC has invited platforms with active trading, a large customer base, major local businesses and a robust corporate governance structure to participate in more in-depth discussions and assessed their ability to comply with relevant expectations.

27. In automated trading venues or stock and futures exchanges, investors trade through licensed intermediaries, but virtual asset trading platforms are different. They engage directly with the public. In view of this, and after completing the exploration and analysis, the CSRC has concluded that certain types of central virtual asset trading platforms can be applied with reference to the standards that a licensed automated trading service provider or broker must meet. Similar regulatory standards. As a result, the SFC will begin accepting license applications from platform operators that are committed and capable of complying with expected licensing standards and ongoing ethics requirements.

28. The regulatory framework for virtual asset trading platforms is discussed in detail in Part III.

29. In addition, the SFC issued a statement today stating that platforms selling virtual asset futures contracts may violate Hong Kong law

As such futures contracts carry significant risks, investors should be alert when investing.

Part III-Regulatory framework for virtual asset trading platforms

A. Licensing and supervision

30. The regulatory framework for virtual asset trading platforms is detailed below. The regulatory standards under this framework are based on and are similar to the current regulations applicable to licensed automated trading service providers and securities brokers, and meet the standards set out in the advisory report of the International Organization of Securities Commissions.

Licensing system

31. Virtual asset trading platforms usually provide trading of non-secure tokens. As stated in the "November 1 Statement" and this document, if the activities of the central platform operator only provide non-secure token transaction services, it will not fall within the jurisdiction of the SFC. In view of this, the CSRC introduced a regulatory framework aimed at including virtual asset trading platforms that intend to be licensed into its regulatory scope.

32. The SFC is empowered to grant licences to persons carrying out "regulated activities" as defined in the Securities and Futures Ordinance. Under this regulatory framework, if the platform operator operates a central online trading platform in Hong Kong and provides at least one security token transaction on its platform, it will fall within the jurisdiction of the Securities and Futures Commission and must have the first Class (securities trading) and Type 7 (providing automated trading services) regulated activities. In the event that a qualified platform operator meets other licensing requirements, including the appropriate candidate criteria, the SFC may grant a license to it to operate the business of virtual asset trading.

33. At this stage, the CSRC will work to regulate the virtual asset trading platform (that is, the central virtual asset trading platform) that provides virtual asset trading, settlement and settlement services and has control over investor assets. If the platforms only provide trading services for direct peer-to-peer markets, and their investors usually retain control of their own assets (whether fiat money or virtual assets), the SFC will not accept license applications for these platforms. If the platform conducts virtual asset transactions for customers (including transmission of buy and sell instructions) but does not provide automated transaction services itself, the Association will not accept their license applications.

Regulatory system

34. Once the platform is licensed, its infrastructure, core suitable candidate qualifications and the conduct of virtual asset trading activities should be considered as a whole. Although the trading activities of non-secure tokens are not "regulated activities", as long as the platform involves trading activities of securities tokens (even if they only account for a small part of their business), the regulatory area of ​​the SFC covers All relevant aspects of platform operations.

35. Transactions involving non-securities tokens and transactions involving securities tokens may be mixed with each other and form part of an integrated business.

36. Under section 116 of the Securities and Futures Ordinance, the SFC must refuse to grant a licence unless the applicant for the licence is a suitable candidate. In considering a person's appropriate qualifications (whether at the initial stage or as a continuing requirement), the SFC may also consider the status of any other business of the corporation under section 129 of the Ordinance. Therefore, the Association will consider the way in which the licensee conducts non-secure token business, on the grounds that it may affect the appropriate qualifications of the licensee for regulated activities. This practice has also been reflected in the supervisory powers of the SFC set out in section 180 of the Ordinance. The scope of such regulatory powers extends to the inspection and inquiry of any records and documents relating to any transaction or activity that may affect the business of a licensed corporation.

37. Therefore, when reviewing the platform operator's license application, the CSRC will consider the way in which the virtual asset trading platform operates its overall virtual asset trading business, especially whether the operator is compliant (or willing and able to comply). Regulatory standards.

38. In light of this, the operator of the platform applying for a license should be aware that when operating virtual asset trading business, whether it involves securities tokens or non-securities tokens, and whether the business is on its platform or not All relevant regulatory requirements shall be followed.

39. In addition, the SFC will require platform operators to ensure that all their group of companies actively promote or conduct Hong Kong investors' virtual asset trading business activities (referred to as related activities) are a single legal entity licensed by the SFC Undertaking, which includes all virtual asset transactions on the platform and non-platform, as well as any activities performed solely to provide relevant trading services. Restricting all relevant activities to a single legal entity will allow the SFC to implement comprehensive monitoring on the one hand, and on the other hand will minimize any uncertainty in which parts of the business are licensed and regulated by the SFC . Follow Block Rhythm, download Block Rhythm APP to get the latest information

B. Regulatory standards

Licensing conditions

40. If the SFC decides to grant a licence to a qualified platform operator, it will impose licensing conditions to address the specific risks associated with its operations. The licensing conditions that may be imposed under section 116 (6) of the Securities and Futures Ordinance are set out below:

(a) Licensees can only provide services to professional investors. The term “professional investor” is defined in Section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules.

(b) Licensee must comply with the attached “Terms and Conditions Applicable to Operators of Virtual Asset Trading Platforms” (as amended from time to time).

(c) The licensee must obtain the prior written approval of the SFC for any plan or proposal to introduce or provide new or incidental services or activities or to make significant changes to existing services or activities.

(d) The licensee must obtain the prior written approval of the SFC for any plan or proposal to add any product to its trading platform.

(e) The licensee must provide the SFC with a monthly report on its business activities in a format prescribed by the SFC. Relevant reports must be submitted to the SFC within two weeks after the end of each calendar month and at the request of the SFC.

(f) The licensee must engage an independent professional company acceptable to the SFC to conduct an annual review of the licensee's activities and operations and prepare a copy confirming that it has complied with the licensing conditions and all relevant legal and regulatory requirements Report. The first report must be submitted to the SFC within 18 months from the date of approval of the license. Subsequent reports should be submitted to the SFC within four months after the end of each financial year and as requested by the SFC .

41. Licensed platform operators must comply with all licensing conditions imposed on them in any relevant activity. Violation of any licensing conditions will be considered "misconduct" under Part IX of the Securities and Futures Ordinance, and may have a negative impact on the qualifications of a suitable candidate for the platform operator to continue to be licensed and may lead to the Commission Take disciplinary action (such as revoking a license, public reprimand or fine).

Terms and conditions applicable to virtual asset platform operators

42. As mentioned above, one of the licensing conditions will require platform operators to comply with the prescribed terms and conditions. Relevant licensing conditions and terms and conditions are set out in Appendix 1 to this document, and the standards set out therein are mainly for the operation arrangements of the virtual asset trading platform when conducting related activities.

43. The relevant terms and conditions are formulated on the following basis:

a. Once the platform operator is licensed, it is a licensed corporation and must comply with the relevant provisions of the Securities and Futures Ordinance and its subsidiary legislation. The platform operator must also comply with all relevant regulatory requirements contained in the Code of Conduct and the guidelines, circulars and frequently asked questions issued by the SFC from time to time when conducting any relevant activities.

b. As some current regulations explicitly refer to "securities" and "regulated activities", the SFC has revised the relevant regulations and added relevant terms and conditions to apply the same or similar concepts to the conduct of relevant activities .

c. In addition to the above-mentioned current regulations, the SFC has also added additional requirements based on the unique characteristics of virtual assets and the technology involved in them. Follow Block Rhythm, download Block Rhythm APP to get the latest information

44. The main terms and conditions are set out below.

Safekeeping of assets

45. The virtual asset trading platform not only matches the market of buyers and sellers, but also holds virtual assets on behalf of its customers.

46. ​​The SFC believes that the operating structure and technology adopted by any virtual asset trading platform seeking a license should ensure that customers are provided with the same protection as traditional financial institutions in the securities industry. Trust structure

47. The platform operator should hold client assets for its clients through a trust, and the company must be (i) the platform operator's "associated entity" under the Securities and Futures Ordinance; (ii) ) Incorporated in Hong Kong; (iii) holds a “trust or company service provider license” within the meaning of the Anti-Money Laundering and Terrorist Financing Ordinance (Cap. 615); and (iv) the platform operator Owned subsidiaries ("Associated Entities"). This requirement should help protect customers' virtual assets and ensure that these assets are properly separated from the platform's assets.

48. There is currently a degree of uncertainty as to whether virtual assets constitute "property" under the laws of Hong Kong. The court has so far made no ruling on this issue. The legal classification of virtual assets may affect the rights of clients in bankruptcy and liquidation proceedings. Although this uncertainty cannot be resolved in the short term, the SFC believes that this will not hinder the current regulatory framework. At the same time, the Association requires that, if licensed, platform operators must fully disclose any significant legal uncertainties to their customers, especially any laws that they may have with customers about their virtual assets bought and sold on the platform. Uncertainty related to the nature of the claim.

49. Investors should be aware that while some risks related to the custody of virtual assets should be mitigated, there are still other risks, especially those related to cyber attacks (such as hacking).

Online and offline wallets

50. The SFC will require platform operators and their associated entities to establish and implement written internal policies and governance procedures to ensure compliance with the requirements related to the safekeeping of customers' virtual assets. For example, the "online wallet" storage method refers to the practice of storing private keys of virtual assets on the Internet, and is therefore vulnerable to external threats such as hacking and social engineering (such as counterfeiting fraud). "Offline wallet" storage means that the private key is stored offline (that is, without access to the Internet), so it is more secure. The SFC will require platform operators to ensure that they (or their associated entities) store 98% of their customer's virtual assets in their offline wallets and limit their virtual assets held by customers to no more than 2%. The platform operator and its associated entities should also try to minimize the allocation of assets from offline wallets that hold most of the customer's virtual assets for transactions.

51. In addition, given the unique characteristics of virtual assets, platform operators and their associated entities should have detailed procedures for handling events such as hard forks or air drops from an operational and technical perspective.

52. The platform operator and its affiliated entities should also develop adequate procedures for handling deposit requirements for customers' virtual assets to prevent losses due to theft, fraud and other dishonesty, professional misconduct or inaction.

Insurance

53. Once hacked, it is often difficult for investors to recover losses. The CSRC will require the platform operator to ensure that the insurance purchased is valid at all times, and its protection scope should cover the risks involved in holding the customer's virtual assets in online storage (full protection), and holding in offline storage Risks involved in customer's virtual assets (most protections, such as 95%). Follow Block Rhythm, download Block Rhythm APP to get the latest information

Private Key Management

54. Access to and custody of virtual assets requires digitally signed transactions through the use of private keys in order to proceed. Therefore, the safekeeping of virtual assets basically requires the safe management of relevant private keys. The SFC believes that the platform operator and its associated entities should establish and implement strict internal control measures and governance procedures in managing private keys to ensure that all encrypted seeds and keys are securely generated, stored, and backed up.

55. Please refer to paragraphs 7.1 to 7.19 of the relevant terms and conditions for detailed requirements regarding the safekeeping of client assets.

Know your customers

56. The platform operator shall comply with the requirements applicable to licensed corporations who know your customers, and shall take all reasonable steps to establish the true and full identity, financial situation, investment experience and investment objectives of each of its customers.

57. Unlike traditional securities trading venues, virtual asset trading platforms allow investors direct access. Easy access to trading platforms, coupled with the complexity and inherent risks of virtual assets, have caused major investor protection issues. The CSRC will require platform operators to ensure that customers have a full understanding of virtual assets (including the related risks involved in virtual assets) before providing any services to customers24.

58. If the client does not have the relevant knowledge, the platform operator can only provide services to the client on the premise that the client has been provided with training and the client's personal status has been checked to ensure that the service provided is suitable for the client.

59. The platform operator should also assess the concentration risk by setting the transaction limit or position limit (or both) by referring to the customer's financial situation to ensure that the customer has sufficient net assets to bear the risk and transactions that may be incurred loss.

60. Please refer to paragraphs 6.6 to 6.10 of the relevant terms and conditions for detailed rules on knowing your customers.

Combating money laundering and terrorist financing

61. Since many virtual assets are bought and sold anonymously, they often pose a risk of money laundering and terrorist financing. The SFC expects that platform operators should establish and implement adequate and appropriate policies, procedures and monitoring measures to combat money laundering and terrorist financing (collectively referred to as the system against money laundering / terrorist financing) in order to fully manage the relevant risks.

62. Platform operators should also refer to any new guidelines issued by the Securities and Futures Commission and the latest content of the Special Actions on Financial Actions (FAO) recommendations applicable to virtual asset-related activities (such as the commentary to recommendation 15 and the Guidance for a Risk-based Approach to VirtualAssets and Virtual Asset Service Providers), regularly review the effectiveness of the anti-money laundering / terrorist fund-raising system and strengthen it where appropriate Measures.

63. Platform operators can use virtual asset tracking tools so that the platform can track the records of specific virtual assets on the blockchain. These tools can support a variety of common virtual assets, can compare transaction records with a database that contains known addresses involved in criminal activities (such as addresses used for ransomware attacks, money laundering or dark web transactions), and will identify Incoming transactions are marked. When these transactions occur, the platform may refuse to establish customer business relationships with the persons involved.

64. When adopting these tracking tools, platform operators should bear in mind that they have the primary responsibility for fulfilling their obligations to combat money laundering and terrorist financing, and should be aware that the search scope of retrospective tracking tools is limited and their effectiveness may Anonymous enhanced technologies or mechanisms designed to disrupt transaction records (including hybrid services and privacy coins) have weakened.

65. For detailed provisions on the anti-money laundering / terrorist fund-raising system, please refer to paragraphs 13.1 to 13.2 of the relevant terms and conditions.

Prevent market manipulation and illegal activities

66. It is reported that market manipulation and illegal activities are quite common in the virtual asset world, and the most commonly used methods are not significantly different from those used for other asset types, such as spoofing and layering ) And "pump-and-dump scheme".

67. The SFC considers that platform operators should establish and implement written policies and controls to properly monitor activities on their platforms to identify, prevent and report on any market manipulation or illegal trading activities. Relevant policies and controls should cover multiple areas, including steps to limit or suspend trading (such as temporarily freezing accounts) as soon as manipulation or violations are discovered.

68. Market surveillance tools (often used by global exchanges and regulators) developed to detect market manipulation activities in traditional asset classes can also be used to monitor virtual asset classes with minor adjustments.

69. As an additional safeguard, platform operators should adopt an effective market monitoring system provided by reputable independent suppliers to identify, monitor, detect and prevent any market manipulation or violation activities on their platforms, and Provide access to this system to the SFC when necessary to enable it to perform its own supervisory functions.

70. For detailed regulations on the prevention of market manipulation and illegal activities, please refer to paragraphs 5.1 to 5.4 of the relevant terms and conditions.

Accounting and auditing

71. The CSRC will require platform operators to select and appoint auditors on their financial statements with appropriate skills, prudence and diligence, and shall take into account their experience and experience in auditing virtual asset-related businesses Track record, and their ability to audit platform operators.

72. For detailed accounting and auditing requirements, please refer to paragraphs 12.1 to 12.2 of the relevant terms and conditions.

Risk Management

73. Platform operators and their associated entities will need to establish a robust risk management framework that will enable them to identify, measure, monitor and manage all risks arising from their business and operations.

74. Platform operators should also require clients to deposit funds into their accounts in advance. There are only a few cases where the CSRC may allow institutional professional investors to conduct intra-day settlement transactions outside the platform. Platform operators must not provide customers with any financial facilities to purchase virtual assets.

75. For detailed provisions on risk management, please refer to paragraphs 8.1 to 8.2 of the relevant terms and conditions.

Conflict of interest

76. It has been reported that the virtual asset trading platform acts as both the client's agent and the principal trader who trades for its own books. In order to avoid any potential or actual conflicts of interest, platform operators should not engage in self-employed transactions or self-managed bookmaking activities if they are licensed. If the platform plans to use market making services to improve its market liquidity, the SFC generally expects this arrangement to be conducted in accordance with the principle of fairness and provided by independent outsiders using normal user access channels.

77. The platform operator and its associated entities should also have policies that govern employees' transactions on virtual assets in order to eliminate, avoid, manage or disclose actual or potential conflicts of interest.

78. For detailed provisions on conflicts of interest, see paragraphs 10.1 to 10.7 of the relevant terms and conditions.

Virtual assets for sale

79. The platform operator should establish a function responsible for establishing, implementing and enforcing:

a. Rules setting out responsibilities and limitations applicable to issuers of virtual assets (for example, to notify the platform operator of any proposed hard fork or airdrop, any significant change in the issuer ’s business, or any regulatory action against the issuer responsibility);

b. Guidelines and applications for the inclusion of virtual assets in its platform (the guidelines contained in relevant terms and conditions have been taken into account);

c. Criteria for the suspension, suspension, and cancellation of trading of virtual assets on its platform, the options that customers holding the virtual assets can exercise, and any notice period.

80. Platform operators should conduct all reasonable due diligence on such virtual assets and ensure that they continue to meet all criteria for inclusion in their platforms before incorporating them into their platforms for trading. The following is a non-exhaustive list of factors that platform operators must consider when applicable:

a. The background of the management or development team of the virtual asset issuer;

b. The regulatory status of virtual assets in various jurisdictions where platform operators provide trading services, including whether virtual assets can be sold and traded under the Securities and Futures Ordinance, and whether the regulatory status will also affect the platform operator's regulatory responsibilities;

c. Virtual asset supply and demand, market maturity and liquidity, including its market value, average daily trading volume, whether other platform operators also provide services that facilitate the trading of the virtual asset, are there any relevant transaction combinations (such as fiat currency Virtual assets), and in which jurisdictions the virtual assets have been sold;

d. The technical level of the virtual asset, including the security infrastructure of the blockchain protocol of the virtual asset, the size of the blockchain and the network (especially whether it is vulnerable to 51% attacks25), and the type of consensus algorithm;

e. the level of activity of the development community;

f. Ecosystem penetration;

g. The virtual asset promotion materials provided by the issuer shall be accurate and not misleading;

h. The development of virtual assets, including the results of any projects related to it contained in its white paper (if any), and any major events related to its history and development in the past;

i. For virtual assets that fall within the definition of “securities” under the Securities and Futures Ordinance, the platform operator should only include virtual assets that meet the following descriptions: (i) those with asset support; (ii) Comparable jurisdictions (approved by the SFC from time to time) approved, deemed eligible or registered by the regulatory body; and (iii) have a 12-month post-issue track record.

81. Please refer to paragraphs 4.1 to 4.6 of the relevant terms and conditions for detailed requirements on permitting the sale and purchase of virtual assets.

25 refers to an attack on the blockchain by a group of miners who control more than half of the mining hash rate or computing power of the network.

Part IV-Way Forward

82. With effect from November 6, 2019, companies operating a central virtual asset trading platform in Hong Kong and intending to provide trading services for at least one security token on their platform may apply to the SFC for categories 1 and 7 License for regulated activities.

83. Applicants must demonstrate their willingness and ability to comply with expected standards under the regulatory framework described in this document.

84. In view of the rigorous evaluation process and in order to ensure compliance with the expected regulatory standards, the processing time required for a license application submitted by a virtual asset trading platform may be longer than the processing time for a standard license application.

85. Once the operator of the virtual asset trading platform is licensed, it will be placed in the regulatory sandbox of the SFC. This generally means more frequent reporting, monitoring and inspection. Through strict supervision, the SFC will be able to highlight areas where operators should improve in terms of internal control and risk management.

86. This Council wishes to emphasize that some of the regulatory constraints described in this document can only be resolved through legislative amendments. The SFC will continue to monitor the evolution of crypto assets and work with the Hong Kong government to explore whether there is a need to amend the law in the long run.

For enquiries, please contact the FinTech Section of the SFC ([email protected]). Securities and Futures Commission Intermediary Department

We will continue to update Blocking; if you have any questions or suggestions, please contact us!