APPLY FOR A VASP LICENSE
IN HONG KONG

Virtual Asset Services in Hong Kong

Any person or entity carrying on a virtual asset service (VAS) in Hong Kong, must be licensed as a VASP by the Securities and Futures Commission (SFC). The carrying on of any unlicensed activity is a criminal offense.

In accordance with Hong Kong regulation Virtual Asset Trading Platforms (VATPs) are licensed by the SFC and regulated under the framework introduced in 2019 for centralised VA trading platforms in Hong Kong which offer trading of at least one security token. Following the issuance of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 by the Legislative Council, as of 1st June 2023, a new licensing regime will take effect, upon commencement all centralised VATPs carrying on their businesses in Hong Kong or actively marketing their services to Hong Kong investors, will need to be licensed and regulated by the SFC, irrespective of whether they provide trading services in security tokens before commencing any virtual asset related business in Hong Kong.

Further to above, VATP platforms which do not fall within the scope of the transitional arrangements described below, must only carry on their businesses in Hong Kong or actively market their services to Hong Kong investors, after becoming formally licensed under the AMLO VASP regime.

VATP & Duel Licenses

Pre-existing virtual asset trading platforms

Note: the below transitional arrangements under the AMLO VASP regime only apply to non-security token by VATPs; there is no transitional arrangement for compliance with the SFC. VATP trading platforms which intend to offer trading in security token will be subject to Hong Kong securities laws and should only operate upon obtaining the relevant license from the SFC.

The SFC have established transitional arrangements which aim to provide reasonably sufficient time for Virtual Asset Trading Platforms operating in Hong Kong prior to 1st June 2023 with a meaningful and substantial presence, to either apply for a license or close down in an orderly manner. Subject to the conditions set out in Schedule 3G to the AMLO, Virtual Asset trading platforms who fall within the permit of the transitional arrangements may continue to operate in Hong Kong during the non-contravention period (1 June 2023 to 31 May 2024), and will be subject to deeming arrangements from the 1st June 2024.

In determining whether a firm falls within the scope of the transitional arrangements, (i.e., was operating in Hong Kong prior to 1st June 2023 and had a meaningful and substantial presence) the SFC will take into account the following:

Whether the firm was incorporated in Hong Kong,
Whether it has a physical office in Hong Kong,
Whether the Hong Kong staff members manage and control the VATP,
Whether key personnel are based in Hong Kong,
Whether the centralised trading platform’s operation is live with a substantial number of clients and volume of trading activities in Hong Kong.

A VATP falling within the permit of the above arrangements which intends to apply for a license should note the following in preparation of the relevant application:

In order for a pre-existing VATP to qualify for the deeming arrangements, it must submit a fully completed license application online under the AMLO VASP regime between 1 June 2023 and 29 February 2024.
In the application the pre-existing VATP must demonstrate:
- It was operating in Hong Kong immediately before 1st June 2023,
- Upon licensing it will comply with the regulatory requirements applicable to a licensed platform operator and have arrangements in place to ensure the VATP complies with the regulatory requirements applicable.
Upon review of the license application, if the SFC considers that the application of the VATP itself does not meet the necessary conditions or the VATP does not have a reasonable prospect of successfully showing that it is capable of complying with all the relevant legal and regulatory requirements, the SFC may issue a notice to the VATP to inform it that the deeming arrangements will not apply and the VATP must proceed to close down its business by 31st May 2024 or within three months from the issuance of the notice (whichever is later).
If the SFC considers that the license application meets the deeming conditions, no notice will be issued and the VATP will automatically be deemed to be licensed from 1st June 2024 until the license application is approved, withdrawn or refused (whichever is earlier).
Upon approval the VATP will be subject to the SFC’s supervisory, disciplinary, intervention and other applicable powers as well as the legal and regulatory requirements under the AMLO VASP regime as if they were formally licensed or approved.

Therefore, in accordance with above, by 1st June 2024 all VATPs in Hong Kong must have been granted a license or deemed to be licensed by the SFC otherwise it will be in breach of the AMLO regime and subject to enforcements action.

Dual Licenses

Upon commencement of the AMLO VASP regime, the SFC will regulate the trading of security tokens by VATPs under the existing SFO regime and regulate the trading of non-security tokens by the VA trading platforms under the AMLO VASP regime.

Taking into account the terms of virtual assets may evolve over time, the classification may change from non-security token to security token or vice versa, to avoid contravening any of the licensing regimes and ensure business continuity, the SFC recommends VATPs and their licensed representatives apply for approval under both the existing SFO regime and the AMLO VASP regime and become dually licensed and approved.

Streamlining the application process:

Applicants for licenses under both the existing SFO regime and the AMLO VASP regime will need to submit a single consolidated application online and indicate that they are applying for both licenses simultaneously.
The application process will be streamlined for SFC- licensed platform operators and they will only need to submit to the SFC the additional information required under the AMLO regime (for instance information regarding the ultimate owners). The application under the AMLO VASP regime will then be processed in an expedited manner.
Additionally, where a license application under the existing SFO regime is being reviewed and an application for a license under the AMLO VASP regime is subsequently be submitted, the SFC will only require the applicant to submit the additional information and will handle the two licensing regimes concurrently.

Requirments & Applications

License Requirements & Applications

Requirements

Hong Kong incorporated companies having a permanent place of business in Hong Kong and overseas companies which are registered non-Hong Kong companies under the Companies Ordinance are eligible to apply for licensing as VASPs.

The proposed VATP Guidelines are based on the existing regulatory requirements, which include the following:

Safe custody of assets: a platform operator should hold client virtual assets on trust through a wholly-owned subsidiary, ensuring that 2% or less of the client’s virtual assets are stored in hot wallets and safe management of the private keys. There should be established and implemented internal policies and governance procedures for private key management ensuring that all cryptographic seeds and keys are securely generated, stored and backed up. The platform operator should also have insurance in place to cover the risks associated with the custody of the client’s virtual assets.
Know-your-client: the platform operator should take all reasonable steps to establish the identity of its clients, their full economic profile and confirmation that the client has sufficient knowledge of the virtual assets, including of their risks, before providing any such service.
Anti-money laundering (AML) and combating terrorist financing (CFT): there should be adequate AML/ CFT policies, procedures and controls in place.
Conflicts of Interest: there should be an adequate policy in place governing employees’ dealings in virtual assets to avoid, mitigate or disclose actual or potential conflicts of interest.
Admission of VA for trading: there should be a designated function responsible for establishing, implementing and enforcing the criteria for admitting, halting and suspending (et cetera) a virtual asset, additionally due diligence should be conducted on all virtual assets, making certain all criteria is satisfied.
Prevention of market abuse and manipulation: there should be established and implemented policies and controls in order to effectively identify, prevent and report manipulative or abusive trading activities on the platform, inclusive of controls to restrict or suspend trading.
Accounting and auditing: auditors should be selected with due skill, care and diligence, considering their experience, track record and capability in authoring virtual asset related businesses and platform operators. Audits should be conducted annually as well as monthly reports to the SFC regarding its business activities within two weeks after the end of each calendar month and upon SFC request.
Risk management: there should be a sound risk management framework in place in order to identify, monitor and mitigate any risks. The platform operator is also prohibited from providing any financial accommodation for clients to acquire virtual assets.

Application

The applicant must appoint at least two responsible officers (ROs) who must demonstrate he / she:

Has the necessary qualifications,
Is knowledgeable about virtual assets and the market,
Has sufficient experience,
Has a good understanding of the regulatory and legal framework,
Is familiar with the ethical standards expected of a financial practitioner.
The individual must obtain RIQ and pass LRP to illustrate they are adequately equipped to carry on the Relevant Activities and are aware of their legal responsibilities as well as potential liabilities.

The SFC must be satisfied that the persons applying to be licensed are fit and proper and upon licensing will continue to be fit and proper in accordance with section 129(1) of the SFO and section 53ZRJ(1) of the AMLO, whether in Hong Kong or elsewhere, namely relating to:

Financial status and solvency,
Educational or other qualifications or experience,
Ability to carry on Relevant Activities competently, honestly and fairly, and
Reputation, character, reliability and financial integrity.

Note: where “recency” is of concern, it is usually taken to mean the last five years for related persons.

Where the applicant is a corporation, it is the officers who are examined in accordance with above.

The onus is on the applicant to provide they are fit and proper, the SFC is obliged to refuse a license application if the requirement is not satisfied. Applicants are encouraged to discuss concerns with the SFC prior to submitting an application. The SFC is cognizant of the fact that the application of these elements would be different taking into account a corporation’s business model and complexity of its business lines, etc; therefore, the competence requirements will be administered in a pragmatic manner.

The following is a non-exhaustive list of elements that the SFC will consider in assessing the competence of a business:

Business (such as, business lines, target clientele, products and services, remuneration model, modes of operation for instance automation systems and outsourcing arrangements, risk analysis)
Cooperate governance (such as, the shareholding structure, organisational structure, policies and procedures, whether the committees are adequately composed and organised, systems and controls to supervise).
Staff competencies (the application should show through the policies and procedures that positions are taken by suitably qualified staff and that there are arrangements in place to ensure updated operational and control manuals are distributed to staff and accessible, as well as policies and procedures to ensure staff compliance with CTP requirements).
Internal controls (whether the internal controls are in accordance with the relevant codes and guidelines, proper audit trails are maintained and adequate reporting systems are established, as well as if the applicant ensures data integrity and consistent data flow).
Risk management (such as, the setting of exposure limits and communication of the same, as well as how they are monitored and measures, procedures to deal with exceptions to the risk limits, capital adequacy, policy review schedule, stress testing, and also the appointment of an independent and appropriate risk manager).
Compliance (policies and procedures should ensure compliance with all applicable law and regulations and that non-compliance is dealt with, as well as that the information submitted to the SFC is complete and accurate. There should also be adequate internal control systems to address conflicts of interests. Where the applicant operates outside Hong Kong, they must illustrate they are fully compliant with the relevant law and regulations of that jurisdictions, as well as risk management pertaining to any branches).

Capital Requirements

The platform operator must at all times maintain a paid-up share capital of at least HK $5,000,000.

Additionally, a platform operator must at all times maintain liquid capital which is not less than minimum liquid capital calculated in accordance with Part 4 of the Financial Resources Rules, the liquid capital will then be the higher of HK $3,000,000 and the basic amount defined in section 2 of the Financial Resources Rules.

In the event that capital falls below 120% of its required liquid capital or 50% below the liquid capital amount stated in the most recent return submitted to the SFC then the SFC must be notified as soon as possible and in any event within one business day of the platform operator becoming aware of the matter.

Capital

What Can FAI Comply do for Your Business?

We undertake the preparation and submission of applications to the SFC and provide post-submission support leading up to the granting of the license, which authorises companies to provide investment services in accordance to applicable laws and regulations.

Consulting on services, and design of the VATP/VASP structure

Preparation of the Application File

Completion of the Application Form
With input from you, where required, preparation of the applicant’s:
- Internal Operations and AML Manuals according to the law
- Business Plan
- Risk Management, Conflict of Interest and other policies and procedures.