Hong Kong has taken a significant step toward establishing itself as a global hub for virtual asset innovation with the introduction of a comprehensive licensing framework for virtual asset trading platforms (VATPs). Effective June 1, 2023, this new regulatory regime, overseen by the Securities and Futures Commission (SFC), brings clarity, structure, and enhanced investor protections to the rapidly evolving digital asset landscape.
The updated rules mark a pivotal shift—allowing retail investors to participate in virtual asset trading under strict safeguards while ensuring platforms operate with transparency, security, and compliance. This move aligns Hong Kong with international regulatory standards and positions it at the forefront of responsible fintech advancement in Asia.
Core Regulatory Framework
Under the new regime, virtual asset trading platforms must comply with three key regulatory instruments:
- Guidelines for Virtual Asset Trading Platform Operators ("VATP Guidelines")
- Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Guidelines
- SFC Disciplinary and Penalty Guidelines
In addition, platforms are subject to statutory obligations under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the Securities and Futures Ordinance (SFO). Compliance with all these frameworks is mandatory—no exemptions are permitted.
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Key Provisions of the VATP Guidelines
Retail Investor Access with Safeguards
For the first time, licensed VATPs can serve retail investors—but only if they implement robust investor protection measures across three pillars: client onboarding, governance, and disclosure obligations.
Client Onboarding Requirements
Platforms must conduct a thorough assessment of potential investors, including:
- Evaluating their understanding of virtual assets and associated risks
- Performing KYC procedures to assess financial capacity and risk tolerance
- Reviewing investment experience and objectives
Notably, executing five or more virtual asset trades in the past three years does not automatically qualify an investor as knowledgeable. The SFC emphasizes suitability and informed participation, aligning with its approach to derivatives trading.
Governance Standards
To ensure sound decision-making, each platform must establish a Token Listing and Review Committee responsible for due diligence on listed assets. The committee should include senior personnel from business operations, compliance, risk management, and IT.
Platforms must:
- Maintain transparent and fair token listing/removal criteria
- Publicly disclose these criteria on their website
- Keep detailed records of all listing-related decisions
Ongoing monitoring is required—any virtual asset that no longer meets standards must be suspended or delisted promptly.
Disclosure Responsibilities
All information published on a platform’s website must be accurate, balanced, and free from misleading or deceptive content. Platforms must exercise due care, skill, and diligence when disclosing product details.
Token Listing, Due Diligence & Ongoing Monitoring
General Token Inclusion
Platforms must perform comprehensive due diligence before listing any virtual asset. The SFC provides a non-exhaustive list of factors to consider:
- Background of the project’s development team
- Supply-demand dynamics, market maturity, and liquidity
- Technical architecture and security features
- Legal status in Hong Kong and other jurisdictions
While legal opinions confirming non-security status are no longer mandatory, the SFC may request them during the licensing process depending on market developments.
Additional Criteria for Retail-Traded Tokens
Tokens available to retail investors must meet stricter standards:
- Must be non-security tokens
- Must demonstrate high liquidity, evidenced by inclusion in at least two recognized indices from independent providers
- Index providers must have experience in traditional markets and adhere to IOSCO principles
Importantly, stablecoins are currently excluded from retail trading until further regulatory guidance is issued. The SFC aims to minimize exposure to market manipulation risks for retail participants.
Prohibited Activities
To prevent conflicts of interest and speculative excesses, the SFC prohibits:
- Proprietary trading: Platforms cannot trade virtual assets for their own accounts unless granted case-by-case exemptions
- Market-making or yield-generating activities using client assets
- Offering virtual asset derivatives or futures to retail investors
These restrictions emphasize the platform’s role as an agency-based intermediary rather than a principal trader.
Custody & Cybersecurity
Client asset protection is paramount. Platforms must:
- Store 98% of client assets offline (e.g., via hardware security modules) unless otherwise permitted
- Keep client funds segregated from platform-owned assets
Robust cybersecurity protocols are required, covering operational procedures, access controls, data backups, and incident response plans.
Insurance & Compensation Arrangements
Platforms must have insurance or equivalent compensation mechanisms in place to protect against loss:
- 100% coverage for hot wallet and other online storage losses
- 50% coverage for cold wallet holdings
Acceptable arrangements include:
- Third-party insurance policies
- Trust-held funds (cash or short-term deposits)
- Trust-held virtual assets designated for compensation
- Bank guarantees from authorized financial institutions in Hong Kong
Dual Licensing Regime
Given that some tokens may qualify as securities under the SFO, platforms may need dual licensing:
- Non-security tokens: Regulated under the new AMLO Part 5B regime
- Security tokens: Continue to fall under existing SFO licensing requirements
To reduce administrative burden:
- A streamlined application process allows submission of a single combined application
- Responsible officers approved under one regime may also serve under the other
This flexibility supports platforms offering both types of assets while maintaining regulatory rigor.
AML/CFT Compliance
All VATPs must comply with AML/CFT guidelines, including adherence to the Travel Rule, which requires collection and verification of sender and recipient information for virtual asset transfers. Sanctions screening is also mandatory to mitigate money laundering and terrorist financing risks—consistent with FATF recommendations.
The SFC Disciplinary and Penalty Guidelines apply uniformly across both licensing regimes. For example, misconduct leading to disqualification as a fit and proper person may result in fines up to HK$10 million or three times the profit gained or loss avoided.
Licensing Application Process
Applicants—whether corporate or individual—must prove they are fit and proper persons with sufficient competence, financial resources, and operational readiness.
Key evaluation criteria include:
- Financial soundness and liquidity
- Educational background, qualifications, and industry experience
- Understanding of regulatory frameworks and ethical standards
- Reputation, integrity, and risk management capabilities
Minimum Financial Requirements
- Maintain liquid assets (cash, deposits, treasury bills) equal to at least 12 months of operating expenses
- Minimum paid-up capital of HK$5 million
- Accounting records must follow generally accepted principles and reflect economic substance
Applicants must also engage an independent third-party assessor to submit two reports:
- First-stage report with initial license application
- Second-stage report after preliminary approval
These reports evaluate governance, risk management, custody practices, KYC/AML systems, technology infrastructure, and implementation effectiveness.
Transition Period for Existing Platforms
Existing platforms operating in Hong Kong before June 1, 2023—and conducting “meaningful and substantial” business—qualify for a transitional arrangement.
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| Platforms Seeking a License | Platforms Not Seeking a License |
|---|---|
| May continue operations until May 31, 2024 Must submit application within first nine months If deficiencies are found, must cease operations by May 31, 2024—or three months after notice (whichever is later) If no issues arise, operations may continue until final decision | Must wind down operations in an orderly manner by May 31, 2024 Expected to stop actively marketing to Hong Kong users Must fully exit virtual asset services post-transition |
New entrants not qualifying as “existing” platforms cannot begin operations or market services in Hong Kong without prior licensing.
Frequently Asked Questions (FAQ)
Q: Can retail investors now trade crypto freely in Hong Kong?
A: Yes—but only on licensed platforms that meet strict investor protection requirements. Access is permitted only for non-security tokens with high liquidity and strong governance.
Q: Are stablecoins allowed for retail trading?
A: Not currently. The SFC has stated that stablecoins should not be offered to retail investors until further regulatory clarity is provided.
Q: What happens if a platform fails to get licensed by June 2024?
A: Unlicensed platforms must cease all operations targeting Hong Kong users. Continuing to operate may result in enforcement actions, penalties, or criminal prosecution.
Q: How does Hong Kong’s regime compare globally?
A: It aligns closely with FATF and IOSCO standards, placing Hong Kong among the most advanced jurisdictions—similar to Singapore and Switzerland—in regulating virtual assets responsibly.
Q: Is dual licensing mandatory?
A: Only if a platform offers both security and non-security tokens. The SFC offers a streamlined process to reduce compliance burdens.
Q: What role does insurance play?
A: It’s mandatory. Platforms must protect client assets through insurance or equivalent compensation schemes covering both online and offline storage risks.
Conclusion
Hong Kong’s new virtual asset trading platform regime represents a balanced approach—fostering innovation while prioritizing investor protection and financial stability. By setting clear rules, enforcing rigorous standards, and allowing controlled retail access, Hong Kong strengthens its position as a leading fintech center in Asia.
As the SFC prepares to issue additional guidance—including FAQs and licensing handbooks—market participants should proactively align their operations with regulatory expectations.
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