The Licensing Regime under the Securities and Futures Ordinance
2. THE LICENSING REGIME UNDER THE SECURITIES AND FUTURES ORDINANCE
The SFO gives the SFC authority over the securities and futures industry, which only gives it authority over entities conducting business activities in the very limited category of cryptocurrencies which are “securities” or “futures contracts” within the statutory definitions. The SFC has however issued statements which bring the following within the scope of the licensing regime under the SFO:
- firms managing funds that invest in virtual assets (in addition to traditional securities or futures contracts);
- firms distributing funds which invest in virtual assets (irrespective of whether they are securities or not); and
- exchanges providing trading services in virtual assets where at least one virtual asset is a security or futures contract.
However, despite many of the world’s largest crypto exchanges operating in Hong Kong, these currently remain unlicensed since they are outside the scope of the SFC’s licensing regime as they only trade cryptocurrencies (such as Bitcoin and Ethereum) which are not “securities” or “futures contracts” under the SFO (“non-SF virtual assets”). Thus, an exchange which only trades non-SF virtual assets or a firm which only manages funds investing in non-SF virtual assets is completely unregulated at present. Primary market issues and offers of cryptocurrencies (such as ICOs) which are not securities are also unregulated.
2.1 Regulation of Virtual Asset Portfolio Managers
As outlined, the SFC’s regulatory jurisdiction under the SFO does not extend to activities in the many cryptocurrencies (including the most widely traded, such as Bitcoin and Ethereum) which are not securities or futures contracts (i.e. non-SF virtual assets). The SFC has issued a number of warnings to potential investors of the risks of investing in cryptocurrencies.
In November 2018, the SFC published a regulatory framework which deals with its regulation of portfolio managers which invest in cryptocurrencies which are not securities or futures contracts. Portfolio managers include both fund managers and managers of discretionary accounts (in the form of an investment mandate or a pre-defined model portfolio). The statement extends the SFC’s regulation of the activities of licensed portfolio managers to cover their crypto-related services. Where a firm is already or will be licensed for Type 9 regulated activity (asset management) for managing portfolios in traditional securities and/or futures contracts, its management of portfolios (or portions of portfolios) which invest in cryptocurrencies which are not securities or futures contracts is also subject to the SFC’s oversight. The SFC exercises oversight over the firm’s crypto-related activities through the imposition of licensing conditions.
However, a portfolio manager which only manages funds which invest only in cryptocurrencies which are not securities or futures contracts does not need to be licensed for Type 9 regulated activity since managing funds investing only in cryptocurrencies that are not securities or futures contract is not a regulated activity. To the extent that the portfolio manager distributes the fund in Hong Kong, it will however need to be licensed for Regulated Activity Type 1 (dealing in securities) (see further at 2.2 below).
(a) De minimis provision
The additional licensing conditions are subject to a de minimis provision: they apply to firms which manage or plan to manage virtual asset funds or investment portfolios which:
- have a stated investment objective to invest in virtual assets; or
- intend to invest or have invested more than 10% of their gross asset value (GAV) in virtual assets directly or indirectly).
The licensing conditions do not however apply to:
- licensed corporations which only manage funds/portfolios investing in virtual asset funds (i.e. funds of funds); or
- licensed corporations managing portfolios whose mandate is to invest mainly in securities and/or futures contracts and their investment in virtual assets exceeds 10% of GAV only because of an increase in the prices of the virtual assets held in one or more of the portfolios. The licensed corporation is required to take all reasonable steps to reduce the portfolio’s investment in virtual assets below the 10% of GAV threshold. If, however, the position is expected to continue (i.e. virtual assets will continue to exceed 10% of GAV), the licensed corporation must alert the SFC which will consider imposing licensing conditions. Failure to notify the SFC may result in disciplinary action.
(b) Requirement to notify the SFC
Licensed corporations and licence applicants are required to inform the SFC if they currently manage, or plan to manage, one or more funds/portfolios that invest in cryptocurrencies, or intend to hold cryptocurrencies on behalf of funds/portfolios under their management. The notification requirement applies even if the fund/portfolio intends to invest less than 10% of the portfolio’s gross asset value in cryptocurrencies and whether or not the cryptocurrencies involved are “securities” or “futures contracts.” Failure to inform the SFC may constitute a breach of the Securities and Futures (Licensing and Registration) (Information) Rules.
On being informed that a firm is managing or plans to manage virtual asset portfolios, the SFC will send the standard licensing conditions  to the firm and these may be varied following discussions with the firm according to its particular business model. Licensed corporations which do not agree to comply with the licensing conditions will be prohibited from managing virtual asset portfolios and must unwind their cryptocurrency positions.
A new licence applicant has to agree to the licensing conditions proposed, or its licensing application will be rejected.
(c) The Licensing Conditions
The SFC has published Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets  that it will impose on a fund manager that manages a fund (or portion of a fund) that invests in virtual assets and meets the de minimis threshold (a Virtual Asset Fund Manager). The conditions are onerous and include the following principal obligations.
1. Restriction to professional investors and disclosure requirements
Investors in a fund with a stated investment objective of investing in cryptocurrencies or which intends to invest 10% or more of its GAV in cryptocurrencies are restricted to “professional investors” as defined in the SFO (including high net worth investors under the Securities and Futures (Professional Investor) Rules). If a virtual asset fund will be distributed through distributors, the Virtual Asset Fund Manager must implement measures to ensure that the fund is only distributed to professional investors.
2. Safeguarding of assets
Despite the SFC acknowledging that crypto funds face “a unique challenge due to the limited availability of qualified custodian solutions”, the SFC has imposed onerous obligations on licensed Virtual Asset Fund Managers in relation to custodians.
A manager of a virtual asset fund is firstly required to assess and select the most appropriate custodial arrangement – that is whether to hold the assets itself or with a third-party custodian or an exchange – taking into consideration the advantages and disadvantages of holding cryptocurrencies at different host locations by way of “hot” or “cold” wallets, considering (among others) the ease of accessibility to cryptocurrencies and the security of the custodial facility.
Virtual Asset Fund Managers are also required to exercise due skill, care and diligence in selecting, appointing and conducting on-going monitoring of custodians by reference to factors such as the custodian’s:
- experience and track record in providing custodial services for cryptocurrencies;
- regulatory status, particularly whether its cryptocurrency custodial business is subject to regulatory oversight;
- corporate governance structure and the background of its senior management;
- financial resources and insurance cover for compensating customers for loss of customer assets; and
- operational capabilities and arrangements, for example, its “wallet” arrangements and cybersecurity risk management measures.
Where cryptocurrencies are held by the licensed fund manager itself, it is required to document the reasons for self-custody and disclose the risks of self-custody to investors. Appropriate measures must be implemented to protect the fund’s assets and to effectively segregate the cryptocurrencies from the fund manager’s own assets in the event of its insolvency. The fund manager is also required to use best endeavours to acquire and maintain insurance cover over the cryptocurrencies.
3. Portfolio valuation
The SFC recognises that there are currently no generally accepted valuation principles for virtual assets, particularly ICO tokens. The licensing conditions however require licensed corporations to select valuation principles, methodologies, models and policies which are reasonably appropriate in the circumstances and in the best interests of investors. These also need to be disclosed to investors.
4. Risk management
Virtual Asset Fund Managers are required to set appropriate limits for each product or market the fund invests in. They should, for example, consider setting a cap on a fund’s investment in illiquid cryptocurrencies and newly-launched ICO Tokens and its exposure to counterparties. According to the risk management procedures set out in Appendix 2 to the Proforma Terms and Conditions, Virtual Asset Fund Managers should consider using more than one custodian to hold the fund’s assets to avoid undue concentration of risk. Periodic stress testing is also required to assess the effect of abnormal and significant changes in market conditions on the fund.
Before transacting with a crypto exchange, a licensed Virtual Fund Manager is required to assess the reliability and integrity of the virtual asset exchange taking into account matters such as its:
- experience and track record;
- legal or regulatory status;
- corporate governance structure and background of its senior management;
- operational capabilities;
- mechanisms (e.g., surveillance systems) implemented to guard against fraud and manipulation with respect to products traded on the exchange;
- cybersecurity risk management measures; and
- financial resources and insurance cover.
Exposure to individual crypto exchanges must be limited by setting appropriate caps.
The SFC has noted that the accounting profession has no agreed standards and practices for how an auditor can perform assurance procedures to obtain sufficient audit evidence for the existence and ownership of virtual assets and ascertain the reasonableness of the valuations. Despite this, the SFC requires the appointment of an independent auditor to audit the financial statements of managed funds. The SFC also requires licensed corporations to consider auditors’ experience and capability in checking the existence and ownership of virtual assets, and ascertaining the reasonableness of their valuation, in their selection of an auditor.
6. Liquid capital
A licensed fund manager which holds cryptocurrencies on behalf of the funds it manages is required to maintain liquid capital equal to the higher of HK$3 million or the amount of its variable required liquid capital).
(d) SFC licensed crypto fund managers
To date, only one fund management firm, Venture Smart Asia Limited, has succeeded in obtaining a Type 9 asset management licence to manage funds investing in crypto assets. It is also licensed for regulated activities Types 1 and 4 and the firm acted as advisor to, and distributor of, the Bitcoin tracking fund launched by the firm’s blockchain arm, Arrano Capital.
- SFC. “ Statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators ”. 1 November 2018
- SFC. “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets”. October 2019.
- SFC. October 2019. “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets”. Available at: https://www.sfc.hk/web/EN/files/IS/publications/VA_Portfolio_Managers_Terms_and_Conditions_(EN).pdf
- The Standard. 21 April 2020. “HK first approved crypto fund eyes US$100 million”. Available at: https://www.thestandard.com.hk/section-news/section/2/218298/HK-first-approved-crypto-fund-eyes-US$100m
2.2 Regulation of Virtual Asset Fund Distributors
Fund distribution requires a securities dealer licence (Type 1) because a fund is a “collective investment scheme” which is a security irrespective of whether the fund invests in virtual assets which are securities or not. Accordingly, firms distributing virtual asset funds (whether as fund managers under an asset management licence or as fund distributors under a securities dealer licence) are required to comply with:
- the SFC’s regulatory framework for licensed corporations including its Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct), including (among others) Know-your-Client (KYC) and AML and CTF obligations, as well as an obligation to ensure the suitability of product recommendations and solicitations for particular clients; and
- additional requirements set out in the SFC’s “Circular to intermediaries on the distribution of virtual asset funds”  of 1 November 2018 (the SFC November 2018 Circular) including extensive due diligence in relation to the virtual asset funds they distribute, their fund managers and counterparties.
A fund manager which only manages funds investing in cryptocurrencies that are not securities does not need to be licensed for Type 9. This is because “asset management” is defined in the SFO as the management of “securities” or “real estate”. Managing a fund investing only in cryptocurrencies which are not securities is not therefore “asset management” and does not require a Type 9 licence.
However, the distribution of a fund which invests in cryptocurrencies that are non-securities will require the distributor (whether that is the fund manager or a third party distributor) to be licensed for Type 1 – dealing in securities. A fund is a collective investment scheme, which is within the SFO’s definition of “securities”, irrespective of the type of assets the fund invests in. A Type 9-licensed asset manager which also distributes the funds it manages can rely on the incidental exemption from need to be separately licensed for Type 1.
The SFC November 2018 Circular requires licensed corporations to comply with the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (the SFC Code of Conduct) in distributing virtual asset funds (both authorised and unauthorized). In particular, they must ensure the reasonable suitability of any recommendation or solicitation made to a client under paragraph 5.2 of the SFC Code of Conduct.
The SFC November 2018 Circular also sets out additional requirements which apply to distributors of virtual asset funds which:
- are not authorised by the SFC for retail distribution under section 104 SFO; and
- have a stated investment objective of investing in virtual assets or intend to invest or have invested more than 10% of their GAV in virtual assets (i.e. funds which the licensed corporation knows, or should reasonably have known, to be investing more than 10% of their GAV in virtual assets at the time it distributes the fund, unless it has been advised that the fund manager intends to reduce the fund’s investment in virtual assets to below 10% of the fund’s GAV in the near future). The investment in virtual assets may be direct or indirect (i.e. through fund of funds and funds which invest in derivatives, for example, total return swaps, with virtual assets as the underlying).
The additional requirements that apply to licensed corporations distributing these funds include the following:
1. Selling restrictions
A distributor of a Virtual Asset Fund can only target professional investors as defined under the SFO. Except in the case of institutional professional investors (broadly, banks and regulated securities intermediaries), the distributor must also assess whether its clients have knowledge of investing in cryptocurrencies or related products before effecting a transaction on their behalf. A transaction can only be executed for a client without such knowledge, if this would be in the best interest of the client. However, the SFC has given no guidance on when a transaction can be considered as being in the client’s best interests. For the purposes of the knowledge assessment, a licensed corporation can take into account a client’s prior investment experience in private equity or venture capital or whether they have provided capital for a start-up business in the previous two years.
2. Concentration assessments
Licensed corporations must consider the aggregate amount to be invested by a client in virtual asset funds to be reasonable given the client’s net worth.
3. Due diligence on virtual asset funds not authorised by the SFC
Licensed corporations will need to conduct extensive due diligence on virtual asset funds (unless they have been authorised by the SFC for retail distribution), their fund managers and parties providing trading and custodian services to the funds. However, licensed corporations’ compliance with these obligations very much depends on the willingness of the various parties to disclose the required information. The assessments licensed corporations are required to make are difficult given the lack of developed standards in the industry. The due diligence is required to include (without limitation) an examination of the fund’s constitutive documents and completion of a due diligence questionnaire, in addition to making enquiries of the fund manager to obtain an in-depth understanding of the matters referred to below.
The due diligence the SFC expects to be conducted in relation to the fund manager covers:
- the fund manager’s background, relevant experience and (where applicable) the track record of its senior management, including its chief investment, operation, risk and technology officers;
- its regulatory status (e.g. whether it is subject to any regulatory oversight);
- its compliance history (i.e. whether it has been subject to any disciplinary or regulatory actions);
- its operations including its internal controls and systems, e.g.:
- the existence of proper segregation of key functions (such as portfolio management, risk management, valuation and custody of assets) or of adequate compensating controls to prevent abuse;
- who has authority to transfer assets from the fund or custodians and what safeguards are in place;
- the persons responsible for, and the procedures for, reconciling transactions and positions, including the frequency of reconciliations; and
- the methodology and the persons responsible for determining the pricing and assessment of the reasonableness of the determined price of cryptocurrencies;
- the fund manager’s IT infrastructure (e.g., in terms of security and access management); and
- its risk management procedures (including concentration limits, counterparty risk management procedures, stop-loss arrangements and stress testing), its liquidity risk management policy and disaster recovery plan.
In terms of the due diligence the SFC expects a licensed distributor to conduct in relation to the fund, this should cover:
- the fund’s targeted investors;
- list of instruments the fund intends to trade or invest in and any limitations on the size of its holding of ICO tokens, pre-ICO Tokens or other illiquid or hard-to-value instruments;
- its valuation policy (especially for ICO Tokens, pre-ICO Tokens or other illiquid or hard-to-value instruments); and
- the custody arrangement for the fund assets, including the policy on the allocation of assets to be kept at different host locations, such as exchanges, custodians, hot storage, cold storage;
- its use of leverage and derivatives;
- the fund’s targeted risk and return per annum;
- key risks (as described in “Information for clients” below); and
- the fund’s auditors and audited financial statements, including whether the fund has received a qualified audit opinion in the past, and whether the audited statements are up to date.
The SFC expects a licensed distributor to perform the following due diligence on the fund’s counterparties that covers:
- their legal and regulatory status (e.g. whether they are regulated by any authorities to undertake custody business or trade in cryptocurrencies);
- their experience and track record in dealing in cryptocurrencies;
- the robustness of their IT systems (including cybersecurity risk management measures) and contingency plans; and
- their financial soundness and insurance coverage, e.g. whether they have insurance covering loss of customer assets.
4. Provision of information to clients
To assist clients in making informed investment decisions, licensed distributors are required to provide prominent warning statements covering certain risks including (among others):
- the continuing evolution of virtual assets and how this may be affected by global regulatory developments;
- price volatility;
- potential price manipulation on exchanges or trading platforms;
- lack of secondary markets for certain virtual assets;
- that most exchanges, trading platforms and custodians of virtual assets are currently unregulated;
- counterparty risk when effecting transactions with issuers, private buyers/sellers or through exchanges or trading platforms;
- the risk of loss of virtual assets, especially if held in “hot wallets”; and
- cybersecurity and technology-related risks.
For licensed fund managers which both manage funds investing in virtual assets and distribute those funds, the requirements should not prove problematic, particularly where they provide custody for the virtual assets. The requirements are likely to be much more problematic for Type 1-licensed fund distributors where the extent of due diligence they will be required to perform on third party funds, their fund managers and custody arrangements may not be practical.
- SFC. Circular to intermediaries: Distribution of virtual asset funds. 1 November 2018. Available at: https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=18EC77
- The additional requirements will not apply to funds authorised by the SFC for retail distribution.
- A “hot wallet” refers to a wallet used for holding virtual assets in an online environment which provides an interface with the internet, which is more susceptible to cyber-attacks.
2.3 Regulation of Virtual Asset Exchange/Platform Operators
The SFC’s approach to the regulation of operators of crypto exchanges/ trading platforms is set out in its November 2019 Position paper: Regulation of virtual asset trading platforms. According to that paper, the SFC will regulate trading platforms operating in Hong Kong only if they trade at least one cryptocurrency which is a security. Since the vast majority of cryptocurrencies are not securities, crypto exchanges which only trade cryptocurrencies that are not securities or futures contracts are not currently regulated. Indeed, the precondition that an exchange must trade at least one cryptocurrency which is a security (i.e., a security token) makes most ineligible for licensing even if they want to be licensed. More fundamentally, the SFC licensing framework applies only to centralised exchanges and not to decentralised exchanges on which investors trade on a peer-to-peer basis.
To date, the SFC has only licensed one crypto exchange. The SFC issued the first virtual asset trading platform licence on 16 December 2020 to OSL Digital Securities, a platform which will only provide services to professional investors which is one of the licensing conditions. The platform will be subject to the SFC’s “close supervision” and the Terms and Conditions for Virtual Asset Trading Platform Operators.
(a) Licensing Conditions for Hong Kong Crypto Exchanges
The SFC will impose the following licensing conditions on crypto exchange operators (Licensees):
- services may only be provided to professional investors;
- the Licensee must comply with “Terms and Conditions for Virtual Asset Trading Platform Operators” (the Terms and Conditions);
- the SFC’s prior written approval will be required for offering a new service or activity, or making a material change to an existing service or activity;
- prior written approval of the SFC must be obtained for any plan or proposal to add a product to a Licensee’s trading platform;
- the Licensee must provide the SFC with monthly reports on its business activities in the format prescribed by the SFC; and
- the Licensee must engage an independent professional firm to conduct an annual review of its activities and prepare a report confirming compliance with the licensing conditions and all relevant legal and regulatory requirements.
As noted in paragraph (b), it is a licensing condition that the licensed platform operator must comply with the Terms and Conditions for Virtual Asset Trading Platform Operators  which focus on the platform’s operations. A breach of any of the licensing conditions will constitute ‘misconduct’ under Part IX of the SFO and may also reflect adversely on the fitness and properness of the platform operator to remain licensed.
The terms and conditions which a licensed crypto exchange operator must satisfy relate firstly to providing safe custody of cryptocurrencies. The SFC expects a Licensee to adopt an appropriate operational structure and use technology to protect its clients equivalent to those required of traditional financial institutions in the securities sector.
1. Trust structure
Licensed platform operators must hold client assets on trust to enhance safekeeping of client cryptocurrencies and ensure that they are properly segregated from those of the platform operator. Any material legal uncertainties, particularly as to the nature of any legal claims they may have over cryptocurrencies traded by them on the platform, must be disclosed in full to clients.
The SFC mandates that client assets must be held through a company which is incorporated in Hong Kong which is a wholly-owned subsidiary of the licensed platform operator and holds a trust or company service provider licence under the AMLO.
There is uncertainty as to whether cryptocurrencies constitute ‘property’ under Hong Kong Law, which may affect a client’s rights in insolvency proceedings. Notwithstanding this, the SFC has said that this should not preclude the implementation of an interim regulatory regime.
2. Hot and cold wallet storage
The SFC requires the segregation of customers’ virtual assets. Licensed platform operators must store 98% of client cryptocurrencies in “cold wallets” (i.e. where private keys are kept offline) and limit their holdings of client virtual assets in “hot wallets” (i.e. where private keys are kept online rendering them vulnerable to external threats) to no more than 2%. Licensed platform operators must also minimise transactions out of the cold wallet in which a majority of client cryptocurrencies are held.
Platform operators are also required to have adequate processes in place for handling requests for deposits and withdrawals of client cryptocurrencies to guard against loss arising from theft, fraud and other dishonest acts, professional misconduct or omissions. The platform operator and its subsidiary holding the clients’ cryptocurrencies must also set out in writing details of the mechanism for transferring cryptocurrencies between hot, cold and other storage and the procedures for dealing with events such as hard forks and air drops from an operational and technical perspective.
Licensed platform operators must have an insurance policy covering the risks associated with the custody of cryptocurrencies held in both hot storage (full coverage) and cold storage (a substantial coverage) which is in effect at all times.
4. Private key management
The SFC expects a licensed platform operator to set up and implement strong internal controls and governance procedures for private key management to ensure all cryptographic seeds and keys are securely generated, stored and backed up.
SFC KYC Requirements for Crypto Exchanges
The SFC requires licensed platform operators to take all reasonable steps to establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience and investment objectives. Except for institutional and qualified corporate professional investors (as defined in the SFC Code of Conduct), before providing any services to the client, a platform operator must ensure that the client has sufficient knowledge of cryptocurrencies, including knowledge of the relevant risks associated with them. Where a client does not have that knowledge, services can only be provided to the client if the platform operator provides training to the client and enquires into the client’s personal circumstances.
Concentration risks are also required to be assessed by setting a trading limit, position limit, or both by reference to the client’s financial situation to ensure that the client has sufficient net worth to assume the risks and bear any potential trading losses.
Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) Requirements
Licensed platform operators are required to establish and implement adequate and appropriate AML/CTF policies, procedures and controls (AML/CTF Systems) to counter the money laundering and terrorist financing risks associated with cryptocurrencies’ anonymity. Platform operators must also regularly review the effectiveness of their AML/CTF Systems and effect appropriate enhancements, taking into account any new SFC guidance and updates of the FATF Recommendations applicable to cryptocurrency-related activities including Recommendation 15 and its related interpretive note. Cryptocurrency tracking tools can also be used to trace transaction histories against a database of known addresses connected to criminal activities.
Prevention of Market Manipulation and Abusive Activities
Licensed platform operators are required to establish and implement written policies and controls for the proper surveillance of activities on its platform in order to identify, prevent and report any market manipulative or abusive trading activities. They must also adopt an effective market surveillance system and provide the SFC access to this system to perform its own surveillance. Policies should be established for the proper surveillance of platform activities to identify, prevent and report market manipulative or abusive trading practices or activities.
Accounting and Auditing Requirements
Licensed platform operators are required to exercise due skill, care and diligence in selecting and appointing their auditors.
Risk Management and Conflict of Interest Identification
Licensed trading platforms are required to have a risk management framework which enables them to identify, measure, monitor and manage the full range of risks arising from their businesses and operations. Clients should pre-fund their own accounts, as licensed platforms are prohibited from providing any financial accommodation for clients to acquire cryptocurrencies.
Licensed platforms are prohibited from engaging in proprietary trading or market-making activities on a proprietary basis. If a platform plans to use market-making services to enhance liquidity in its market, this must be done at arm’s length and be provided by an independent external party using normal user access channels. A licensed platform operator must also have a policy governing employees’ dealing in cryptocurrencies to eliminate, avoid, manage or disclose actual or potential conflicts of interests.
Cryptocurrencies for Trading
Licensed platform operators are prohibited from offering or trading cryptocurrencies that are crypto futures contracts or crypto derivatives.
Licensed platform operators need to set up a function responsible for establishing, implementing and enforcing the rules setting out the obligations of, and restrictions on, issuers of cryptocurrencies, and the criteria for a cryptocurrency to be included on and/or withdrawn from its platform.
The platform operator is also obliged to conduct reasonable due diligence prior to including a cryptocurrency on its platform and must ensure that the cryptocurrencies traded on its platform continue to satisfy all of the application criteria. Matters which must be considered include:
- the background of the management or development team of the issuer of the cryptocurrency;
- the regulatory status of the cryptocurrency in each jurisdiction in which the platform operator provides trading services which includes whether the cryptocurrency can be traded under the SFO;
- the supply, demand, maturity and liquidity of the cryptocurrency, its market capitalisation, average daily trading volumes, whether other platform operators trade the cryptocurrency in question, the availability of trading pairs and the jurisdictions where the cryptocurrency has been offered;
- the marketing materials of the cryptocurrency which must not be misleading;
- the development and outcomes of any projects associated with a cryptocurrency should be included in the Whitepaper together with the major incidents associated with its history and development; and
- in relation to cryptocurrencies which are “securities” under the SFO, the licensed platform operator should only include those that are: (i) asset-backed; (ii) approved by or registered with regulators in comparable jurisdictions (as agreed by the SFC from time to time); and (iii) have a track record of 12 months or more since issue.
The operator of a virtual asset trading platform will typically be licensed by the SFC for Regulated Activities Type 1 (dealing in securities) and Type 7 (providing automated trading services). Once licensed, a platform operator will be required to comply with all relevant regulatory requirements in relation to all its business (i.e. in relation cryptocurrencies that are securities and those that are not). The SFC also requires that all virtual asset trading activities conducted by the platform operator and its group companies which are actively marketed to Hong Kong investors or are conducted in Hong Kong are carried out by a single legal entity licensed by the SFC. This includes all virtual assets trading activities on and off the platform and activities incidental to the trading activities.
- SFC. “Position Paper: Regulation of virtual asset trading platforms”. 6 November 2019.
- SFC. Terms and Conditions for Virtual Asset Trading Platform Operators. Available at: https://apps.sfc.hk/publicreg/Terms-and-Conditions-for-VATP_10Dec20.pdf