New regulatory regime of virtual asset trading platforms commences on 1st June 2023

Virtual assets have become more actively traded and most of the transactions are conducted through virtual asset trading platforms. In addition to buying and selling, many investors are storing their virtual assets on these platforms for interest-earning purposes. However, many of the hundreds of virtual asset trading platforms worldwide remain unregulated with many jurisdictions only adopting a light-touch regulatory approach (i.e. subject to none or minimal investor protection measures). Incidents of ceasing operation, bankruptcy, hacks, thefts, trading disputes, and even scams are not uncommon for virtual asset trading platforms. In November 2022, FTX, one of the largest virtual asset trading platforms at that time, filed for bankruptcy, causing a significant number of investors to suffer losses.

To protect investors and reduce the risks spillover to the traditional financial system, the Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 in December 2022. The new licensing regime for virtual asset trading platforms came into effect on 1 June 2023. All centralised virtual asset trading platforms carrying on their business in Hong Kong or actively marketing their services to Hong Kong investors need to be licensed and regulated by the Securities and Futures Commission (SFC).

Virtual asset trading platforms already in operation in Hong Kong before 1 June 2023 may continue to operate in Hong Kong during the non-contravention period (1 June 2023 to 31 May 2024) and they must apply for an SFC licence if they wish to continue their operation in Hong Kong. But investors should note that a virtual asset trading platform applying for an SFC licence does not necessarily warrant approval of a licence. Investors should also note that most virtual asset trading platforms currently accessible by the public are not regulated by the SFC.

The SFC formulated the virtual asset trading platform regulatory regime based on the “same business, same risks, same rules” principle. Under the new regime, virtual asset trading platforms are subject to the same regulatory requirements applicable to traditional financial institutions (namely, securities brokers and automated trading venues), with adaptations to address the specific features and risks of virtual assets, including safe custody of client assets, Know-Your-Client processes, anti-money laundering/counter-financing of terrorism, prevention of market manipulative and abusive activities, accounting and auditing, risk management, avoidance of conflicts of interest and cybersecurity.

The new regulatory regime enables retail investors to access licensed virtual asset trading platforms with a series of investor protection measures implemented to ensure suitability. These measures include assessing the client’s virtual asset knowledge, risk tolerance level and risk profile; setting an exposure limit based on the client’s financial situation and personal circumstances; conducting reasonable due diligence on the virtual assets being made available for trading to satisfy the token admission criteria (including the eligible large-cap virtual asset requirement); disclosing sufficient product information to help the clients assess their investment.

Investors can refer to the SFC’s "List of licensed virtual asset trading platforms" which sets out the names of virtual asset trading platform operators which are formally licensed by the SFC, and click on the relevant link for further information on the platform operator.

Investors should note that enabling retail investors to access licensed virtual asset trading platforms is not an endorsement or an encouragement to trade virtual assets. Virtual assets are high risk products. Licensed virtual asset trading platforms must ensure clients’ suitability before providing services. As an investor, you should also carefully consider your risk tolerance and whether you understand the features and risks of virtual assets. If you do not fully understand virtual assets or cannot bear the potential losses, you should refrain from investing in this asset class.