Authors | 吴文谦律师（Gilbert Ng）and 李书沸(Chris Lee)
Gilbert Ng is the founder of consulting firm Mura and a practicing lawyer in the Hong Kong Court of First Instance. He has led the legal and compliance functions of Huobi Group, Neo Global Capital, and OKX.
Chris Lee is the founder and partner of TKX Capital and the former CFO of Huobi and OKX.
Background
The Securities and Futures Commission of Hong Kong released a circular on the evening of May 31, 2023, announcing the latest VATP virtual asset trading platform license manual and the transitional arrangements for the licensing system, making the final announcement for the VATP virtual asset trading platform license application on June 1.
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Read the original text:
https://sc.sfc.hk/TuniS/apps.sfc.hk/edistributionWeb/gateway/TC/circular/intermediaries/licensing/doc?refNo=23EC27
Transitional Arrangements for Trading Platforms
1. Non-securities token trading platforms with “genuine business operations and genuine business premises” in Hong Kong before June 1 can continue to operate for 12 months from June 1. Exchanges that begin operating in Hong Kong after June 1 must obtain a license from the Securities and Futures Commission before they can operate, without any transitional period. Factors to consider for “genuine business” and “genuine business premises” include:
a. Whether the trading platform is a Hong Kong company;
b. Whether there is an office in Hong Kong;
c. Whether the trading platform is managed and controlled by Hong Kong employees;
d. Whether key personnel are based in Hong Kong;
e. Whether there are independent clients and genuine transaction volumes in Hong Kong;
f. Other evidence that the platform is operating in Hong Kong.
Please note that it is not enough to simply have a Hong Kong company registered, and employees need to be stationed in Hong Kong before June 1. The transitional arrangements only apply to non-securities token trading platforms, and there are no transitional arrangements for securities token trading platforms. All securities token trading platforms will need to obtain a license from the Securities and Futures Commission to operate after June 1.
2. Exchanges with a transition period that meet the following conditions can be treated as licensed exchanges from June 1, 2024:
a. Complete the license application to the CSRC before February 29, 2024;
b. Able to provide evidence that the exchange has complied with all licensing regulations and has been accepted by the CSRC.
3. In addition, this transitional arrangement also includes “regulated individuals”, that is, individuals who hold the positions of licensed representatives (RO) and/or responsible officers (LR). Individuals who have executed relevant positions on the trading platform before June 1, and are subject to individual transitional arrangements, can continue to perform relevant functions as RO or LR within 12 months from June 1, 2023 (in the absence of RO and LR licenses). These ROs and LR, if they meet the following conditions, can be treated as licensed ROs and LR from June 1, 2024:
a. These ROs and LR must submit a complete (individual) license application to the CSRC before February 29, 2024.
b. These ROs and LR must have executed the relevant duties of RO and LR on the exchange before June 1, 2023.
c. They can provide evidence that these ROs and LR have the ability to comply with the regulatory requirements of licensed exchanges and have been accepted by the CSRC.
4. It is worth noting that in the license application process, if the CSRC finds that the application is incomplete or that there are any application issues that can be resolved, the CSRC will return the application to the applicant to resolve the issue instead of directly rejecting the application. Therefore, applicants who are eligible for a transition period should submit their applications as soon as possible, rather than waiting until February 29, 2024, to have sufficient time to resolve issues with the CSRC.
5. As for responsible officers, because the CSRC believes that the exchange will not be a small-scale operation, it is recommended that the number of responsible officers may need to be more than the basic provisions.
6. In addition, the CSRC recommends that VATP apply with the No. 1 and No. 7 licenses. The reason is that the nature of securities coins and functional coins can change at any time, and applying for both licenses can ensure the smooth operation of the exchange. The two licenses are submitted together in one comprehensive application form.
Summary of VATP Licensing Handbook
7. The CSRC defines “operating in Hong Kong” as “actively marketing to the Hong Kong public” depending on whether the exchange is promoting to the public in Hong Kong, regardless of where it is registered, the exchange must obtain a license. This can include a variety of situations, such as frequent contact with Hong Kong investors or the public and promoting services to the Hong Kong public through mass media plans or internet activities targeting Hong Kong investors. When determining whether an exchange is “actively promoting” its services to the public, the CSRC will consider the overall nature of the business activities, and factors to be considered include:
- a. Service has a detailed promotion plan;
- b. Service is widely promoted through direct promotion methods, such as advertising in Hong Kong media, broadcasting or other online “sales” technologies (however, if the service is obtained passively, such as in the form of “self-selection”, it may not be considered active promotion);
- c. Promotion is carried out in a planned manner and is carried out according to a plan or process, thereby showing that it is a continuous service rather than a single promotion action;
- d. The service is targeted at the Hong Kong public, such as being written in Chinese and valued in Hong Kong dollars;
- e. The service is actively sought by customers.
8. In addition, any licensed exchange carrying out business outside Hong Kong must ensure full compliance with all local laws and regulatory requirements.
9. Licensed exchanges will need to provide the CSRC with monthly reports on business activities, the format of which will be specified by the CSRC, and provide all information requested by the CSRC. The CSRC also has the power to ask the exchange about anything related to the exchange, and the exchange must respond truthfully.
10. Licensed exchanges need to hire independent professional companies to conduct annual audits of their business, including compliance processes, systems, security, etc. The first audit report must be submitted within 18 months from the date of license approval.
11. All other services or businesses outside the exchange require CSRC approval, and licensed exchanges can only operate one centralized exchange.
Basic Requirements for Licensing
12. The basic requirements for licensing have been summarized in many different articles before, and here we will not repeat them, but only remind you of the more special or important issues. All directors, licensed representatives (RO), responsible personnel (LR), responsible managers (MIC), and ultimate beneficiaries (UBO) must pass the SFC’s “appropriate person” test. The relevant industry experience of RO, LR, and MIC should be experience in regulated activities in Hong Kong or other countries. Work experience in non-compliant environments can also be accepted if it is exempted from the licensing requirements. If it is related to financial technology and the technology of the exchange platform, it can also be considered for acceptance. It is worth noting that at least one licensed representative should reside in Hong Kong.
13. The financial requirements are a paid-in share capital of HKD 5 million, current assets of HKD 3 million, and 12 months of operating expenses. Therefore, the exchange needs to submit an estimated income and expenses to the SFC.
14. The trust company used to safeguard client assets shall not engage in any other business and can only act as a single custodian of client assets.
15. There is no mandatory requirement that data centers and storage centers be located in Hong Kong, but all used data centers and storage centers must be approved by the SFC.
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