VATP regulation in Hong Kong: The transitional arrangements24Oct2023
The regulation of virtual asset trading platforms (VATP) was introduced in Hong Kong at a time when a number of these trading platforms were already operating in Hong Kong. The Securities and Futures Commission (SFC) has helpfully outlined a roadmap to facilitate those businesses, or others looking to enter the Hong Kong market, to understand the path to the single licensing regime for securities and non-securities virtual asset trading platforms contemplated by the SFC. This is particularly important as, unless the benefit of transitional arrangements apply, effective from 1 June 2023 VATPs carrying on its business in Hong Kong or actively marketing services to Hong Kong investors without a valid licence will be in breach of the licensing requirements in Hong Kong. In our third in a series of articles on VATP regulation, Pádraig Walsh and Shirley Kong from the Fintech practice group of Tanner De Witt review the transitional arrangements available under the licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance (Cap. 615 of the Laws of Hong Kong) (AMLO Regime).
Eligibility to the transitional arrangements
The transitional arrangements are designed to provide sufficient time for pre-existing VATPs to comply with the requirements of the AMLO Regime, or otherwise wind down their operations in an orderly fashion.
A pre-existing VATP means a VATP that was in operation in Hong Kong with a meaningful and substantial presence before 1 June 2023. These are the relevant factors the SFC will consider in assessing whether a VATP qualifies as a pre-existing VATP:
- Was the VATP is incorporated in Hong Kong?
- Did the VATP have a physical office in Hong Kong?
- Did employees in Hong Kong have central management and control over the VATP?
- Were the key personnel based in Hong Kong?
- Was the centralised trading platform’s operation live with considerable number of clients and genuine trading volume in Hong Kong?
Eligible entities would typically include platform operators currently licensed under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (SFO), and VATP applicants under the existing SFO regime which have commenced trading non-security tokens in Hong Kong.
Individuals performing regulated functions for qualified pre-existing VATPs can also benefit from the transitional arrangements.
Transitional arrangements only apply to the trading of non-security tokens. There are no transitional arrangements for VATPs dealing with security tokens. These activities are already regulated under the current SFO regime.
The transitional arrangements consist of two stages. There is a non-contravention arrangement from 1 June 2023 to 31 May 2024, and then a deeming arrangement from 1 June 2024 until the application is approved, refused or withdrawn.
There are three possible scenarios arising from the transitional arrangements:
1. a pre-existing VATP may wish to apply for a VATP licence,
2. a pre-existing VATP may choose not to apply for a licence, and
3. a platform operator that is not a pre-existing VATP may wish to apply for a VATP licence.
Pre-existing VATPs applying for a VATP licence
Eligible pre-existing VATPs that intend to continue operations in Hong Kong should submit a licence application before 29 February 2024. These businesses are permitted to operate in Hong Kong during the non-contravention period from 1 June 2023 to 31 May 2024. This means pre-existing VATPs that intend to continue their business in Hong Kong can continue to carry on or hold themselves out as carrying on a business of operating a virtual asset trading platform during this period without committing an offence under AMLO regulation for conducting a regulated activity without a valid licence.
In its VATP licence application to the SFC, the VATP must confirm that:
(a) it has been operating a pre-existing VATP in Hong Kong immediately before 1 June 2023; and
(b) it will, on being deemed to be licensed, comply with the regulatory requirements applicable to a licensed VATP, and have arrangements in place to ensure such compliance.
After the application is submitted, the applicant may benefit from the deeming arrangement. The deeming arrangement will apply if the SFC is satisfied, in addition to the confirmations made in the application, that the platform operator has a reasonable prospect of successfully showing to the SFC that it is capable of complying with the relevant legal and regulatory requirements. An applicant that is deemed to be licensed can carry on the operations of their trading platform in Hong Kong while its licence application continues to be considered and finalised by the SFC. This is the case even though the applicant is not yet in fact licensed as an authorised VATP in Hong Kong pending the result of their application.
The SFC may consider that not all the requirements of the licence application are met or the VATP does not have a reasonable prospect of successfully showing that it is capable of complying with the relevant requirements. Then, the SFC may issue a notice informing the applicant that it will not qualify for the deeming arrangement and will therefore withdraw its application, subject to the applicant’s right to object. The SFC will have to issue a notice of its decision by the end of the non-contravention period. In this event, the applicant must proceed to close down its business by 31 May 2024 or within three months of the issuance of the notice (whichever is later).
Alternatively, the SFC may consider that the application meets the deeming conditions. In this case, no notice will be issued and the applicant will automatically be deemed to be licensed from 1 June 2024 until its licence is approved, withdrawn or refused (whichever is earlier). The VATPs or individuals deemed to be licensed or approved should observe the relevant legal and regulatory requirements under the AMLO Regime as if they were formally licensed or approved (including the financial resources and soundness requirements). Deemed VATPs and individuals will be subject to the SFC’s supervisory, disciplinary, intervention and other applicable powers.
The transitional arrangements also apply to an individual performing or holding himself out as performing regulated functions for pre-existing VATPs. Those individuals may continue to operate in Hong Kong during the non-contravention period without committing an offence under AMLO regulation for conducting a regulated activity without a valid licence.
If the individual wishes to benefit from the deeming arrangements after 1 June 2024, then then individual must apply to be a responsible officer or licensed representative of a pre-existing VATP, and in the licence application must confirm that:
(a) he has been performing a regulated function in Hong Kong for a VATP (whether operating in Hong Kong or elsewhere) immediately before 1 June 2023 (in the case of responsible officers); and
(b) he is performing a regulated function in Hong Kong for the pre-existing VATP at the time of application (for both responsible officers and licensed representatives).
The individual must also confirm that he will, on being deemed, comply with the regulatory requirements that apply to individuals under the AMLO Regime.
Pre-existing VATPs not intending to apply for a licence
If a pre-existing VATP does not wish to apply for a licence in relation to the trading of security tokens and non-security tokens, then it should wind down its business in an orderly fashion. The ultimate deadline for ceasing the regulated activity is 31 May 2024. During the winding-down time, the VATP must not conduct further active marketing of their services to Hong Kong investors.
New VATPs to Hong Kong
VATPs not operating in Hong Kong immediately before 1 June 2023 in a meaningful and substantial manner should not carry on the business or actively market the VATP business to Hong Kong investors until they are formally licensed by the SFC. They may submit the application any time after 1 June 2023. In other words, they are not entitled to benefit from the transitional arrangements.
Dual licensing regime
The SFC strongly recommends and expects VATPs to seek approvals under both the AMLO Regime and the SFO regime. New applicants must submit a consolidated application online. Those already licensed by the SFC or with pending SFO applications will only need to submit information additionally required under the AMLO Regime.
Public lists of VATPs
There are currently five lists published on the SFC’s website indicating the following regulatory status of VATPs:
- Licensed VATPs: These are VATPs that are formally licensed under the SFO regime, AMLO Regime or both.
- VATP applicants: These are VATP applicants whose licence applications have yet to be approved by the SFC.
- VATP applicants with applications turned down: These are VATPs whose application has either been returned or refused by the SFC, or withdrawn.
- VATPs closing-down: These are VATPs who have been requested to close down within a specified period and therefore should not engage in any business activity.
- Deemed licensed VATPs: These are VATP applicants who are deemed to be licensed as of 1 June 2024, but are not yet formally licensed as platform operators.
The VATP regulatory regime in Hong Kong is moving to a single playing field for all virtual asset trading platforms. Pre-existing VATPs can benefit from helpful transitional arrangements to allow continued operations either while preparing a licence application or while closing their operations in Hong Kong. This is a helpful bridge for those who qualify for the transitional arrangements. However, VATPs should not readily assume they are qualified pre-existing VATPs, and all VATPs – whether operating in or entering the market – must ensure their current operations are lawful and permitted in Hong Kong.
Pádraig Walsh and Shirley Kong
If you want to know more about the transitional arrangements or licensing requirements, please contact:
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. This article was last updated on 24 October.