- Brave New World or Wild Wild West? The Hong Kong regime, which balances innovation with regulation, seeks to avoid the latter.
- SFC has warned virtual asset trading platforms not to engage in improper practices.
- Misbehaviour will affect the SFC’s ‘fitness and properness’ evaluation and pose greater difficulty in any licence application.
Introduction
In our previous client alerts,1 we introduced the new licensing regime for the virtual asset trading platform (VATP) in Hong Kong, which came into effect on 1 June 2023.
Two months down the road to regulation, the Securities and Futures Commission (SFC) has issued a warning2 regarding improper practices of some VATPs.
SFC’s warnings
- The SFC observed that some unlicensed VATPs claimed to have submitted licence applications to the SFC when, in fact, they have not done so. Making such misrepresentations, if made fraudulently or recklessly, is a criminal offence.3
- A VATP that was providing virtual assets services with a meaningful and substantial presence in Hong Kong before 1 June 2023 may continue to provide the virtual assets service in Hong Kong from 1 June 2023 to 31 May 2024 (under transitional arrangements4). However, SFC has stated that this may not apply to a VATP that cannot demonstrate it is capable of complying with Hong Kong’s regulatory regime. This is a powerful reminder to VATPs not to take the transitional arrangements for granted. In particular, a VATP that provides services and products which are not in compliance with the new regulatory regime, such as virtual asset derivatives, ‘deposits’, ‘savings’ or ‘earnings’ arrangements, may well find the SFC taking a strong position against such activities.
- The SFC emphasised that any non-compliant activities would be taken into account during the licence application process. In particular, the SFC will consider applicants’ fitness and properness to be licensed. The SFC will also consider whether the VATP can demonstrate a genuine intention to rectify non-compliant activities.
The SFC reminded VATPs that have established virtual asset services in Hong Kong to apply for SFC licences or close their Hong Kong business by May 2024. The hope is that VATPs that decide to close their businesses will keep the interests of their customers in mind and plan an orderly exit.