Recently, the Hong Kong Securities Regulatory Commission of China approved in principle an application for a virtual asset trading platform license for OSL, a subsidiary of BC Technology Group. If the Hong Kong Securities Regulatory Commission completes the final approval of the license, it means that Asia’s first licensed virtual asset trading platform will be Hong Kong, China was born. Hong Kong, China, has always maintained a positive attitude towards digital assets, leading many countries and regions in Asia. This move will undoubtedly consolidate Hong Kong’s position in the international capital market. After the birth of the first licensed virtual asset trading platform in Hong Kong, China, it will have a huge impact on the future development of the entire Asian digital economy.
Licensing rules for Hong Kong digital asset trading platform operators
At present, the Hong Kong digital asset trading platform still needs to apply for a license in accordance with the Hong Kong Securities Regulatory Commission’s “Position: Regulating Virtual Asset Trading Platforms” and its appendix “Licensing Conditions and Terms Applicable to Virtual Asset Trading Platform Operators” on November 6, 2019. And conditions”. The following will interpret the regulatory framework of the Position Paper and the New Regulations.
Supervised object:
The “New Regulations” specify that the operator applying for a license is a central virtual asset trading platform operating in Hong Kong and buying and selling virtual assets including at least one security token. The “New Regulations” clarify that Bitcoin and other common cryptocurrencies are not securities and do not supervise Bitcoin, but only supervise trading security token platforms. Platforms that only buy and sell non-securities virtual assets or tokens do not issue licenses or supervise them. Because such assets are not “securities” or “futures contracts” under the Securities and Futures Ordinance, only platforms that provide customers with securities-type virtual assets or token trading services fall under the supervision of the Securities Regulatory Commission.
Supervision method:
The “New Regulations” indicate that by including securities-type virtual assets or tokens in the licensing scope, investors can easily distinguish between regulated and unregulated platforms. Once a virtual asset trading platform operator is granted a license, it will be placed in the regulatory sandbox of the China Securities Regulatory Commission, which requires more frequent reporting, monitoring and review. Through strict supervision of virtual asset trading platforms, the Hong Kong Securities Regulatory Commission will be able to highlight the areas that operators should improve in terms of internal control and risk management.
Licensing conditions:
According to the regulations in the “Position Letter”, the trading platform must meet the following 6 conditions to apply for a license in SFC:
(1) The licensee can only provide services to professional investors.
(2) Licensees must comply with the attached “Terms and Conditions Applicable to Virtual Asset Trading Platform Operators”.
(3) The licensee must obtain the prior written approval of the China Securities Regulatory Commission for any plan or proposal to introduce or provide new or incidental services or activities or make major changes to existing services or activities.
(4) The licensee must obtain the prior written approval of the China Securities Regulatory Commission for any plan or proposal to add any product to its trading platform.
(5) The licensee must provide monthly reports to the SFC on its business activities in the format prescribed by the SFC, and the relevant reports must be submitted to the SFC within two weeks after the end of each calendar month and in addition upon the request of the SFC Securities Regulatory Commission.
(6) The licensee must appoint an independent professional company acceptable to the China Securities Regulatory Commission to conduct an annual review of the licensee’s activities and operations, and prepare a document confirming that it has complied with the licensing conditions and all relevant legal and regulatory requirements Report. The first report must be submitted to the SFC within 18 months from the date of approval of the license, and subsequent reports should be submitted to the SFC within four months after the end of each financial year and in addition at the request of the SFC .
Operator terms and conditions
In addition to knowing your customers (KYC), anti-money laundering (AML) and anti-terrorist financing (CFT) regulations and other mandatory provisions of the regulatory framework, the “new regulations” set more detailed rules for virtual asset platform operators Strict regulatory standards, such as:
Trust structure requirements: platform operators should hold client assets for their clients in trust through a company. The establishment of the system is mainly to protect the virtual assets of customers and to ensure that these assets are properly separated from the assets of the platform.
Online and offline wallet requirements: For exchanges, the Hong Kong Securities Regulatory Commission will require platform operators to ensure that they store 98% of customer virtual assets in offline wallets, and limit the customer virtual assets held in online wallets to no more than 2%. Exchanges should minimize the allocation of assets for transactions from offline wallets that hold most of their customers’ virtual assets.
Platform insurance requirements: In terms of exchange insurance coverage, the Hong Kong Securities Regulatory Commission will require platform operators to ensure that the insurance purchased is always valid, and its coverage should cover the risks involved in the custody of virtual assets held by customers in online storage ( Comprehensive protection), and custody of the risks involved in holding customers’ virtual assets in offline storage (most protection, such as 95%).
The introduction of Hong Kong’s “New Regulations” means that the STO program has one more jurisdiction in addition to the United States. A commercially successful STO needs to consider not only the choice of transaction structure, intermediaries, and trading platforms, but also whether the relevant legal environment is friendly, so that the interests of investors can be protected.