SFC consults on proposals to regulate virtual asset trading platforms

In view of the upcoming new licensing regime for virtual asset service providers (VASPs) under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 on June 1, 2023, the Hong Kong Securities and Futures Commission (SFC) has launched a new consultation as regards further wide-ranging regulations relating to virtual asset trading platforms (VATPs) that are trading non-security tokens. As these platforms may pose significant risks to (retail) investors just as their security token trading platform counterparts, the SFC plans to impose similar requirements on such platforms as do exist for other regulated trading venues and securities brokers. Specifically the Commission seeks feedback on the following key issues:
– permit VATPs to offer their services to retail clients;
– require VATPs to comply with new „Guidelines for Virtual Asset Trading Platform Operators (VATP Guidelines)“ which will impose obligations pertaining to, among others,
– the safeguarding of customer assets;
– know-your-client responsibilities including the verification of a customer’s identification and the assessment of a customer’s (financial) situation and know-how to ensure suitability;
– the development, maintenance, and review of adequate Anti-Money Laundering (AML) and the Countering of the Financing of Terrorism (CFT) policies and procedures;
– proprietary trading by VATPs or a prohibition thereof; and
– risk management and conflict of interest policies and procedures.
– require VATPs to set up a so-called „token admission and review committee“ which would be responsible – among other things – for determining the criteria for tokens to be admitted to or suspended from trading on a platform and establishing corresponding „listing rules“ for virtual asset issuers. The proposed criteria are outlined in the consultation paper (e.g. the provision and content of marketing material or the background of the management staff as to its experience, track record, etc.)
– require VATPs to make certain daily disclosures such as the disclosure of the „price and trading volume of the virtual asset on the platform, for example, in the last 24 hours“;
– require VATPs to „provide an appropriate level of coverage for risks associated with the custody of client virtual assets“ which would replace the current existing insurance requirements for all virtual asset trading platforms. Such coverage could be in form of own funds or insurance or a combination thereof; or
– permit licensed platform operators to offer corresponding virtual asset derivatives trading.
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The SFC also proposes to implement a transitional regime as regards the registration and AML and CFT requirements under above noted Bill for firms that are operating in Hong Kong prior to June 1, 2023.
As these are only the key issues discussed in the paper, please refer to the original document for more detailed, comprehensive information.