Author丨Wu Wenqian
Wu said authorized release
Wu Wenqian is currently a compliance partner of TKX Capital and a practicing lawyer of the High Court of the Hong Kong Special Administrative Region. He has led legal and compliance functions for Huobi and OKX crypto exchanges, and has advised crypto projects and crypto funds that have cumulatively raised over $200 million.
On February 20, the Hong Kong Securities Regulatory Commission launched a consultation on the proposal to regulate virtual asset trading platforms.
Consultation document download: https://apps.sfc.hk/edistrationWeb/gateway/TC/consultation/doc?refNo=23CP1
main points
background
1. The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 was passed on 8 December 2022.
2. According to the new bill, all virtual asset service providers (VASPs), such as virtual asset trading platforms, operating in Hong Kong will need to be licensed and regulated by the SFC.
3. Pursuant to the Act, virtual asset services means operating a virtual asset exchange during the provision of services: (a) providing services for the sale or purchase of virtual assets; or (b) introducing others to complete the sale or purchase of virtual assets; and (c) ) VASP (directly or indirectly) holds client funds or client virtual assets.
4. VASP mainly covers centralized virtual asset exchanges. It may also cover OTC platforms with escrow capabilities (depending on business model). But P2P transactions or DeFi protocols are not considered.
transition period
5. The SFC proposes to provide a 12-month transition period for existing VASPs operating in Hong Kong.
6. VASPs operating in Hong Kong before 1 June 2023 can continue to operate during this transitional period (until 31 May 2024). Eligible factors include:
a) Registered in Hong Kong
b) Have a physical office in Hong Kong
c) Hong Kong employees are primarily managed and controlled
d) have considerable client and trading activity in Hong Kong
7. Existing VASPs who need to obtain a VASP license should submit an application before February 29, 2024.
SEC's request
8. It is required to have a capital injection of not less than five million Hong Kong dollars, and maintain liquid assets of not less than 12 months of operating expenses.
9. The China Securities Regulatory Commission proposes to allow retail investors to use licensed VASPs, but VASPs must consider investors' risk tolerance and can limit investors' exposure to virtual assets.
10. Custody of customer assets – all customer funds and virtual assets must be held by VASP's subsidiaries (with a TCSP license). The current requirement is that hot wallet storage should not exceed 2%, and the seed and private key must be stored in Hong Kong.
11. VASP will conduct due diligence before listing, and the criteria considered include the background of the token project team, the regulatory status of tokens, liquidity, security infrastructure, etc. However, retail investors can only invest in "large cap" virtual assets (mainly limited to top 3 or top 5 tokens). In addition, there are the following due diligence requirements:
a) Smart contract audit
b) An attorney's legal opinion confirming that the token does not fall within the definition of "securities"
12. The SFC understands that there are practical difficulties in obtaining insurance to cover customers' virtual assets stored in hot and cold wallets. The SFC recommends agreeing to compensation arrangements to cover investors' losses, such as those from the hacking incident.
13. VASPs may not offer or trade virtual asset futures contracts or derivatives.
14. For VASPs, it is proposed to remove the previous requirement related to equity tokens.
15. The SFC requires VASPs to enforce the "Transfer Rules" requirement that VASPs should record the identities of persons who send virtual assets to and receive virtual assets from their clients, and exchange client information with VASPs in other jurisdictions.
16. The SFC proposes that VASPs should not provide algorithmic trading services or "staking"/"earning" services to clients.
Old virtual asset trading platform and new VASP system
17. The China Securities Regulatory Commission emphasized that the old virtual asset trading platform license (OSL and Haskey have obtained) is used to supervise the trading of securities tokens, while the new VASP license system is used to supervise the trading of non-securities tokens. If an exchange wishes to trade both security tokens and non-security tokens, they should apply for both licenses (single consolidated application).
Responsibility Officer Requirements
18. A VASP requires at least 2 Responsible Officers (RO) to act as the VASP's Executive Director. At least one responsible officer must reside in Hong Kong. Other key employees include Compliance Officers, Money Laundering Reporting Officers, Management (eg Risk Managers).
19. RO requirements include:
a) Qualified and appropriate requirements
b) have a clean criminal record, are not barred by any professional or regulatory body, have not been removed from directorship by a court, and are not a director of an insolvent company
c) Pass the Hong Kong Securities and Investment Institute (HKSI) Level 1 and Level 2 examinations
d) Experience in the virtual asset industry (the CSRC may accept experience in a non-regulated industry environment if the experience is exempted from the licensing requirement)
e) A minimum of 12 hours of Continuing Professional Training (CPT) is required per year
External Assessment Reporting Requirements
20. The SFC also requires all VASP license applicants to obtain 2 independent evaluation reports before submitting the license and after approving the principles. The main areas to be assessed include:
(a) governance and staffing;
(b) Token admission;
(c) custody of virtual assets;
(d) KYC, AML/CFT;
(e) market surveillance;
(f) risk management;
(g) Cybersecurity.
According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Transaction Hype" issued by the central bank and other departments, the content of this article is only for information sharing, and does not promote or endorse any operation and investment behavior. Readers are requested to strictly abide by the laws and regulations of the region and do not participate in Any illegal financial conduct. It does not provide transaction entry, guidance, distribution channel guidance, etc. for any virtual currency, digital collection-related issuance, transaction and financing. Wu said that without permission, it is forbidden to reprint or copy the content, and those who violate it will be investigated for legal responsibility.
