Introduction
Hong Kong has a rigorous licensing and compliance framework for virtual asset exchanges, as we summarised in our KWM 2023 Guide to VATP Licensing.
The Securities and Futures Commission (SFC) has recently published fresh guidance on Hong Kong’s virtual asset trading platform (VATP) regime, in three key documents. These are as follows:
- Announcement: SFC’s extension of the swift licensing process to new VATP applicants (Swift Licensing Process).
- Circular: Circular to new VATP operators seeking to be licensed: enhanced licensing process and revamped external assessments (Updated Licensing and Assessments Circular).
- Circular: Circular on findings from inspections on deemed-to-be-licensed VATP applicants and expected standards of conduct for VATP operators (Expectations and Observations Circular).
This article sets out a summary of these important materials.
Please contact us if you have any questions about the VATP regime. We have supported several applicants and would be delighted to assist you.
Swift Licensing Process
In December 2024, the SFC announced that it had granted licences to four deemed-to-be-licensed VATP applicants under its swift licensing process (see the SFC’s news report here for more details). The SFC has now announced that all new VATP applicants can seek licences under the same process.
Two key aspects of this Swift Licensing Process are as follows:
This process is different to the initial VATP licensing regime announced in June 2023, as we summarised in the KWM 2023 Guide to VATP Licensing. That earlier process involved a two-part external assessment: (1) the attestation of policies and procedures at the time of the application, and (2) an attestation of systems / implementation following approval-in-principle. The SFC was not directly involved.
Updated Licensing and Assessments Circular
The Updated Licensing and Assessments Circular sets out the revamped licensing process for new corporations applying for a licence to operate a VATP, in more detail.
We summarise the key aspects as follows. The SFC also provides a helpful diagram:
Step 1 – Application bundle with Controls and External Assessor details
A VATP applicant must submit its licensing application bundle to the SFC for assessment through the SFC’s WINGS platform, together with the following documents:
The SFC has published FAQs (available here) on the key eligibility criteria for the External Assessor. These are now much tighter, but provide much-needed clarity on what can be a very expensive and time-consuming process. At minimum, only independent professional accounting firms regulated by the Accounting and Financial Reporting Council are permitted. Additional standards and minimum documentation are set out in the FAQs.
Step 2 – SFC assessment
The SFC will then assess the following, among other factors:
The SFC’s fit and proper assessment is wide and covers the applicant, its proposed responsible officers and managers-in-charge, as well as upstream owners and controllers.
The SFC may return the application if it is not satisfied with any of the above, or that the application is otherwise incomplete or has fundamental issues. In our experience, this means that it is very important to ensure that the application is of a very high quality before it goes to the SFC.
Step 3 – Implementing systems and controls
Once the SFC formally accepts the application, the applicant will then need to deploy its systems and Controls, ensuring they are calibrated to local standards. Relevant systems must cover, among other areas, market surveillance, anti-money laundering and counter-financing of terrorism (AML/CFT), know-your-client (KYC), and custody.
The Guidelines for Virtual Asset Trading Platform Operators (VATP Guidelines) house the majority of these requirements. The Expectations and Observations Circular contains additional useful guidance on the SFC’s expectations. We summarise key points below.
Step 4 – Tripartite agreement with the External Assessment
The applicant must then enter into a tripartite agreement with the SFC and the External Assessor for the latter to assess the applicant’s Controls. The scope and terms must be agreed with the SFC. The SFC can provide further details of the key terms of this appointment on request to its Fintech Unit.
Step 5 – External assessment, final items and grant of licence
The External Assessor then completes their external assessment, with the oversight and involvement of the SFC. During this process the SFC may clarify regulatory requirements and offer feedback. The upshot of this arrangement is that:
- relevant findings and exceptions can generally be resolved during this interactive process; and
- there are very few actions required once that report is issued. Specifically, once:
- the external assessment is complete;
- any final items such as capital injections are effected;
- no material changes have occurred (which must be disclosed and resolved with the SFC); and
- the SFC is otherwise comfortable that the applicant is fit and proper,
the SFC will grant a licence to the applicant.
Expectations and Observations Circular
The Expectations and Observations Circular sets out:
- standards that the SFC expects VATP operators (Platform Operators) to meet; and
- the SFC’s observations during its on-site inspections on all deemed-to-be-licensed VATP applicants.
Importantly, we note that not all of these expectations are “new” as such. Several of these are clarifications and are already covered to some degree in the existing VATP Guidelines and other regulatory requirements, as we summarised in our KWM 2023 Guide to VATP Licensing.
The following chart summarises the Expectations and Observations Circular. We highly recommend any market participants considering an application to closely consider them, as they can often involve material expenditure and resource, and potential restructure of existing systems. The observations in Appendix 2 to the Expectations and Observations Circular are especially illuminating.
Next steps
Please contact us to discuss the VATP regime anytime. We regularly support clients with regulatory advice, licensing and building strong compliance policies and procedures.
We would be delighted to assist you.
