The digital assets industry has found a new home in Hong Kong. The city’s regulators initially rolled out their comprehensive licensing regime in 2019, and have since further refined it multiple times. Starting June 1st of 2023, all virtual asset trading platforms, whether already operating or being created, have to either start the application process or cease their operations.

It is important to understand that businesses intending to apply for a license cannot simply continue practices that would not be allowed under the licensing regime — they have to take concrete steps to cease such services or products and operate as they would if they were already licensed. Similarly, if a trading platform has no intention of applying for a license, it is required to wind down its operations. Therefore, it is highly important to understand which type of license suits best for each business.

Type 1, Dealing in Securities, and Type 2, Dealing in Futures Contracts, are the most important types of regulated activity for brokers/dealers in Hong Kong. If an existing broker in Hong Kong wanted to extend their services to virtual assets, they would need to apply to the SFC for approval of a so-called “uplift” of their license to include virtual assets. This includes answering a detailed questionnaire, and proving that the company has employed people with sufficient knowledge and experience.

Another relevant license type is Type 9, Asset Management. This license enables investment managers to manage client assets and can also be “uplifted” to enable the asset manager to invest more than 10% of assets under management (AUM) into virtual assets. Again, the applicant will need to prove that they have staff with the requisite knowledge, competence, and experience to invest in virtual assets.

Hong Kong’s comprehensive licensing regime focuses on investor asset protection. By extending it to include retail investors as well as professional investors, the regulators have solidified Hong Kong’s position as the international financial center of choice for both investors and high-quality virtual asset service providers. The ability for retail investors to access virtual assets through Hong Kong-based virtual asset platforms as well as through local securities brokers will be a significant driver of revenue for many firms and will facilitate the financial inclusion of the investing public of Hong Kong in this important new asset class.

To operate a Virtual Asset Trading Platform (VATP), or Virtual Asset Service Provider (VASP), the applicant is required to hold both a Type 1 and Type 7 (Automated Trading Platform) license. The VATP/VASP application process is much more involved than other applications, as the subject matter is much more complex. Core areas that are queried include but are not limited to, custody, AML/KYC, trading operations, market surveillance, cybersecurity, and risk management.

Hong Kong is already ahead of other international financial centers when it comes to having a robust licensing and supervisory framework. The strength of this framework enables Hong Kong to continue establishing itself as the leading digital asset center of the world, where digital asset business can be conducted in a professional, institutional way.

Written by Donald Day, Chief Operating Officer, VDX

With Contribution from Yiwei Wang