The Securities and Futures Commission (SFC) has on Monday launched a consultation on the proposed requirements for operators of virtual asset trading platforms.

Under a new licensing regime to take effect on June 1, 2023, all centralised virtual asset trading platforms carrying on business in Hong Kong or actively marketing to Hong Kong investors will need to be licensed by the SFC, SFC said in a statement.

Under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022, any person who carries on a business of providing a virtual asset service (ie, operating a virtual asset exchange), or holds itself, himself or herself out as carrying on such a business, is required to apply for a licence from the SFC.

The SFC’s proposed regulatory requirements for virtual asset trading platforms are based on the regulatory requirements of the existing regime under the Securities and Futures Ordinance and are comparable to those for licensed securities brokers and automated trading venues.

In 2019, the SFC introduced a regulatory framework for centralised virtual asset trading platforms which provide trading services in at least one security token.

The requirements cover key areas such as safe custody of assets, know-your-client, conflicts of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering/counter-financing of terrorism and prevention of market misconduct.

The SFC has also taken the opportunity to propose modifications to some requirements of the existing regime.

As part of the consultation, the SFC is seeking views particularly on whether to allow licensed platform operators to serve retail investors, and if so, the measures to be implemented in addition to the proposed range of robust investor protection measures, which include ensuring suitability in onboarding clients and token admission.

In addition to ensuring suitability in onboarding clients and token admission, the other key proposals relate to token due diligence, governance and disclosures.

“As has been our philosophy since 2018, our proposed requirements for virtual asset trading platforms include robust measures to protect investors, following the ‘same business, same risks, same rules’ principle,” said Julia Leung, the SFC’s Chief Executive Officer.

“In light of the recent turmoil and the collapse of some leading crypto trading platforms around the world, there is clear consensus among regulators globally for regulation in the virtual asset space to ensure investors are adequately protected and key risks are effectively managed,” she added.

The SFC has identified since 2018 that the risks associated with virtual asset activities are not limited to money-laundering but also include investor protection concerns

Operators of virtual asset trading platforms which plan to apply for a licence, including pre-existing platforms, should begin to review and revise their systems and controls to prepare for the new regime.

Those which do not plan to apply for a licence should start preparing for an orderly closure of their business in Hong Kong.

Virtual asset trading platform operators are considered “pre-existing” if they are operating in Hong Kong with a meaningful and substantial presence prior to 1 June 2023.

The SFC intends to publish lists on its website to inform the public of the different regulatory statuses of VA trading platforms, and will continue working with the Investor and Financial Education Council to enhance investor education for the Hong Kong public.

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