SFC concludes consultation on regulation of virtual asset trading platforms

The Securities and Futures Commission of Hong Kong, SFC, has published a consultation conclusion paper as regards its consultation on proposed requirements for virtual asset trading platforms (VATPs) and virtual asset service providers (VASPs). In its conclusion paper, the regulator briefly describes the responses it has received to its consultation and outlines the final guidelines as they will be implemented from June 1, 2023.
To recall, the SFC sought to revise or issue new guidelines with respect to VATPs and VASPs aimed at imposing similar obligations on these platforms and intermediaries as they do apply to regulated trading venues and securities brokers. Specifically, the Commission sought feedback on
– allowing VATPs to serve retail clients;
– requiring VATP operators to comply with specified customer asset protection, know-your-client, anti-money laundering, and risk management requirements;
– requiring VATPs to set up so-called „token admission and review committee“ to determine criteria for token admission and suspension; and
– requiring VATPs to daily disclose asset prices and trading volumes.
Additionally, the SFC suggested to replace existing insurance requirements with an appropriate alternative insurance requirement (e.g. by imposing own funds requirements) to cover custody risks of virtual assets, and to potentially allow licensed platform operators to offer virtual asset derivatives trading.
In its response paper now, the SFC notes that a huge majority of respondents highly appreciated the consultation and were positive about the proposed requirements on VASPs and VATPs. However, in view of the responses received, the Commission made some changes to the proposed provisions, including changes on
– the assessment of customer knowledge of virtual assets before he or she is allowed to trade (some respondents considered the requirements to be too restrictive);
– the disclosures to be made as regards the traded assets to include a provision that all disclosures must be made on a best effort basis given the fact that the details on the assets primarily come from the issuer and may not be easily verifiable;
– the due diligence requirements of platform operators to make them more principle-based;
– smart contract audits to clarify the requirements of platform operators;
– the requirement to issue legal certification that a token admitted to trading for retail clients is not considered a security token (this requirement was removed altogether due to the high legal costs resulting from it);
– the proposed provision that „platform operators should not offer gifts tied to the trading of a specific virtual asset“ to explicitly prohibit such gifts; and
– the proprietary trading prohibition to allow trading by affiliates.
Additionally, the SFC explains that it will issue further guidelines and frequently asked questions on many of the issues, commentators sought clarification on.
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As the above description only briefly summarizes the key changes, please refer to the original legal document for more detailed, comprehensive information.