New Policy Launch: Interpretation of Hong Kong's Cryptocurrency Platform "Transitional Arrangements"

Source: Wu Says

*Authors: * Lawyer Wu Wenqian (Gilbert Ng) and Li Shufei (Chris Lee), the former is the founder of the consulting firm Mura and a practicing lawyer at the High Court of the Hong Kong Special Administrative Region; the latter is the founder and partner of TKX Capital, former CFO of Huobi and OKX.

I. Background

On the evening of May 31, 2023, the Hong Kong Securities and Futures Commission (SFC) issued a circular regarding the latest VATP license manual and the transitional arrangements for the licensing system, making a final announcement for the VATP virtual asset trading platform license applications starting June 1.

II. Transitional Arrangements for Trading Platforms

1. Non-security token trading platforms that have "real business operations and a real business presence" in Hong Kong before June 1 can continue to operate for 12 months starting from June 1. Exchanges that begin operations in Hong Kong after June 1 must obtain a license from the SFC before they can operate, with no transitional period. Factors to consider for "real business" and "real business presence" include:

a. Whether the trading platform is a Hong Kong company;

b. Whether there is a Hong Kong office;

c. Whether the trading platform is managed and controlled by Hong Kong employees;

d. Whether key personnel are stationed in Hong Kong;

e. Whether there are independent clients and real trading volume in Hong Kong;

f. Other evidence proving the platform operates in Hong Kong.

Note that merely having a registered Hong Kong company is insufficient if the employees are not stationed in Hong Kong. Moreover, employees must have been stationed in Hong Kong before June 1. The transitional arrangements only apply to non-security token trading platforms, while there are no transitional arrangements for security token trading platforms. This means all security token trading platforms must obtain a license from the SFC to operate after June 1.

2. Trading platforms with a transitional period can be considered for licensing starting 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 trading platform has complied with all licensing regulations and is accepted by the SFC.

3. Additionally, this transitional arrangement also includes "regulated functions individuals," namely licensed representatives (RO) and/or responsible officers (LR). Individuals who have been performing relevant functions on the trading platform before June 1 can also have personal transitional arrangements and continue to perform relevant functions for 12 months starting from June 1, 2023 (without holding a license as RO or LR). These ROs and LRs can be considered licensed ROs and LRs starting June 1, 2024, if they meet the following conditions:

a. These ROs and LRs must submit a complete (personal) license application to the SFC before February 29, 2024.

b. These ROs and LRs must have been performing RO and LR functions on the exchange before June 1, 2023.

c. Provide evidence and be accepted by the SFC that these ROs and LRs are capable of complying with the regulations of licensed exchanges.

4. It is worth noting that during the license application process, if the SFC finds that the application is incomplete or has any solvable issues, the SFC will return the application to allow the applicant to resolve the issues, rather than directly rejecting the application. Therefore, applicants with transitional period eligibility should submit their applications as early as possible, rather than waiting until close to February 29, 2024, to ensure ample time to address any issues raised by the SFC.

5. Regarding responsible personnel, since the SFC believes that exchanges will not operate on a small scale, it is suggested that the number of responsible personnel may need to exceed the basic requirements.

6. Additionally, the SFC recommends that VATP apply for licenses 1 and 7 together, as the nature of security tokens and functional tokens can change at any time, and applying simultaneously can ensure smooth operation of the exchange. Both licenses can be submitted with a single comprehensive application form.

III. Summary of the VATP License Manual

7. The SFC defines operations in Hong Kong by whether the exchange is "actively marketing to the Hong Kong public." This means that if an exchange, regardless of its registered location, targets the Hong Kong public for promotion, it must obtain a license. This can include various situations, such as regularly contacting Hong Kong investors or the public and promoting services to them, conducting media campaigns aimed at Hong Kong public investors, and engaging in internet activities targeting Hong Kong investors. In determining whether an exchange is "actively promoting" its services to the public, the SFC will consider the overall nature of the business activities, including:

a. Whether there is a detailed promotional plan for the service;

b. Whether the service is promoted through direct promotional channels, such as advertising in Hong Kong media, broadcasting, or other online "marketing" technologies for widespread publicity (as opposed to passive methods, such as obtaining services through "self-selection," which may not be considered active promotion);

c. Whether the promotion is carried out in a planned manner and whether it is conducted according to plans or procedures, indicating that it is a continuous service rather than a one-off promotional action;

d. Whether the service is aimed at the Hong Kong public, such as being written in Chinese and denominated in Hong Kong dollars;

e. Whether the service is actively sought by customers.

8. Additionally, any licensed exchange conducting business outside of Hong Kong must ensure full compliance with all local laws and regulatory requirements.

9. Licensed exchanges will need to provide the SFC with monthly reports on business activities, in a format specified by the SFC, and provide all information required by the SFC. The SFC also has the authority to inquire about any matters related to the exchange, and the exchange must respond truthfully.

10. Licensed exchanges are required to hire an independent professional firm to conduct an annual audit of their business, including 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 outside of the exchange must be approved by the SFC, and licensed exchanges can only operate one centralized exchange.

IV. Basic Requirements for Licensing

12. The basic requirements for licensing have been outlined in many previous articles, so they will not be repeated here, but special or important matters are reminded. All directors, licensed representatives (RO), responsible officers (LR), responsible managers (MIC), and ultimate beneficial owners (UBO) 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. Work experience in non-compliant environments may be accepted if it is due to exemptions (from licensing requirements). Experience related to fintech technology and exchange platform technology may also be considered. It is worth noting that at least one licensed representative must reside in Hong Kong.

13. The financial requirement is a paid-up capital of HKD 5 million, current assets of HKD 3 million, plus 12 months of operating expenses. Therefore, exchanges need to submit an estimate of operating expenses and revenues to the SFC.

14. Trust companies used for safeguarding client assets must not engage in any other business and can only safeguard assets for clients.

15. There is no hard requirement that data centers and storage centers must be located in Hong Kong, but all data centers and storage centers used must be approved by the SFC.