SFC adopts new approach to virtual asset trading platforms

6 Nov, 2019 19:06
source: HKSFC

The Securities and Futures Commission (SFC) today issued a position paper setting out a new regulatory framework for virtual asset trading platforms (Note 1). Platforms which operate in Hong Kong and offer trading of at least one security token (Note 2) may now apply to be licensed by the SFC (Note 3).

The position paper emphasises that the SFC will only grant licences to platform operators which are capable of meeting robust regulatory standards. These standards are comparable to those which apply to licensed securities brokers and automated trading venues but also incorporate additional requirements to address specific risks associated with virtual assets.

For example, the SFC will impose licensing conditions requiring that platform operators offer their services exclusively to professional investors, only service clients who have sufficient knowledge of virtual assets and maintain stringent criteria for the inclusion of virtual assets on their platforms. In addition, licensed platforms will be placed in the SFC Regulatory Sandbox for a period of close and intensive supervision (Note 4).

“Regulators need to be open to the benefits of innovation, but they should also be ready to tackle the risks to investors which some financial technologies give rise to,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “We have decided to move ahead with this new regulatory framework because it is clearly in the public interest to enable investors to choose to participate in properly regulated virtual asset trading platforms.”

The SFC’s new regulatory framework is aligned with the recommendations of international standard setting bodies (Note 5). It will help investors identify trading platforms which agree to be regulated or supervised. However, the SFC would like to make clear that virtual assets traded on licensed platforms will not be subject to the same kind of regulation which applies to traditional offerings of securities or collective investment schemes. Moreover, the SFC has no power to grant a licence to or supervise platforms which only trade virtual assets or tokens which do not qualify as securities under Hong Kong law.

Also today, the SFC issued a statement warning investors about the risks associated with the purchase of virtual asset futures contracts (Note 6), as they are largely unregulated, highly leveraged and subject to extreme price volatility.

1. On 1 November 2018, the SFC issued a statement setting out a conceptual framework for the potential regulation of virtual asset trading platforms. A virtual asset is a digital representation of value. Examples include “cryptocurrencies”, “crypto-assets” and “digital tokens”.
2. Security tokens are virtual assets which fall within the definition of “securities” under the Securities and Futures Ordinance.
3. By offering trading in at least one security token, the operator would fall within the jurisdiction of the SFC and require a licence for Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities.
4. On 29 September 2017, the SFC launched its Regulatory Sandbox to provide a confined regulatory environment for qualified firms to conduct regulated activities utilising financial technologies.
5. A consultation report published by the International Organization of Securities Commissions in May 2019 sets out key considerations and toolkits for jurisdictions which have legal authority to regulate trading activities on virtual asset trading platforms.
6. Virtual asset futures contracts are typically instruments which allow investors to speculate on the prices of virtual assets at a future date.