Editor's Note: This article comes fromNakamoto Shallot (ID: xcongapp), Author: Sister Xiaocong, published by Odaily with authorization.
Editor's Note: This article comes from
Nakamoto Shallot (ID: xcongapp)
Nakamoto Shallot (ID: xcongapp)
, Author: Sister Xiaocong, published by Odaily with authorization.
The new regulations may clear the way for hundreds of billions of funds to enter the market, and will also directly benefit a series of exchanges.
Beijing time yesterday (November 6) at noon, sources revealed to the media that the Hong Kong Securities and Futures Commission intends to release details of the application for virtual asset exchanges. Statement, issued in March 2019 regarding the issuance of security tokens, aimed at clarifying cryptocurrency regulatory measures.
Ashley Ian Alder, chairman of the Hong Kong Securities Regulatory Commission (SFC), attended the Hong Kong Financial Technology Week and delivered a speech, saying that the Hong Kong Securities Regulatory Commission will issue new regulatory guidelines for digital asset trading platforms later yesterday, and he revealed the new guidelines in advance details. Alderly said that the new regulatory framework will regulate listed tokens. However, he emphasized that these regulations apply to securities tokens, and any digital asset trading platform is applicable to this regulation as long as there are securities tokens listed for trading. He said that the Hong Kong Securities Regulatory Commission will issue licenses to digital asset exchanges; the new regulatory regulations will involve the supervision of anti-money laundering, market manipulation, fair trade and other issues, and will require digital asset trading platforms to provide insurance provisions for potential risks. Alder also said that the new regulations do not apply to non-securities transactions.
Since the Chinese government officially implemented a cryptocurrency trading ban in 2017, a large number of traders in the mainland have moved to the cryptocurrency trading market in Hong Kong in the past two years. It is reported that many Chinese investors buy USDT and other stable coins through some over-the-counter trading platforms in Hong Kong under the condition of bearing a certain percentage of premium in order to invest in cryptocurrencies or conduct cryptocurrency transactions, and then participate in cryptocurrencies. in market transactions.
With the introduction of the new regulatory guidelines for digital asset trading platforms, it will undoubtedly provide a strong legal basis for cryptocurrency exchanges to operate in Hong Kong, which is expected to help cryptocurrency trading platforms solve the problems of banking-related services previously faced.
Dovey Wan, founder of Primitive Ventures, pointed out that the introduction of the new regulations will provide very direct benefits to exchanges such as Huobi, which are favored by Chinese investors. Considering that Huobi is already publicly listed on the Hong Kong exchange, the implementation of the new regulations is expected to help them become the first legalized Chinese cryptocurrency exchange.
Apart from this, the new regulations are also expected to have a positive impact on some Hong Kong exchanges, especially those whose users are mainly concentrated in mainland China. This also means that as cryptocurrency exchanges in Hong Kong are allowed to operate stably under a clear regulatory framework, investors in China will obtain a safer and more reliable cryptocurrency investment environment.
However, it is worth mentioning that this new policy in Hong Kong deviates from the attitude of the mainland to a certain extent. Although the Chinese government has recently expressed its determination to vigorously promote the implementation of blockchain technology, but for cryptocurrencies In terms of trading and speculation, it still holds a firmer attitude of resistance. "People's Daily" still made it clear in the article "Blockchain, a breakthrough for changing lanes and overtaking" published on Nov. etc. behavior.
In addition, the implementation of another cryptocurrency-related regulations introduced in Hong Kong a year ago is also extremely slow. Since the Hong Kong Securities Regulatory Commission officially launched the standards for cryptocurrency investment funds in November 2018, it has been still a year. Only one company, Hong Kong-based Diginex, managed to meet this standard. According to Reuters, many cryptocurrency investment funds have begun to "flee" from Hong Kong.
The full text of the regulatory guidelines is as follows:
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Part I - SFC’s regulatory approach to virtual asset trading platforms
1. On 1 November 2018, the Securities and Futures Commission (SFC) published a conceptual framework for the possible regulation of virtual asset trading platforms and indicated that the SFC would consider whether Operators license and regulate them.
2. After the announcement, the SFC met with virtual asset trading platform operators to discuss their business and clarify the SFC's regulatory requirements. After an in-depth review of the technical, operational and other aspects of virtual asset trading, the SFC has concluded that certain central platforms providing trading services for security and non-security tokens would be appropriate to be subject to the framework set out in this position paper Regulated.
3. The SFC has therefore adopted a set of strict regulatory standards for virtual asset trading platforms similar to those applicable to licensed securities brokers and automated trading venues, thereby addressing issues related to safe custody of assets, knowing your client, and combating money laundering and terrorist financing, market manipulation, accounting and auditing, risk management, conflicts of interest and acceptance of virtual assets for buying and selling. The SFC will only grant licenses to platforms that can meet the expected standards.
4. However, it must be clarified that the SFC does not have the power to license or regulate platforms that only trade non-security virtual assets or tokens. Since such virtual assets are not classified as "securities" or "futures contracts" under the SFO, the business conducted by these platforms does not constitute "regulated business" under the SFO. This explains why under the current regulatory framework, only platforms that provide customers with securities-type virtual assets or token trading services are within the scope of the CSRC’s supervision.
5. Once a platform that chooses to include securities-type virtual assets or tokens in the scope of trading is licensed, investors can easily distinguish between regulated and non-regulated platforms. This is the new regulatory framework described in this position paper. A great feature. However, the SFC understands that many virtual assets are highly speculative and volatile, and many have no real value, whether they are traded on regulated or unregulated platforms. Investors should only participate in virtual asset trading if they fully understand and are able to manage the risks involved.
6. The SFC also wishes to state that even if a virtual asset trading platform is licensed and regulated by the SFC, virtual assets traded on the platform are not exempt from the traditional sales of "securities" or "collective investment schemes". subject to any authorization or prospectus registration provisions. There are no other mandatory disclosure requirements applicable to non-securities virtual asset offers in Hong Kong. In addition, even if the virtual assets traded on a licensed platform are security tokens, as long as the tokens are only sold to professional investors, they will not be subject to Hong Kong’s investment offer approval process and prospectus registration system.
7. It is also important to note that while Parts XIII and XIV of the SFO enable the SFC to take action against market misconduct in the securities and futures markets, this does not apply to licensed virtual asset trading platforms for the reasons But such platforms are not recognized securities or futures markets, and the virtual assets in question are not "securities" or "futures contracts" listed or traded on that market.
9. Although some of the regulatory gaps identified in this document can only be addressed through legislative amendments, the SFC has developed a set of regulations for licensed securities brokers and automated trading venues for platforms that are willing and able to obtain a license. A strict standard similar to the standard. However, the SFC will continue to monitor market developments and work with the Hong Kong government to explore the need for legislative amendments in the long run.
10. The regulatory standards mentioned above are detailed in Part III of this document. The SFC welcomes license applications from platform operators who are committed and capable of complying with the licensing criteria and ongoing conduct requirements. Licensed platforms will also be included in the regulatory sandbox of the SFC and will be subject to close and rigorous supervision for a period of time.
11. The main licensing conditions include stipulating that platform operators can only provide their services to professional investors, must formulate strict inclusion criteria to screen the virtual assets that can be traded on their platforms, and only provide services to customers who fully understand virtual assets . In addition, platform operators will be required to employ reputable external market surveillance systems to complement their own market surveillance policies and controls. Platform operators should also ensure that the insurance they purchase against the risks involved in the custody of virtual assets is in effect at all times.
12. The adoption of the new regulatory framework will enable the SFC to formulate its future regulatory strategy through close supervisory interaction with an evolving and fast-growing industry.
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Part II - Background
A. Global environment
13. Virtual assets express value in digital form, also known as "cryptocurrency", "encrypted assets" or "digital tokens". The total market value of virtual assets in the world is currently estimated to be between US$200 billion and US$300 billion, and there are about 3,000 digital tokens and more than 200 virtual asset trading platforms. Despite a volatile period in 2019, there are no signs that the virtual asset market is going to die.
14. While the initial coin offering (ICO) craze appears to be fading, other forms of virtual asset crowdfunding are gaining traction. For example, security token offering (STO) generally has the attributes of traditional securities sales, but involves the use of blockchain technology to express asset ownership or economic rights in digital form. Initial exchange offerings (IEOs) have also increased significantly. IEO generally involves the use of blockchain technology to exclusively launch the initial issuance and sale of tokens on a virtual asset trading platform. The total amount of funds raised via IEOs in the second quarter of 2019 reportedly exceeded $1.4 billion.
15. Currently, there is another class of virtual assets commonly known as "stablecoins". Stablecoins typically claim to have a mechanism that seeks to stabilize the value of the coin by backing it with fiat currency, commodities, or a basket of cryptocurrencies. These virtual assets have raised significant regulatory concerns among global central banks and financial regulators, especially if such virtual assets are intended for global adoption.
16. Other virtual asset investment products have also emerged. Since 2017, large-scale exchanges in the United States have successively sold bitcoin futures, and these exchanges are all regulated by the Commodity Futures Trading Commission. The SFC also noted an increase in other forms of virtual asset derivatives, including cryptocurrency options, swaps and contracts for difference. These are just a few examples of how the field of virtual assets is gradually extending into the financial market and entering the scope of certain securities regulatory regimes.
17. In addition, as more and more traditional financial institutions and service providers enter the market, the virtual asset ecosystem is steadily expanding and becoming more complex, providing services comparable to traditional mainstream financial institutions. For example, several traditional custodians are looking into offering crypto custodian services or technology solutions. To meet the needs of virtual asset companies, the Big Four accounting firms have extended their services to this area. Large-scale insurance companies and insurance brokers are increasingly open to providing insurance protection and services to the virtual asset industry. Furthermore, a number of traditional financial institutions are studying the use of private blockchains to develop their own cryptocurrencies for real-time and cross-border fund transfers.
18. The SFC elaborated on the risks involved in virtual assets in its 1 November Statement, some of which are due to the inherent nature of virtual assets. Such risks include the risks of money laundering, terrorist financing, fraud, volatility, liquidity and market manipulation and non-compliance. The statement also highlights certain inherent risks of operating a virtual asset trading platform. Some platforms are not subject to any regulatory standards as they are designed to be deliberately out of the scope of any regulatory regime. Not only do these platforms seriously lack protection for investors, but they also raise major concerns in terms of safe custody of assets and network security. Disruptions to platform operations occur from time to time, and there have been reports of platforms being hacked from time to time, resulting in significant losses for investors. In addition, the trading rules of the platform may lack transparency and fairness.
19. In recent years, international standard-setting bodies have been closely monitoring and discussing how to deal with the risks involved in virtual assets. Although the assessment of the Financial Stability Board (Financial Stability Board) still believes that virtual assets do not pose a significant risk to global financial stability, securities regulators currently have a consensus that virtual assets pose policy issues related to investor protection. Although the consultation report issued by the International Organization of Securities Commissions (International Organization of Securities Commissions) in May 2019 did not make a conclusion on whether encrypted assets fall within the scope of supervision of securities regulators, the report has provided a basis for the analysis of virtual asset trading platforms. Jurisdictions with legal regulatory authority for trading activities listed a number of major considerations and suggested a series of corresponding measures.
20. Securities regulators in various places have also adopted different countermeasures. Some jurisdictions prohibit virtual asset activities, while others have specific regulatory regimes for such activities. Several jurisdictions have taken a more nuanced approach, such as categorizing tokens and indicating which categories fall within the scope of their existing regimes. Other jurisdictions are still taking a wait-and-see approach.
B. The CSRC’s regulatory approach to virtual assets
21. The public can trade virtual assets through several channels including ICOs, investment funds, centralized trading platforms and over-the-counter trading desks. Like other securities regulators in major jurisdictions, the SFC's initial approach was to clarify how virtual assets and certain activities involving these assets would be regulated by its existing regulatory regime. This policy needs to be classified according to the terms and features of each token, which may evolve over time. In this regard, the SFC has issued a number of statements and circulars clarifying its position on regulation, and stepped up investor education and regulatory action against those suspected of misconduct. Following the above measures, ICO activity in Hong Kong has decreased, and in some cases, issuers have canceled ICO transactions. Security tokens have also been delisted from virtual asset trading platforms, while Hong Kong investors have been denied participation in ICOs or trading in ICOs on virtual asset platforms.
22. However, virtual asset trading platform operators have found ways to operate outside the purview of the SFC and other regulators in Hong Kong. Currently, there are dozens of virtual asset trading platforms operating in Hong Kong, including some of the world's largest platforms. Some platforms provide virtual asset futures contract transactions, and such contracts involve extremely high risks due to volatility and high leverage.
23. In November 2018, the SFC decided to adopt a new set of guidelines to bring certain virtual asset activities involving a wide range of investors into its regulatory scope under its existing powers.
24. The first part of this guideline addresses the management and distribution aspects of funds investing wholly or partly in virtual assets. SFC-licensed investment organizer firms intending to invest more than 10% of their mixed portfolios in virtual assets will be subject to additional requirements set out in the November 1 Statement. In another circular, the SFC also set out the standards that licensed corporations that distribute virtual asset funds should meet. The combined effect of the above measures is that the rights and interests of investors will be protected at the fund management level or the distribution level or at both levels.
26. Following the announcement, the SFC met with operators of virtual asset trading platforms to understand and discuss their operations and explain the SFC's regulatory requirements. The SFC has invited platforms with active trading, large customer base, significant local presence and solid corporate governance structures to participate in more in-depth discussions and assess their ability to comply with the expected requirements.
27. Unlike automated trading venues or stock and futures exchanges, where investors trade through licensed intermediaries, virtual asset trading platforms engage directly with the public. In view of this, and after completing the exploratory analysis, the SFC concluded that certain types of centralized virtual asset trading platforms may be imposed with reference to the standards required to be met by licensed automated trading service providers or brokers. similar regulatory standards. Accordingly, the SFC will begin accepting license applications from platform operators who are committed to and capable of complying with expected licensing standards and ongoing conduct requirements.
28. The regulatory framework for virtual asset trading platforms will be discussed in detail in Part III.
29. In addition, the Securities and Futures Commission issued a statement today stating that platforms that sell virtual asset futures contracts may violate Hong Kong laws, and investors should remain vigilant when investing because such futures contracts carry great risks.
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Part III - Regulatory Framework for Virtual Asset Trading Platforms
A. Licensing and Regulation
30. The regulatory framework for virtual asset trading platforms will be elaborated below. Regulatory standards under this framework are benchmarked and comparable to existing requirements applicable to licensed automated trading service providers and securities brokers, and are in line with the standards set out in the IOSCO Consultative Report.
licensing system
31. Virtual asset trading platforms typically offer trading in non-security tokens. As stated in the November 1 Statement and this document, activities of central platform operators that only provide trading services for non-security tokens are outside the jurisdiction of the SFC. In view of this, the SFC has introduced a regulatory framework aimed at bringing virtual asset trading platforms that intend to be licensed into its regulatory scope.
32. The SFC is empowered to grant licenses to persons carrying on "regulated activities" as defined in the SFO. Under this regulatory framework, if a platform operator operates a central online trading platform in Hong Kong and provides trading of at least one type of security token on its platform, it will fall under the jurisdiction of the SFC and must obtain Section 1 Type 7 (dealing in securities) and Type 7 (provision of automated trading services) regulated activities. The SFC may grant a license to a qualified platform operator to operate a business of virtual asset trading, subject to the other licensing requirements (including the fit and proper criteria) being met.
33. At this stage, the SFC will aim to regulate virtual asset trading platforms that provide virtual asset trading, settlement and settlement services and have control over investors' assets (ie central virtual asset trading platforms). The SFC will not accept license applications from platforms that only provide trading services on direct peer-to-peer markets, where investors generally retain control of their own assets (whether fiat or virtual). If the platform conducts virtual asset transactions (including sending orders) for customers but does not provide automated trading services itself, the Commission will not accept their license applications.
Regulatory system
34. Once a platform is licensed, its infrastructure, core fit and proper qualifications, and the status of conducting virtual asset trading activities should be considered as a whole. While the trading of non-security tokens is not a “regulated activity,” the SFC’s regulatory domain covers any platform involved in the trading of security tokens, even if it is only a small part of its business. All relevant aspects of platform operations.
35. Trading activities involving non-security tokens and trading activities involving security tokens may be intermingled and form part of an integrated business.
36. Under section 116 of the SFO, the SFC must refuse to grant a license unless the applicant for the license is a fit and proper person. In considering a person's fitness and properness (whether initially or as an ongoing requirement), the SFC may also take into account the status of any other business of the corporation under section 129 of the Ordinance. Accordingly, the Commission will consider the manner in which a licensee operates a non-security token business, on the grounds that this may affect the licensee's fitness and properness to carry out regulated activities. This approach is also reflected in the SFC's supervisory powers set out in section 180 of the Ordinance. The scope of the supervisory powers extends to inspection and inquiry into any records and documents relating to any transaction or activity which may affect the licensed corporation's business.
37. Therefore, when reviewing a platform operator’s application for a license, the SFC will take into account the manner in which the virtual asset trading platform operates its overall virtual asset trading business, and in particular whether the operator has complied (or is willing and able to) regulatory standards.
38. In view of this, platform operators who apply for licenses should be aware that when operating virtual asset trading business, whether it involves security tokens or non-security tokens, and regardless of whether the business is on its platform shall comply with all relevant regulatory requirements.
39. In addition, the SFC will require platform operators to ensure that all virtual asset trading business activities (relevant activities) actively promoted by their group of companies to Hong Kong investors or conducted in Hong Kong (relevant activities) are conducted under a single legal entity licensed by the SFC , which includes all virtual asset transactions on and off the platform, and any activities conducted solely for the purpose of providing related transaction services. Confining all relevant activities within a single legal entity, on the one hand, allows the SFC to exercise comprehensive supervision, and on the other hand, it also minimizes any uncertainty about which parts of the business are licensed and regulated by the SFC .
B. Regulatory standards
licensing conditions
40. If the SFC decides to grant a license to a qualified platform operator, it will impose licensing conditions to address specific risks associated with its operation. The licensing conditions that may be imposed under section 116(6) of the SFO are set out below: (a) The licensee may only provide services to professional investors. The term "professional investor" is defined in section 1 of Part 1 of Schedule 1 to the SFO and the Securities and Futures (Professional Investor) Rules.
(b) The licensee must comply with the attached "Terms and Conditions Applicable to Virtual Asset Trading Platform Operators" (as amended from time to time).
(c) The licensee must obtain the SFC's prior written approval for any plan or proposal to introduce or provide new or incidental services or activities, or to introduce material changes to existing services or activities.
(d) A licensee must obtain the SFC's prior written approval for any plan or proposal to add any product to its trading platform.
(e) The licensee must provide the SFC with monthly reports on its business activities in a format prescribed by the SFC. The reports must be submitted to the SFC within two weeks of the end of each calendar month and separately at the SFC's request.
(f) The licensee must engage an independent professional firm acceptable to the SFC to conduct an annual review of the licensee's activities and operations and prepare a report confirming compliance with the licensing conditions and all relevant legal and regulatory requirements Report. The first report must be submitted to the SFC within 18 months from the date of approval of the license, and subsequent reports should be submitted to the SFC within four months after the end of each financial year and additionally at the request of the SFC .
41. A licensed platform operator must comply with all licensing conditions imposed on it when carrying out any relevant activities. Any breach of any licensing condition will be regarded as a "misconduct" under Part IX of the SFO and may negatively affect the fitness and properness of the platform operator to continue to be licensed, and may lead to SFC Take disciplinary action (eg revocation of licence, public reprimand or fine).
Terms and Conditions Applicable to Virtual Asset Platform Operators
42. As mentioned above, one of the licensing conditions will require the Platform Operator to comply with prescribed terms and conditions. The relevant licensing conditions and terms and conditions are set out in Appendix 1 of this document, and the standards set out therein are mainly aimed at the operational arrangement of virtual asset trading platforms when carrying out relevant activities.
43. The relevant terms and conditions are formulated on the following basis:
a. Once a platform operator is licensed, it is a licensed corporation and must comply with the relevant provisions of the Securities and Futures Ordinance and its subsidiary legislation. Platform Operators are also required to comply with all relevant regulatory requirements as set out in the Code of Conduct and the guidelines, circulars and FAQs issued by the SFC from time to time when conducting any relevant activities.
b. As some of the existing regulations clearly refer to "securities" and "regulated activities", the SFC has amended the relevant regulations and added relevant terms and conditions to apply the same or similar concepts to the conduct of the relevant activities .
c. In addition to the above existing requirements, the SFC has also added additional requirements in consideration of the unique characteristics of virtual assets and the technologies involved.
44. The key terms and conditions are set out below.
safe custody of assets
45. A virtual asset trading platform is not only a marketplace for matching buyers and sellers, but also holds virtual assets on behalf of its clients.
46. The SFC believes that any virtual asset trading platform seeking to obtain a license should adopt an operating structure and adopt technology that ensures the same level of protection to clients as traditional financial institutions in the securities industry.
Trust structure
47. A Platform Operator should hold client assets on trust for its clients through a company that is (i) an “associated entity” of the Platform Operator under the SFO; (ii ) incorporated in Hong Kong; (iii) holds a “trust or company service provider licence” within the meaning of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615); and (iv) the platform operator is fully owned subsidiaries ("Associated Entities"). This requirement should help safeguard customers' virtual assets and ensure that they are properly segregated from the platform's assets.
48. There is currently a degree of uncertainty as to whether virtual assets constitute "property" under Hong Kong law. The court has so far not made any ruling on this issue. The legal classification of virtual assets may affect customers' rights in insolvency proceedings. While this uncertainty is unlikely to be resolved in the short term, the SFC believes that it will not impede the current implementation of the regulatory framework. At the same time, the Commission will require that, if licensed, platform operators fully disclose to their clients any material legal uncertainties, in particular any legal issues that clients may have in relation to the virtual assets they buy or sell on the platform. Uncertainty relating to the nature of the claim.
Online and offline wallets
Insurance
50. The SFC will require platform operators and their associated entities to establish and implement written internal policies and governance procedures to ensure compliance with requirements related to the custody of clients' virtual assets. For example, "online wallet" storage refers to the practice of storing the private keys of virtual assets online, making them vulnerable to external threats such as hacking and social engineering (such as spoofing). The "offline wallet" storage method refers to the practice of storing the private key offline (ie without access to the Internet), so it is more secure. The SFC will require platform operators to ensure that they (or their associated entities) store 98% of their customers’ virtual assets in offline wallets and limit their holdings of customers’ virtual assets in online wallets to no more than 2%. Platform operators and their associated entities should also minimize the transfer of assets from offline wallets that hold most of their customers' virtual assets for transactions.
51. In addition, given the unique characteristics of virtual assets, platform operators and their associated entities should have detailed procedures in place to handle events such as hard forks or air drops from an operational and technical perspective.
52. Platform operators and their associated entities should also establish adequate procedures for handling customers’ virtual asset deposit and withdrawal requests to prevent losses arising from theft, fraud and other dishonesty, professional misconduct or omission.
Insurance
53. In the event of a hack, it is often difficult for investors to recover losses. The SFC will require platform operators to ensure that the insurance purchased is valid at all times, and the coverage should cover the risks involved in the custody of customers’ virtual assets held in online storage (comprehensive protection), and the custody of customers’ virtual assets held in offline storage. The risk involved in the customer's virtual assets (mostly guaranteed, such as 95%).
private key management
54. Access to and safekeeping of virtual assets requires digitally signed transactions using private keys. Therefore, the custody of virtual assets basically requires the safe management of the relevant private keys. The SFC believes that platform operators and their associated entities should establish and implement stringent internal controls and governance procedures for the management of private keys to ensure that all encryption seeds and keys are securely generated, stored and backed up.
55. Please refer to paragraphs 7.1 to 7.19 of the relevant Terms and Conditions for detailed requirements regarding the safekeeping of client assets. know your customers
56. A platform operator should comply with the know-your-client requirements applicable to licensed corporations and should take all reasonable steps to establish the true and full identity, financial situation, investment experience and investment objectives of each of its clients.
57. Unlike traditional securities trading venues, virtual asset trading platforms allow investors to directly enter. The ease of access to trading platforms, combined with the complexity and inherent risks of virtual assets, raises significant investor protection concerns. The CSRC will require platform operators to ensure that customers have a full understanding of virtual assets (including awareness of the risks involved in virtual assets) before providing any services to customers24.
58. If the customer does not have the relevant knowledge, the platform operator can only provide services to the customer on the premise that it has provided training to the customer and checked the customer's personal situation to ensure that the services it provides are suitable for the customer.
59. Platform operators should also assess concentration risk by setting trading limits or position limits (or both) with reference to clients’ financial situation to ensure that clients have sufficient net worth to bear the risks and trades that may be incurred loss.
60. Please refer to paragraphs 6.6 to 6.10 of the relevant Terms and Conditions for detailed requirements regarding Know Your Client.
Anti-money laundering and terrorist financing
61. Since many virtual assets are bought and sold anonymously, there are often money laundering and terrorist financing risks. The SFC expects that Platform Operators should have in place and implement adequate and appropriate AML/CFT policies, procedures and controls (collectively referred to as AML/CFT systems) to adequately manage the associated risks.
62. Platform Operators should also refer to any new guidance issued by the SFC and the latest Financial Action Task Force (FATF) recommendations applicable to virtual asset-related activities (e.g. Notes to Recommendation 15 and Applicable to Virtual Assets and Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers (Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers), regularly reviewing the effectiveness of AML/CFT systems and taking appropriate action Strengthen measures.
63. Platform operators can use virtual asset tracking tools so that platforms can trace the records of specific virtual assets on the blockchain. Supporting a variety of common virtual assets, these tools compare transaction records against databases of known addresses involved in criminal activity, such as those used in ransomware attacks, money laundering, or dark web transactions, and identify Arrived transactions are marked. When these transactions occur, the platform may refuse to establish a customer business relationship with the persons involved.
64. When adopting these tracking tools, Platform Operators should bear in mind their primary responsibility to fulfill their anti-money laundering and counter-terrorist financing obligations, and be mindful that retro-tracing tools are limited in scope and their effectiveness may vary depending on specific Weakened by anonymity-enhancing techniques or mechanisms designed to disrupt transaction records, including mixing services and privacy coins.
65. Please refer to paragraphs 13.1 to 13.2 of the relevant Terms and Conditions for detailed AML/CFT requirements.
Prevent market manipulation and illegal activities
66. It has been reported that market manipulation and irregular activities are quite common in the virtual asset world, and the most commonly used methods are not significantly different from those used for other asset classes, such as spoofing, layering ) and the pump-and-dump scheme.
67. The SFC considers that platform operators should have in place and implement written policies and controls for the proper monitoring of activities on their platforms to identify, prevent and report any market manipulation or illicit trading activities. The policies and controls should cover a number of areas, including taking immediate steps to restrict or suspend trading (such as temporarily freezing accounts) upon detection of manipulative or irregular activities.
69. As an additional safeguard, platform operators should employ effective market surveillance systems provided by reputable independent vendors to identify, monitor, detect and prevent any market manipulation or irregular activities on their platforms, and Provide the SFC with access to this system as and when necessary to enable it to perform its supervisory functions.
Risk Management
70. Please refer to paragraphs 5.1 to 5.4 of the relevant terms and conditions for detailed provisions on the prevention of market manipulation and irregular activities. Accounting and Auditing
71. The SFC will require platform operators to select and appoint auditors for their financial statements with due skill, care and diligence, taking into account their experience and track record in auditing virtual asset-related businesses. track record, and their ability to conduct audits for platform operators.
Risk Management
conflict of interest
73. Platform Operators and their associated entities will need to have a robust risk management framework in place to enable them to identify, measure, monitor and manage all risks arising from their business and operations.
74. Platform operators should also require clients to pre-fund their accounts. Only in a few cases, the SFC may allow institutional professional investors to conduct same-day settlement transactions outside the platform. Platform operators are not allowed to provide customers with any financial accommodations to purchase virtual assets.
75. For detailed provisions on risk management, please refer to paragraphs 8.1 to 8.2 of the relevant terms and conditions.
conflict of interest
76. It has been reported that virtual asset trading platforms act both as agents for clients and as principal traders trading for their own books. To avoid any potential or actual conflict of interest, platform operators, if licensed, should not engage in proprietary trading or proprietary market making activities. Where a platform plans to use market making services to increase the liquidity of its markets, the SFC will generally expect this arrangement to be conducted on an arm's length basis and provided by independent external parties using normal user access.
77. Platform Operators and their associated entities should also have policies governing employees' transactions in virtual assets to eliminate, avoid, manage or disclose actual or potential conflicts of interest.
78. For details on conflicts of interest, please refer to paragraphs 10.1 to 10.7 of the relevant terms and conditions.
virtual assets for sale
79. The Platform Operator should establish a function responsible for establishing, implementing and enforcing:
a. Rules setting out the responsibilities and limitations applicable to virtual asset issuers (e.g., notification of platform operators of any proposed hard fork or airdrop, any material change in the issuer’s business, or any regulatory action against the issuer); responsibility);
b. the criteria and applications for the inclusion of virtual assets on its platform (taking into account the criteria set out in the relevant terms and conditions); and
c. The criteria for suspending, suspending and canceling the trading of virtual assets on its platform, the options available to customers who hold the virtual assets, and any notice period.
80. A platform operator should conduct all reasonable due diligence on any virtual assets before including them for trading on its platform and ensure that they continue to comply with all criteria for inclusion on its platform. The following is a non-exhaustive list of factors that Platform Operators must consider where applicable:
a. The background of the management or development team of the virtual asset issuer;
b. The regulatory status of virtual assets in various jurisdictions where platform operators provide trading services, including whether virtual assets can be sold and traded under the SFO, and whether the regulatory status will also affect the regulatory responsibilities of platform operators;
c. The supply and demand of the virtual asset, market maturity and liquidity, including its market value, average daily trading volume, whether other platform operators also provide services to facilitate the transaction of the virtual asset, and whether there is any relevant transaction combination (such as fiat currency vs. virtual asset), and the jurisdictions in which the virtual asset has been sold;
d. The technical aspects of the virtual asset, including the security infrastructure of the virtual asset's blockchain protocol, the size of the blockchain and network (especially whether it is vulnerable to 51% attacks25), and the type of consensus algorithm;
e. The activity level of the development community;
f. The popularity of the ecosystem;
g. Virtual asset promotional materials provided by issuers should be accurate and not misleading;
h. The development of the virtual asset, including the results of any projects related to it as set out in its white paper (if any), and any significant past events related to its history and development; and
i. For virtual assets that fall within the definition of “securities” under the SFO, platform operators should only include virtual assets that are: (i) asset-backed; (ii) approved, deemed qualified or registered by a regulatory authority in a comparable jurisdiction (as agreed by the SFC from time to time); and (iii) have a 12-month post-issuance track record.
81. Please refer to paragraphs 4.1 to 4.6 of the relevant terms and conditions for detailed requirements on the permitted trading of virtual assets.
PART IV - THE WAY FORWARD
82. From November 6, 2019, companies that operate a central virtual asset trading platform in Hong Kong and intend to provide trading services for at least one security token on their platform can apply to the SFC for Types 1 and 7 A license for regulated activities.
83. Applicants must demonstrate their willingness and ability to comply with the standards expected under the regulatory framework described in this document.
85. Once a virtual asset trading platform operator is licensed, it will be placed in the regulatory sandbox of the SFC. This generally means that more frequent reporting, monitoring and inspections will be required. Through strict supervision, the SFC will be able to highlight areas where operators should improve their internal controls and risk management.
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