Hong Kong Securities and Futures Commission (SFC) has recently announced the set up of the regulatory framework for Virtual Asset Trading Platform (VATP) license. After several months of discussion, the SFC has published a set of new regulation to govern VATP. Areas covered by the regulations include token admission, investor protection, custody, trading, corporate governance, insurance and compensation, anti-money laundering and combatting the financing of terrorism.

Under the new regime, all VATP exchanges which carry on business in Hong Kong or actively market to Hong Kong investors must obtain a license from the Securities and Futures Commission.

1 – What is a Virtual Asset Trading Platform (VATP)?

A Virtual Asset Trading Platform (VATP) is an online platform that facilitates the buying, selling, and trading of virtual assets. Virtual assets refer to digital or virtual representations of value traded or exchanged, such as cryptocurrencies (e.g., Bitcoin, Ethereum), digital tokens, virtual currencies used in video games, and other blockchain-based assets.

A VATP acts as an intermediate between buyers and sellers, giving them a safe and convenient setting in which to transact in virtual assets. Order placing, price discovery, market analysis tools, and wallet services for storing and managing virtual assets are just a few of the features and capabilities that these platforms normally provide to allow users to trade virtual assets.

VATPs play a crucial role in the virtual asset ecosystem by providing liquidity, market access, and a trusted environment for participants. They act as a marketplace for individuals and institutional investors to trade virtual assets, utilizing the platform’s services and infrastructure to carry out trades, track market trends, and manage portfolios of virtual assets.

2 – What is the recent regulatory framework for?

The new licensing regime places a strong emphasis on measures to protect investors, to bring more transparency on the governance and admission of new virtual assets. Last but not least, VATP in Hong Kong can provide services to retail investors which was until now only allowed for investors with a portfolio over HKD 8m.

3 – When is it applicable?

The new licensing regime will become effective on June 1, 2023. This means that any Platform Operator operating or marketing its services to Hong Kong investors without a valid licence will commit a breach unless they qualify for the 12-month transitional period. As such, Platform Operators not operating in Hong Kong immediately before June 1, 2023 can not commence any virtual asset trading platform business in Hong Kong until they are SFC-licensed.

The 12-month transitional period will help existing SFO-licenses platform operators to adapt their organisation to be fully compliant with the requirements in relation to existing clients or virtual assets. To be eligible for the transitional arrangements, a Platform Operator must be in operation in Hong Kong immediately prior to June 1, 2023 and must have meaningful and substantial presence. Considerations on whether a Platform Operator has meaningful and substantial presence in Hong Kong include whether it is incorporated in Hong Kong, whether it has a physical office in Hong Kong, and whether its key personnel are based in Hong Kong.

4 – What type of mandatory insurance for virtual asset platforms?

To protect investors, the new regulatory regime includes measures to ensure that client assets are adequately safe and secure. A platform operator should have in place a compensation arrangement approved by the SFC to cover potential loss of 50% of client virtual assets in cold storage and 100% of client virtual assets in hot and other storages held by its Associated Entity.

The compensation arrangements can include third party insurance to protect against loss arising from hacking incidents on the platform, theft, fraud or defaults resulting from negligence or errors or omission. However, since insurance market is reluctant to provide coverage for any cryptocurrency related risks, compensation arrangements such as own funds or bank guarantees can be also approved.

Any modification of the compensation arrangements must be approved by the SFC who as well will have a say on the selected insurance company: “when selecting an insurance company to provide insurance coverage, a Platform Operator should base its choice of insurance company on verifiable and quantifiable criteria. These include a valuation schedule of assets insured, maximum coverage per incident and overall maximum coverage, as well as any excluding factors.

In conclusion,

The recent announcement by the SFC to extend the regulatory framework for Virtual Asset Trading Platform (VATP) licenses marks a significant step towards broadening retail access to cryptocurrency trading. This expansion allows not only professional or institutional investors but also retail investors to participate in virtual asset trading, including alternative coins/altcoins in addition to popular cryptocurrencies like Bitcoin and Ethereum.

By taking early measures to adhere to the new regulations and protect clients with the right insurance policies, companies can ensure the safety of client virtual assets, mitigate risks associated with hacking incidents or defaults, and build trust and confidence among their clientele.

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