WuBlockchain is authorized by the author to translate and publish.
Gilbert Ng, founder of consultancy firm Mura and practicing lawyer in the High Court of the Hong Kong Special Administrative Region. Previously led the legal and compliance functions at Huobi Group, New Huo Tech, and OKX.
Chris Lee, founder and partner of TKX Capital and former CFO of Huobi and OKX.
Background
On the evening of May 31, 2023, the Securities and Futures Commission (SFC) of Hong Kong issued a circular on the latest VATP (Virtual Asset Trading Platform) License Handbook and transitional arrangements for licensing procedures, providing the final announcement for VATP license applications, which will commence on June 1.
Read the original text:
Transitional Arrangements for Trading Platforms
1. Non-securities token trading platforms that have “genuine operations and genuine business premises” in Hong Kong before June 1 can continue their operations within 12 months starting from June 1. However, exchanges that commence operations in Hong Kong after June 1 will need to obtain SFC licenses before operating without a transitional period. Factors considered for determining “genuine operations” and “genuine business premises” include:
a. Whether the trading platform is a Hong Kong company;
b. Whether it has an office in Hong Kong;
c. Whether the trading platform is managed and controlled by Hong Kong employees;
d. Whether key personnel are resident in Hong Kong;
e. Whether there are existing independent customers and genuine trading volume in Hong Kong;
f. Other evidence demonstrating that the platform operates in Hong Kong.
Note that simply having a Hong Kong registered company without employees residing in Hong Kong is not sufficient. Employees must already be resident in Hong Kong before June 1. The transitional arrangements only apply to non-securities token trading platforms, and there are no transitional arrangements for security token trading platforms. Therefore, all security token trading platforms will require SFC licenses to operate after June 1.
2. Trading platforms with transitional periods can be considered for licensing starting from June 1, 2024 if they meet the following conditions:
a. Submit a complete license application to the SFC before February 29, 2024;
b. Provide evidence that the exchange has complied with all licensing regulatory requirements and is accepted by the SFC.
3. Additionally, the transitional arrangements also cover “regulated individuals,” namely Responsible Officers (ROs) and/or Licensed Representatives (LRs) performing regulated functions. Individuals who have been executing relevant functions on the trading platform before June 1 can also benefit from a transitional period and continue performing those functions within 12 months starting from June 1, 2023 (in the absence of a license for ROs and LRs). These ROs and LRs can be considered as licensed ROs and LRs starting from June 1, 2024 if they meet the following conditions:
a. Submit a complete (individual) license application to the SFC before February 29, 2024.
b. Have already executed RO and LR functions on the exchange before June 1, 2023.
c. Provide evidence and be accepted by the SFC, demonstrating the capability to comply with regulatory requirements for licensed exchanges.
4. It is worth noting that during the license application process, if the SFC finds incomplete applications or any application issues that can be resolved, they will return the application to the applicant for resolution rather than rejecting it outright. Therefore, applicants eligible for the transitional period should submit their applications as early as possible, rather than waiting until near February 29, 2024, to allow sufficient time to address any SFC queries.
5. Regarding responsible officers, as the SFC considers that exchanges are not likely to be small-scale operations, it is suggested that the number of responsible officers may need to exceed the minimum requirement.
6. Additionally, the SFC recommends that VATP applications be submitted together with Type 1 and Type 7 licenses. This is because the nature of securities tokens and functional tokens can change over time, and applying for all licenses concurrently ensures smooth operation of the exchange. Both licenses can be included in a single comprehensive application form.
Summary of VATP License Handbook
7. The SFC defines operations in Hong Kong based on whether the exchange is “actively marketing to the Hong Kong public.” If an exchange, regardless of its place of incorporation, promotes its services to the Hong Kong public, it must obtain a license. This can include various activities such as regular contact with Hong Kong investors or the public, advertising services to the Hong Kong public through mass media campaigns targeted at Hong Kong investors, and engaging in internet activities targeting Hong Kong investors. When determining whether an exchange is actively promoting its services to the public, the SFC considers the overall nature of the business activities, taking into account factors such as:
a. The existence of a detailed marketing plan for the services.
b. Direct marketing efforts, such as advertising in Hong Kong media or using other online promotional techniques, for broad dissemination (passive acquisition of services, such as through “self-selection,” may not be considered active promotion).
c. Planned and programmatic promotion, demonstrating ongoing service provision rather than a single promotional activity.
d. Services targeting the Hong Kong public, such as being provided in Chinese and denominated in Hong Kong dollars.
e. Services sought out by customers actively.
8. Furthermore, any licensed exchange conducting business outside Hong Kong must ensure compliance with all local laws and regulatory requirements.
9. Licensed exchanges will be required to provide monthly reports to the SFC on their business activities, in a format specified by the SFC, and provide all information requested by the SFC. The SFC also has the power to inquire about any matters related to the exchange, and the exchange must provide truthful responses.
10. Licensed exchanges are required to undergo annual audits of their operations by independent professional firms, covering compliance processes, systems, security, etc. The first audit report must be submitted within 18 months from the date of license approval.
11. All other services or businesses apart from the exchange itself require SFC approval. A licensed exchange can only operate one centralized exchange.
Basic Requirements for the License
12. The basic requirements for the license have been covered in various previous articles, so they are not repeated here. However, it is important to note specific or important issues. All directors, responsible officers (ROs), responsible officers for management control (LRs), managers in charge (MICs), and ultimate beneficial owners (UBOs) must pass the SFC’s “fit and proper” test. The relevant industry experience of ROs, LRs, and MICs should be in regulated activities in Hong Kong or other countries. Experience in non-compliant environments, if exempted from license requirements, may also be accepted. Experience related to financial technology and the technology of the exchange platform can also be considered. It is worth noting that at least one responsible officer should reside in Hong Kong.
13. The financial requirements include a paid-up share capital of HKD 5 million, liquid assets of HKD 3 million, and an additional estimate of 12 months’ operating expenses. Therefore, exchanges need to submit an estimation of operating expenses to the SFC.
14. Trust companies used to safeguard client assets must not engage in any other business and can only provide custody services for clients’ assets.
15. There is no strict requirement for data centers and storage centers to be located in Hong Kong, but all used data centers and storage centers must obtain approval from the SFC.
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