Regulation of virtual asset trading in Hong Kong will be implemented, providing detailed protection for individual investors.

On May 23, the Hong Kong Securities and Futures Commission issued a “Consultation Summary on the Application of Supervision and Management Regulations for Virtual Asset Trading Platforms that Obtain Licenses from the Securities and Futures Commission”.

According to the Hong Kong Securities and Futures Commission, it will publish the “Guidelines for Virtual Asset Trading Platform Operators”, “Combatting Money Laundering and Terrorist Financing Guidelines”, “Guidelines for Securities and Futures Commission Issued Virtual Asset Service Providers with Related Entities Holding Licenses and Stopping Money Laundering and Terrorist Financing Funds” and the “Securities and Futures Commission’s Disciplinary Fines Guidelines” in the Official Gazette on May 25, 2023.

In addition, starting from May 25, the application forms for virtual asset trading platforms to apply for relevant licenses under the Securities and Futures Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance will also be published in the Official Gazette and will be accepted from June 1.

Detailed regulations to protect the rights and interests of traders

The reporter summarized today’s “Consultation Summary” and glimpsed the key contents of the upcoming guidelines. The following are several key regulations related to protecting the interests of users of the trading platform:

1. In order to prevent market manipulation and violations, the trading platform is required to develop policies and monitoring measures to independently review suspicious price surges and immediately restrict or suspend trading after manipulative or illegal activities are discovered.

2. Who can become a customer of a Hong Kong cryptocurrency exchange? According to the “Consultation Summary”, the trading platform needs to implement various measures in the review of customers, such as checking IP addresses to prohibit customers from countries or regions that are not allowed, and also needs to have measures to detect customers using virtual IP addresses.

At the same time, investors must submit real identity documents, financial status, and the trading platform must examine whether they have received training related to virtual assets, whether they have experience in virtual asset trading, and whether their work is related to virtual assets in order to determine whether they are qualified to open an account.

Section 3: In terms of protecting client assets, the exchange is required, except for a few cases approved by the CSRC, to store 98% of customer virtual assets offline by the platform’s operating entities.

Section 4: In terms of risk management, monitoring should be in place so that operators can prevent erroneous operations, prevent trades that can be made by users, and cancel any unexecuted trading instructions on the platform. In addition, the trading platform is required to maintain independent audits.

Only one comprehensive application form is required for dual license applications.

The consultation summarizes 152 opinions obtained during the consultation period, provided by industry and professional organizations, professional and consulting companies, market participants and people, licensed corporations, individuals, and other stakeholders.

In these opinions, most respondents agreed with the proposal to allow licensed virtual asset trading platforms to provide services to retail investors. Most respondents agreed to impose regulations on licensed virtual asset trading platforms establishing business relationships with retail customers. Most respondents agreed to establish a token inclusion and review committee. Most respondents agreed that licensed virtual asset trading platforms should consider general token inclusion criteria before including any virtual assets for trading. Most respondents support the requirement that licensed virtual asset trading platforms have insurance or compensation arrangements for the storage of customer assets. Many respondents suggested that, given the rich technical expertise of third-party custodians, the CSRC should allow third-party custodians to be commissioned to store customer virtual assets. Respondents generally support the CSRC’s permission to allow licensed virtual asset trading platforms to provide virtual asset derivative trading services. Respondents generally welcome the inclusion of anti-money laundering/terrorist financing provisions for virtual assets in Chapter 12 of the Guidelines for Anti-Money Laundering for Licensed Corporations and Virtual Asset Service Providers Licensed by the CSRC.

Regarding license applications, the CSRC responded that, for the scope of “providing virtual asset services,” the system under the Anti-Money Laundering Regulations will cover central virtual asset trading platforms that operate similarly to traditional automated trading venues licensed under the Securities and Futures Ordinance. These platforms usually use automated trading systems that can match customer trading instructions to provide virtual asset trading services and provide additional custody services with such trading services. Therefore, those who provide virtual asset services (such as OTC virtual asset trading activities and virtual asset brokerage activities) but do not have automated trading systems and additional custody services will not be covered by the system under the Anti-Money Laundering Regulations. Given that the terms and characteristics of virtual assets may evolve over time, the classification of a particular virtual asset may change from a non-securities token to a securities token (and vice versa). To avoid violating the provisions of the licensing regime and ensuring that their business can continue to operate, virtual asset trading platforms apply for approval under the current system under the Securities and Futures Ordinance and the virtual asset service provider system under the Anti-Money Laundering Regulations.

Regarding the licensing application, the Hong Kong Securities and Futures Commission stated that it will adopt a simplified application process, allowing dual licensing applications to submit only one comprehensive application form. In terms of responsible personnel, the same personnel may be approved under the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance, so virtual asset trading platforms that obtain dual licenses do not need to have four different responsible persons. For the lack of talent in the industry who may lack both virtual asset and traditional securities experience, the Securities and Futures Commission stated that it is willing to adopt a pragmatic approach, and details will be supplemented through more guidelines.

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