Five YES or NOs about the Hong Kong VASP Act

After the implementation of the VASP system, the China Securities Regulatory Commission will, on the one hand, supervise the securities token transactions conducted by virtual asset trading platforms in accordance with the current system under the Securities and Futures Ordinance (involving No. 1 and No. 7 licenses); According to the VASP system under the Anti-Money Laundering Regulations, the non-security token transactions conducted by virtual asset trading platforms will be supervised (involving VASP licenses). In practice, it is often difficult to judge whether a virtual asset is a security, and some virtual assets may change their characteristics over time.

To avoid breaching the requirements of any licensing regime and to ensure continued business operations, the SFC requires virtual asset trading platforms (together with their recommended responsible officers and licensed representatives) to comply with both the existing regime under the SFO and the SFO Approval for the VASP regime under the Anti-Money Laundering Ordinance for dual licensing and approval. The SFC will provide streamlined application measures for the dual licensing regime. It is worth mentioning that this arrangement of the SFC is consistent with the author’s expectation when interpreting the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 in 2022.

**1. Can the Vasp licensed exchange provide services to retail investors? **

SFC confirms it will allow licensed platform operators to offer non-securities securities to retail investors

Token trading services, provided that a series of proper investor safeguards are followed, including business with clients

Measures related to the establishment, token inclusion, token due diligence program and information disclosure.

1. Establish business relationship and knowledge assessment with customers

Regulators are preparing to allow virtual asset trading platforms to accept business from retail investors, but require them to take steps to protect investors. One of these measures is to assess the level of investor understanding of virtual currencies. For example, check whether they have taken courses, whether they have relevant work experience, and how many times they have bought and sold virtual currency before. The point is, as long as they have bought and sold five or more times in the past three years, they cannot be considered sufficiently understanding. Even if retail investors understand virtual assets, platforms are still obliged to assess their risk tolerance.

In general, if the platform wants to accept retail investors, it must first prove that investors have a sufficient understanding of the characteristics and risks of virtual currencies, and assess their risk tolerance.

2. The platform needs to do a good job **** general token inclusion criteria

To accept any currency for trading, the platform must do dueiligence (due diligence) on it. Now regulators have loosened the rules. The platform only needs to consider the regulatory status of virtual assets in Hong Kong, not around the world. For example, check whether this virtual currency is a security token in Hong Kong. However, platforms still need to ensure that their operations comply with the laws of all jurisdictions in which they operate.

Because if it breaks the law in other places, it will still affect the qualification of the platform to operate in Hong Kong.

**Second, each token needs to submit a legal opinion? **

The answer is no, because the cost of submitting legal opinions for each virtual currency is too high, and regulators have canceled the requirement for platforms to submit legal written opinions for each virtual currency. However, platforms still need to ensure that they only run non-security tokens on the platform, so regulators may require platforms to provide legal opinions on certain specific tokens during approval.

3. Only "qualified large-scale virtual assets" can be traded

Qualified large-scale virtual assets refer to virtual assets that are simultaneously included in their indexes by at least two independent index providers.

At least one of these index providers is dedicated to providing traditional financial market indices. In order to be recognized, these indexes must meet certain conditions:

1. These indexes must be investable, that is, the virtual assets contained have sufficient liquidity.

2. The calculation method of the index must be objective and regular.

3. Index providers must have sufficient expertise and technical support to provide and review these indices.

4. The methodology and rules for the compilation of these indices must be clearly documented, transparent and consistent.

**According to this standard, Bitcoin and Ethereum clearly meet the requirements and can be opened to individual investors for trading. **

4. Retail customers should not be allowed to trade stablecoins until the stablecoin regulatory regime is implemented

In addition to prohibiting trading platforms from providing securities-based virtual currencies to retail investors, regulators have prohibited them from buying and selling. Indicates that since the value of stablecoin may be unstable, there is a high risk of large-scale redemption. Until the stablecoin is regulated in Hong Kong, it should not be included in the platform for retail investors to buy and sell. The Hong Kong Monetary Authority has issued regulatory recommendations on stablecoins in January 2023.

Regulatory policies for stablecoins are expected to be implemented in 2023/2024.

**5. Do over-the-counter exchanges (OTC), market makers, and trusts need to apply for VASP licenses? **

This question will return to how the Hong Kong Securities Regulatory Commission defines virtual asset services. The following is its definition:

According to Schedule 3 B of the Anti-Money Laundering Ordinance and the VASP guidelines, activities related to virtual asset services (VA Service) are defined as: only operating virtual asset exchanges, namely:

(a) by means of electronic means, to provide services that comply with the following descriptions:

(1) The service:

A. Offers to buy or sell virtual assets are frequently made or accepted in a manner in which such offers or acceptances result in, or result in, a binding transaction; or

B. Persons are frequently introduced or identified to each other with a view to negotiating or completing the sale or purchase of virtual assets, or they often introduce or recognize each other with the reasonable expectation that they will negotiate or complete the sale or purchase of virtual assets in some way, and the sale and purchase were negotiated or consummated in such a manner that a binding transaction was formed or resulted in a binding transaction; and

(2) In the service, client money or client virtual assets are directly or indirectly possessed by the person providing the service; and

(b) Any off-platform virtual asset trading activities and incidental services provided by the platform operator to its customers, and any activities undertaken in relation to off-platform virtual asset trading activities.

Therefore, for (1) a centralized virtual asset exchange operating in Hong Kong, and (2) an offshore centralized virtual asset exchange that actively promotes its services to Hong Kong investors, if engaging in the above-mentioned relevant activities , all belong to the category of virtual asset services. According to the "Anti-Money Laundering Regulations" 53 ZRD, any entity operating virtual asset services must obtain a VASP license from SFC.

At present, in addition to the above-mentioned virtual asset services, other businesses such as **** OTC exchanges, **** market makers, futures contracts and derivatives, etc. have not yet been determined and there is no applicable bill* *, but it does not rule out that the Hong Kong Financial Services and the Treasury Bureau will include other virtual asset services in the form of gazetted announcements