Hong Kong Securities and Futures Commission Half-Yearly Examination: 35 Events Discussed the Issuance of New Licenses for Virtual Asset Exchanges

In terms of promoting compliant development of the virtual asset industry, the Hong Kong Securities and Futures Commission has delivered its results for the first half of the year.

In terms of promoting compliant development of the virtual asset industry, the Hong Kong Securities and Futures Commission has delivered its results for the first half of the year.

The Hong Kong Securities and Futures Commission recently released its latest quarterly report, listing the new licensing system for virtual asset trading platforms as the headline of regulatory optimization measures. In terms of communication and education, the Securities and Futures Commission participated in more than 35 events to discuss virtual assets, and conducted investor education to the public through television, educational activities, publications, etc.

From public media reports, it can be seen that the Chief Executive Officer of the Hong Kong Securities and Futures Commission, Leung Fung-yee, frequently attends events to publicize and interpret the licensing system for virtual asset trading platforms. She said that cryptocurrency trading is an important part of the virtual asset ecosystem, and the Securities and Futures Commission supports related distributed ledger technologies and responsible innovation concepts.

1. 35 events involved topics related to virtual assets

On August 23, the Securities and Futures Commission of Hong Kong released the "Quarterly Report from April to June 2023" (hereinafter referred to as the "Report"). The report mentioned "virtual assets" 26 times. In the communication and education section of the report, "virtual assets" runs through almost all the work of the SFC.

The report pointed out that in terms of speaking activities, senior members of the SFC participated in more than 35 local and international events this quarter, and delivered speeches on topics such as virtual assets, promoting and interpreting Hong Kong’s new licensing system for virtual asset trading platforms, and deepening the industry’s understanding of the new system.

On April 12 this year, global Web3.0 practitioners gathered at the "2023 Hong Kong Web3 Carnival". Cai Zhonghui, interim director of the Intermediary Department of the Hong Kong Securities and Futures Commission, delivered a speech at the meeting, saying that the potential of Web3 and virtual assets will be released. Starting from June, virtual asset trading platforms will be licensed by the Securities and Futures Commission to protect investors. Cai Zhonghui called on all parties involved in the market to actively participate in discussions and conduct constructive dialogues with the Securities and Futures Commission.

On April 27, Hong Kong Securities and Futures Commission CEO Leung Fung-yee participated in a one-on-one interview program with Bloomberg. She said that the SFC’s key tasks include the licensing system for virtual asset trading platforms, which is an important cornerstone of the third-generation Internet (Web3) ecosystem. The SFC supports related distributed ledger technologies and responsible innovation concepts.

Liang Fengyi also attended two events held in Bangkok, Thailand in June.

On June 13, Leung Fung-yee delivered a keynote speech entitled "Hong Kong's New Virtual Asset Licensing System". She said that cryptocurrency trading is an important part of the virtual asset ecosystem. Hong Kong's regulatory framework comprehensively covers all aspects of the public's interaction with virtual assets, ensuring that investors are protected while taking into account the risks faced by financial institutions.

The Hong Kong Securities and Futures Commission has expressed support for fund tokenization at multiple meetings.

On June 5, Leung Fung-yee attended the 16th Annual Conference of the Hong Kong Investment Funds Association and delivered a speech. She expressed support for fund tokenization to improve the efficiency of the industry.

According to media reports, Elizabeth Wong, head of the SFC’s fintech department, revealed at another meeting in June that the SFC is actively studying the benefits of tokenization while ensuring that “investors will not be worse off if tokenization is used.” She said: “We support tokenization and are happy to discuss the tokenization of public funds with the industry.”

In addition, the report also pointed out that in order to promote communication between banks and the virtual asset industry and encourage banks to provide banking services to licensed virtual asset trading platforms, the SFC and the HKMA held two roundtable meetings.

Several heads of virtual asset institutions told Techub News that practitioners generally encounter problems in opening bank accounts in Hong Kong, which is a current pain point in the industry. Although the Hong Kong government has been promoting communication and exchanges among multiple parties, it still takes time to resolve.

ZhongAn Bank's alternate CEO, Diyun Sin, said the key to the issue lies in whether banks understand the specific industries that Web3.0 companies are engaged in. Banks are worried about money laundering and problems with business rivals, etc. ZhongAn Bank embraces Web3.0, hopes to support the development of this industry, and explore some norms.

2. New license system to be implemented within 10 months

In the "Summary" on the first page of the report, "Virtual Assets" is listed in the headline of "Regulatory Optimization Measures". The report points out that a consultation summary has been published on the regulatory provisions applicable to licensed virtual asset trading platform operators, and relevant guidelines applicable to these operators have been issued. The new licensing system came into effect on June 1, 2023.

Industry analysts said that the Hong Kong Securities and Futures Commission was unprecedented in its speed in promoting the new licensing system for virtual asset exchanges. It took less than 10 months from Hong Kong's decision to embrace Web 3.0, to the implementation of the new licensing system, and then to the virtual asset exchanges obtaining licenses.

On October 31, 2022, the Hong Kong Special Administrative Region Government issued the "Policy Statement on the Development of Virtual Assets in Hong Kong", which pointed out that Hong Kong is open and inclusive to innovative personnel engaged in virtual asset business around the world, and Hong Kong is stepping up preparations for a new virtual asset service provider licensing system.

On June 1, 2023, the new licensing system for virtual asset exchanges in Hong Kong officially came into effect, and the Securities and Futures Commission announced that it would begin accepting applications for new licenses.

Prior to this, the SFC released a consultation summary and "Guidelines for Virtual Asset Trading Platform Operators" in May, which explained the standards that the new virtual asset trading platform licensing system should meet, including safekeeping of assets, segregation of customer assets, avoidance of conflicts of interest and network security.

To help the industry understand the new licensing system, the Hong Kong Securities and Futures Commission has also released a series of publications, including the "Licensing Manual for Virtual Asset Trading Platform Operators", circulars on the implementation details and transitional arrangements of the new system, and frequently asked questions about licensing and conduct matters.

The Hong Kong Securities and Futures Commission’s website has set up a new page that integrates various practical information, such as online application forms.

On August 3, Hong Kong virtual asset exchanges HashKey and OSL announced on the same day that they had obtained approval to upgrade their Type 1 (securities trading) and Type 7 licenses (providing automated trading services) from the Hong Kong Securities and Futures Commission, expanding their business scope from professional investors to retail investors.

Under the new licensing system, all virtual asset trading platforms in Hong Kong must obtain a license from the SFC. HashKey and OSL previously held Hong Kong Type 1 and Type 7 licenses, so they can complete the license upgrade through a simplified procedure. The application procedures for other trading platforms are relatively complicated.

Through various educational activities, the CSRC emphasizes the importance of compliance of virtual asset trading platforms and issues warnings on related risks.

The report pointed out that the SFC has strengthened its investor education work by accepting television interviews with RTHK and has also launched a new round of investor education activities with the SFC's subsidiary institutional investor and financial education committee.

On August 7, the SFC issued a warning that some unlicensed platforms falsely claimed to have submitted license applications to the Hong Kong SFC, and most virtual asset trading platforms accessible to the public are not regulated. The Hong Kong SFC will update the list of licensed trading platforms in a timely manner.