Conventus Law

Conventus Law

by

The SFC’s Initiatives To Grow Hong Kong’s Virtual Asset Market.

During Fintech Week 2024 on 28 October 2024 (check out what our team was up to during the event here), the SFC’s Executive Director of Intermediaries outlined several initiatives aimed at advancing and expanding Hong Kong’s virtual asset market: 

  1. Swift Licensing for Virtual Asset Trading Platforms (VATPs) 
  1. Consultative Panel for VATPs 
  1. Further regulatory building blocks relating to virtual assets 
  1. Tokenisation and Project Ensemble 

As we start 2025, it’s a great opportunity to review the latest developments in Hong Kong’s virtual asset landscape. 

1) Swift Licensing for Virtual Asset Trading Platforms (VATPs) 

Since Fintech Week, four more VATPs have been licensed, bringing the number of licenced VATPs in Hong Kong to seven. 11 applications are still underway. The SFC remains focused on proceeding the “deemed to be licensed” applicants that already operate in Hong Kong. 

Instead of a traditional document review, the SFC conducted risk-based on-site inspections to evaluate compliance in areas like client asset safety, cybersecurity, and anti-money laundering (AML) practices. 

The SFC has now adopted a three-pronged approach for processing VATP licensing applications: 

  • Applicants must agree on rectification actions based on inspection feedback. 
  • Licenses will be granted, allowing restricted operations while they address issues. 
  • The SFC will collaborate with licensed VATPs for an external review to enhance their robustness. Once this is completed, the platform can operate with the scope restriction lifted. 

2) Consultative panel for VATPs 

To promote a sustainable business environment while balancing regulatory priorities, the SFC will establish an official consultative panel in early 2025, comprising senior management representatives from all licensed platforms. This panel aims to ensure that all voices are heard and will help prioritize developments that incorporate investor safeguards. 

The SFC anticipates that the panel will foster community, transparency, and shared responsibility among participants. It is expected that the panel’s discussions will lead to a comprehensive white paper outlining a roadmap for the development of virtual asset products and services, along with recommendations for improvements in compliance and risk management. 

3) Further regulatory building blocks relating to virtual assets 

The SFC is working to complete the regulatory framework for virtual assets by drawing parallels with securities trading, settlement, and custody. The goal is to enhance liquidity aggregation for effective price formation and risk transfer. 

To this end, the SFC is engaging with the virtual asset community to gain insights into the business models of asset managers, market makers, and brokers, as well as to improve AML-compliant processes for asset transfers. Understanding needed market structure enhancements and the role of third-party custodians in safeguarding assets is also a priority. 

While leveraging existing regulations, the SFC is collaborating with the Hong Kong Government to establish new legislative frameworks and introduce licensing regimes through public consultations. 

4) Tokenisation and Project Ensemble 

The SFC is advancing its tokenisation efforts following last year’s circulars (read our articles here and here to find out more) and the launch of Project Ensemble. As a key member of the HKMA’s Project Ensemble, the SFC is co-leading initiatives to establish a unified standard for settling tokenised asset transactions in the asset management sector. Financial institutions involved have proposed numerous innovative use cases, including a local bank testing tokenised deposits to facilitate subscriptions and redemptions of tokenised Money Market Funds for institutional clients. 

Additionally, the HKMA plans to implement a fiat-referenced stablecoin regime, potentially introducing regulated stablecoins for public use by 2025. As covered in our article here, the Hong Kong Government published the much-anticipated Stablecoins Bill in the gazette. The Stablecoins Bill went through its first reading in the Legislative Council on 18 December 2024. To maximize the benefits of settlement efficiency and certainty, it is crucial to explore how virtual assets traded on VATPs will interact with these regulated stablecoins. 

To learn more about Hong Kong’s virtual asset landscape, contact us today. 

WRITTEN BY

For further information, please contact:

Basil Hwang – Hauzen LLP,
basilhwang@hauzen.hk

Basil Hwang – Hauzen LLP

Basil Hwang - Hauzen LLP. Basil specializes in financial markets regulation, disputes, and complex transactions. With extensive experience in Hong Kong and Greater China, he provides insightful, results-driven advice to clients.

Basil is a specialist in financial markets regulation, disputes and investigations, as well as contentious and complex transactions. He represents public companies, licensed intermediaries and investors.

Basil is recognized by clients for his business insight and sensible advice, his familiarity with regulations and business practices in Hong Kong and Greater China, and his ability to deliver results for clients.

Prior to founding Hauzen LLP, he founded and was the Managing Partner of a US law firm for seven years, managed and ran a Hong Kong Mainboard-listed company, and was general counsel and independent director of other companies listed in Hong Kong and Singapore.

Basil is admitted as a solicitor in Hong Kong, as a solicitor in England and Wales, and as an advocate and solicitor in Singapore. He is fluent in English, Mandarin and Cantonese.

Register for your monthly Asia legal updates from Conventus Law

Error: Contact form not found.

RELATED ARTICLES