SFC outlines new regulatory framework for virtual asset trading platforms, HKMA highlights recent FinTech initiatives, and PBOC discusses China’s forthcoming central bank digital currency.
The fourth annual Hong Kong FinTech Week conference kicked off with a major announcement from Mr. Ashley Alder, Chief Executive Officer of the Securities and Futures Commission (SFC), who introduced a new, formalized regulatory framework for virtual asset trading platforms (VATPs). A panel of central bankers also discussed stablecoins and central bank digital currencies, including the People’s Bank of China’s (PBoC) forthcoming central bank digital currency, referred to as the digital currency / electronic payment (DCEP) coin.
Last year, the SFC published its conceptual framework for the potential regulation of VATPs and, since then, the SFC has worked behind the scenes with some of Hong Kong’s existing VATPs to better understand their operations, and to explain the SFC’s regulatory expectations, while also assessing VATPs capability to comply with the SFC’s expected requirements.
Importantly, under Hong Kong’s securities laws, the SFC only has power to regulate a VATP that trades virtual assets or tokens that are legally “securities” or “futures contracts.” Bitcoin and other, more familiar, cryptoassets are not securities, and nothing in the SFC’s new framework alters this position. The new framework therefore only applies to VATPs, which include at least one security virtual asset or token for trading. Thereafter, the SFC’s new rules will apply to all of a VATP’s operations, even if the vast majority of other virtual assets or tokens traded on the platform are not securities.
Essentially, the new regulatory framework allows a VATP to “opt in” to SFC regulation by electing to trade at least one security virtual asset. The SFC’s view is that the principal benefit of being regulated is that the VATP would be able to represent itself to clients as a supervised business. Once licenses are granted to the VATPs that choose to opt in, investors will then be able to distinguish easily between regulated platforms and platforms that are not regulated.
VATPs that wish to opt in under the new framework may apply to the SFC to be licensed for Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities. The SFC will only accept license applications from centralized VATPs that are based in Hong Kong, so decentralized and peer-to-peer VATPs will not be able to obtain licenses (for the time being, at least).
License applicants must demonstrate that they are willing and able to comply with the expected standards under the regulatory framework published by the SFC. Under the key licensing conditions that will be imposed on licensees, a VATP operator must:
Notably, SFC-licensed VATPs should only include security virtual assets that are (i) asset-backed; (ii) approved or qualified by, or registered with regulators in comparable jurisdictions; and (iii) with a post-issuance track record of 12 months.
In light of the intensive assessment process and to meet the expected regulatory standards, the time required for processing a licensing application from a VATP may be longer than the 16-week period that is typically expected for a standard securities licensing application.
If a platform operator is licensed, its infrastructure, core fitness, and properness and conduct of virtual asset trading activities should be viewed as a whole. Although trading activities in non-security virtual assets or tokens are not “regulated activities,” the SFC’s regulatory remit over all of these aspects of platform operations will be engaged once a platform involves trading activities in security virtual assets or tokens, even if these activities are a small part of its business.
The SFC has stated that it will continue to monitor the evolution of cryptoassets and work with the Hong Kong government to explore the need for legislative changes in the longer term.
Other FinTech Initiatives in Hong Kong
Mr. Eddie Yue, Chief Executive of the HKMA, highlighted a series of recent initiatives aimed to foster the FinTech ecosystem in Hong Kong:
Central Bank Digital Currencies
In a panel entitled “Central Bank Digital Currencies: Shaping the Future of Payments,” Mr. Mu Changchun, Director-General of the Institute of Digital Currency of the PBoC, was asked about the PBoC’s plans to release the DCEP coin. Mr. Mu highlighted the following points: