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According to its Position Paper: Regulation of Virtual Asset Trading Platforms (the Position Paper), issued on 6 November 2019, the SFC introduced a voluntary, opt-in licensing regime for VATPs (the Voluntary Licensing Regime). The SFC has reiterated in the Position Paper that VATP operators that trade only non-security virtual assets are not regarded as carrying out 'regulated activities' for the purpose of the SFO, and that these platform operators will not be eligible to apply for an SFC licence under the Voluntary Licensing Regime. Nevertheless, if a platform operator decides to 'opt-in' to the SFC's regulatory remit by offering at least one security token on its platform, the SFC can grant licences for Types 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities. SFC will view all virtual asset trading activities (whether they are traded as securities or not) holistically and supervise their infrastructure, core fitness, properness, and conduct.1
A VATP operator (the licensed VATP operator) will be subject to certain licensing conditions if the SFC grants the licenses (Types 1 and 7) outlined in the Position Paper. As specified in the SFC Code of Conduct and guidelines, circulars, and FAQs published periodically by the SFC, licensed VATP operators must also comply with all other regulatory requirements.1
This voluntary opt-in licensing regime under the Position Paper could, however, be supplemented by the mandatory licensing regime outlined in the Consultation Conclusions published by the Financial Services and Treasury Bureau (FSTB) in May 2021. These were published after a public consultation conducted between 3 November 2020 and 31 January 2021 on various legislative proposals to enhance the anti-money laundering and counter-terrorist financing regulation in Hong Kong, which included a proposal to introduce a new licensing regime for virtual asset services providers (VASPs) under the AMLO. Those who operate a virtual asset exchange, namely a VATP, that comes into custody, control, power, or possession of any money or virtual assets will be required to obtain a licence from the SFC (the VASP Licensing Regime) under this new licensing regime. If the actual transactions are conducted outside the platform, and the platform does not come into possession of any money or any virtual asset at any time during the underlying transactions, peer-to-peer trading platforms are not considered virtual asset exchanges under this definition. In the same vein, VASP Licensing Regime would not cover over-the-counter trades at first.1
On 28 January 2022, the SFC and HKMA released the Joint Circular – an updated regulatory framework governing virtual asset-related products sales, dealing services implementation and advisory services provision. Intermediaries authorised to conduct Type 1 regulated activities (dealing in securities) may provide virtual asset dealing services, as long as they partner with licensed VATPs registered by the SFC. Furthermore, these services may only be made available to professional investors who are already clients of said intermediaries.1
Section 103 of the SFO (the Securities and Futures Ordinance) forbids the publicizing of offers and invitations to participate in a collective investment scheme (CIS). Such schemes come under the definition of 'securities' found in Paragraph (d) of Schedule 1. CISs are investments that involve contributions from many investors, which includes modern equivalents of unit trusts, mutual funds, and other similar arrangements. Breaking it down into simpler terms, four conditions must be met for something to be defined as a CIS:
As a consequence, if a product constitutes an interest in a CIS, it will also fall within the definition of securities under the SFO, and be subject to all licensing requirements.1
On 27 March 2020, the IRD released its redesigned Departmental Interpretation and Practice Notes (DIPN) No. 39, which outlines how it treats different digital assets. Tokens are classified according to their function rather than by their name. There are three categories of digital assets: payment tokens, security tokens and utility tokens. While the DIPN contains certain guidelines on digital asset treatment, there is still a number of points that require further clarification on questions such as whether a transfer of security tokens incurs stamp duty obligations or not.1
Marketing and distributing security tokens (whether in Hong Kong or targeting Hong Kong investors) requires a license or registration for Type 1 regulated activities (dealing in securities) under the SFO. Currently, professional investors are the only ones allowed to market to.1
In January 2022, the SFC and HKMA released a joint circular specifying an updated regulatory framework regarding virtual asset products and services. This gave increased clarity on how these activities are regulated in Hong Kong. The document outlines that certain derivative products could be offered to retail investors when traded on authorised exchanges. In addition, the HKMA announced their intention for authorised institutions to entertain investments, loans and card payments for virtual assets, as long as adequate risk management is applied. Collectively, the two documents may create avenues for digital assets to become part of the local economy in daily life.1
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