The Hong Kong licensing regime for virtual asset trading platforms (VATPs) (VATP regime) has moved into the “deemed-to-be-licensed” phase. This alert provides the key details of this phase and the key implications for:

VATPs that are deemed-to-be licensed;
VATPs and brokers that are not deemed-to-be-licensed; and
other stakeholders such as banks and advertising platforms.

KWM continues to advise multiple exchanges and other industry participants on licensing and compliance. Please contact us if you have any questions.

1. Overall synopsis – where are we?

On 1 June 2023, the Hong Kong Securities and Futures Commission (SFC) released its conclusions to its consultation on its proposed rules to be implemented under Hong Kong’s new VATP regime.

The VATP regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) commenced on 1 June 2023, with detailed SFC guidelines providing a harmonised framework for VATPs licensed under the AMLO and those licensed to provide services in relation to virtual assets that may be securities under the SFO. See our detailed KWM alert on the VATP regime for more details.

There were two key implications of the VATP regime going live:

For VATPs operating in Hong Kong before 1 June 2023 - the VATP regime includes transitional mechanisms to enable such platforms to continue their activities lawfully while their application is being formally assessed by the SFC, subject to several conditions.

In this article, “Hong Kong” or “Hong Kong SAR” should be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China” and the Mainland of China is described as “Mainland China”.

For other platforms – any other in-scope platform (at a high level, generally being an exchange provided automated order matching capability) cannot operate their business in Hong Kong or actively market their services in or to the Hong Kong public.

The net result is that only VATPs that are currently deemed-to-be licensed can lawfully operate a virtual asset exchange in, or market one in or to, Hong Kong. For anyone else, a formal licence must be granted by the SFC before operations commence.

We set out more details below.

2. Who are the deemed-to-be-licensed VATPs?

There are currently 11 deemed-to-be-licensed VATP applicants. The details of each such applicant (such as its business address, email address, website address, and/or licensing conditions), are set out in the SFC’s Public Register. There are six additional applicants, but not earmarked as being deemed to be licensed.

The SFC provides a list of licensed VATPs and VATP applicants, together with their respective status (SFC VATP List), available here.

Specifically, the SFC VATP List sets out the following:

The SFC also maintains a list of “Suspicious virtual asset trading platforms” and “Suspicious Investment Products”, which include several virtual asset related schemes. It routinely publishes periodic warnings on suspicious products and platforms, signalling an evident focus on compliance in the sector.

3. What are the key points to know about this deemed licensing period?

The key points to know are as follows:

For VATP applicants and their stakeholders

A deemed licence not tantamount to full licence. On the SFC’s VATP List, the SFC clearly states that that all VATP applicants on the “List of VATP applicants” are not licensed by the SFC, and may not be in compliance with the SFC’s requirements, even if currently deemed to be licensed. The SFC also expressly clarifies that it has not formally licensed deemed-to-be-licensed VATP applicants.

There are several restrictions that apply to deemed-to-be-licensed VATP applicants generally. The SFC may impose specific conditions on licensees. In this respect, the SFC has issued a statement on the end of non-contravention period for VATPs (available here), which sets out reminders for deemed-to-be-licensed VATP applicants. A summary of such reminders are as follows:

On-site inspections are likely. The SFC will conduct on-site inspections of deemed-to-be-licensed VATP applicants to ascertain their compliance with the SFC's regulatory requirement, with a particular focus on safeguarding of client assets and know-your-client (KYC) processes.

Non-compliance is likely to result in rejection. The SFC has indicated that the deeming arrangement serves to strike a balance between protecting investors and facilitating market development, but any non-compliance with key regulatory requirements for investor protection will result in the SFC's swift refusal of the licence application of a deemed-to-be-licensed applicant.

For VATPs that have not applied, or which are not already deemed-to-be-licensed

If operating a virtual asset exchange in or outside Hong Kong, VATPs must remain aware that it is unlawful to carry on or market this business unless licensed. Fresh licensing applications do not provide access to any transitional protection – the eligibility window has now closed. A virtual asset exchange with a Hong Kong jurisdictional nexus will need full approval from the SFC before commencing.

“Dos and don’ts” for staff and other controls are essential. These can assist in ensuring that staff members wishing to meet regulators, attend conferences or simply understand the market, may do so with a good understanding of the rules of the road.

For VATPs and market participants generally

Building a strategy for Hong Kong. It is possible to build a strategy for Hong Kong that can involve applying under the VATP regime or following other regulatory pathways, depending on business priorities. For example:

Hong Kong has a proposed regime to regulate over-the-counter virtual asset brokerage services. This regime is not yet live. Please refer to our alert here for details. For some VATPs, this route may be an alternative route, or potential component of a Hong Kong launch strategy.

Hong Kong has a proposed regime to regulate fiat-referenced stablecoin issuers and offerors. This regime is not yet live. Please refer to our alert here for details. This will be particularly relevant to issuers and distributors of stablecoins.

Other regulatory regimes, such as securities and futures licensing, money service operator licensing, or trust or company service provider licensing, may be relevant.

For regulated entities that wish to refer clients to VATPs or establish omnibus accounts

Only fully licensed VATPs can be used for referrals and omnibus accounts. The “Joint circular on intermediaries’ virtual asset-related activities” (Joint Circular) issued jointly by the SFC and the Hong Kong Monetary Authority (HKMA) contains multiple rules for how entities regulated by the SFC and HKMA provide services in relation to virtual assets and virtual asset-related products. Paragraph 17 and footnote 20 of the Joint Circular make clear that regulated entities can only introduce clients to, or establish omnibus accounts with, SFC-licensed platforms, expressly excluding deemed-to-be-licensed VATP applicants.

For advertisers, payment partners, banks etc

Checking a VATP’s regulatory status is critical. There are various criminal penalties in the AMLO in connection with advertising VATPs that do not have the requisite licence, as described in our KWM alert on the VATP regime. There can also be ancillary liability for aiding and abetting a VATP operate unlawfully; the proceeds from such a business can also amount to the proceeds of crime under Hong Kong money laundering laws. Importantly, deemed licensing can be relevant and helpful in such circumstances, but should be carefully checked.

Banks are already supporting many VATPs. With the HKMA’s support, we have seen a significant change in the banking landscape for licensed and deemed-to-be-licensed VATPs. This goes hand-in-hand with the significant anti-money laundering and counter-terrorist financing controls imposed by the AMLO and VATP regime, without which such banking support would be very challenging. As noted above, KYC and client asset controls will also be a regulatory focus area for the SFC’s inspections of applicants.