/ 2 min read / Reed Smith Client Alerts

Hong Kong SFC issues warning to virtual asset trading platform: don’t misbehave

Authors

Jill Wong, Teddy To
  • 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

  1. 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
  2. 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.
  3. 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.

Takeaways

In a fast-changing market, VATPs often adopt innovative measures to stand out from competitors. It is, however, important for platform operators not to overstep the line and ensure they can operate in a regulated environment. Platform operators who are unaccustomed to regulatory oversight should understand that the SFC’s oversight “might be regarded as tough, but…[it is]…transparent, consistent and predictable”.5

Some key takeaways:

  1. Do not take the transitional period as an opportunity to offer services or products that will not be allowed at the expiry of the period.
  2. Do not say you have submitted an application for a licence if you have not done so. There are serious, potentially criminal, consequences for such misleading claims. Be aware that investor protection, and fair and orderly markets, are key features of Hong Kong’s regulatory regime.
  3. Do provide true and accurate information in your licence application. It is not uncommon for the SFC to prosecute licence applicants for providing false or misleading information.6 Even if no criminality is involved, a licence applicant would face extra hurdles in its application if it has not been conducting business responsibly during the transitional period.
  4. Regulators talk to each other. If you have a good reputation in one jurisdiction and are seeking a licence in another, that reputation will likely help you. And it works the other way: if you create a bad impression in one jurisdiction, you may find that news will travel to other jurisdictions where you have businesses.7
  5. In its regulatory approach, the SFC will consider substance over form. We have noted that some platforms have good disclaimers – such as certain services being unavailable in Hong Kong – but such services are nevertheless accessible in reality. Disclaimers which do not work or which are not effective may not offer a good defence against unlicensed activities.

We regularly advise clients on licensing and regulatory issues involving traditional and virtual assets. If you have any questions, feel free to reach out to our team. 

  1. See: Alerts published on 17 March 2023 and 31 May 2023.
  2. See: Warning: VATP engaging in improper practices.
  3. Under section 53ZRG of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). 
  4. See SFC Circular on transitional arrangements of the new licensing regime for VATP.
  5. Speech by Julia Leung, Chief Executive Officer, SFC Keynote Speech at executive dinner organized by the Hong Kong Economic and Trade Office in Bangkok, Office for Attracting Strategic Enterprises and InvestHK 13 June 2023.
  6. For example: 25 May 2023; 11 May 2018; 27 July 2017; 7 Jan 2016; 28 April 2016; 12 Nov 2015; 28 May 2014.
  7. See Enforcement News: 14 Feb 2013.

Client Alert 2023-176

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