The Hong Kong Securities and Futures Commission (SFC) has established a comprehensive regulatory framework for virtual asset trading platforms, setting a global benchmark for compliance, investor protection, and market integrity. As the Web3 and blockchain ecosystem continues to evolve, understanding the nuances of Hong Kong’s dual licensing system—comprising the Type 1 (Dealing in Securities) and Type 7 (Automated Trading Services) licenses under the Securities and Futures Ordinance, along with the Virtual Asset Service Provider (VASP) license under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022—is essential for any platform aiming to operate legally in the region.
This guide breaks down the core requirements, compliance obligations, and strategic considerations for obtaining and maintaining virtual asset exchange licenses in Hong Kong.
The Dual Licensing Requirement
To legally operate a virtual asset trading platform in Hong Kong, entities must secure both the SFC’s Type 1 and Type 7 licenses and the VASP license. This dual licensing regime ensures that platforms meet both securities regulation and anti-money laundering (AML) standards.
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The SFC has streamlined the application process: applicants can now submit a single integrated form indicating their intent to apply for both sets of licenses. This simplification reduces administrative burden while ensuring full regulatory coverage.
For platforms already holding Type 1 and Type 7 licenses—currently only OSL and Hashkey—a simplified VASP application process applies. Similarly, those in the middle of a Type 1/7 application must also file for a VASP license, with both applications processed concurrently.
Key Regulatory Requirements for Licensed Platforms
1. Retail Investor Access Under Strict Conditions
While most virtual asset trading remains restricted to professional investors, the SFC is exploring limited access for retail investors under stringent safeguards:
- Platforms must conduct knowledge assessments or provide educational training.
- Only qualified large-cap virtual assets may be offered.
- A Token Listing Committee must oversee token inclusion, conducting due diligence including smart contract audits.
- Platforms must submit a “non-security” legal opinion to the SFC for each listed token.
This cautious approach balances innovation with investor protection.
2. Prohibition on Proprietary Trading and Market Manipulation
To prevent conflicts of interest, licensed platforms are prohibited from engaging in proprietary trading or market-making activities using their own capital. The only exception is back-to-back hedging transactions executed offline.
Additionally, platforms must implement robust systems to detect, prevent, and report market manipulation—ensuring fair and transparent trading environments.
3. Secure Custody of Client Assets
Client funds and digital assets must be held in trust by a wholly-owned subsidiary that holds a Trust or Company Service Provider (TCSP) license. This subsidiary may only manage client assets and cannot engage in other business activities.
At least 98% of client virtual assets must be stored offline in cold wallets, with private keys securely stored within Hong Kong to minimize hacking risks.
4. Flexible User Protection Mechanisms
Previously, platforms were required to purchase third-party insurance. Recognizing market challenges, the SFC now allows alternative protection mechanisms:
- Third-party insurance coverage, or
- Reserved funds held in trust by the platform or its affiliate
This flexibility supports operational feasibility without compromising user security.
5. No Financial Assistance or Leverage
Platforms are prohibited from offering loans or leveraged trading services to clients. This restriction mitigates excessive risk-taking and aligns with conservative risk management principles.
Transition Arrangements and Eligibility
Platforms operating in Hong Kong before June 1, 2023, with a “meaningful and substantial business presence,” could apply for transitional arrangements by February 29, 2024. Upon submission, such platforms are “deemed licensed” until the SFC issues a final decision.
However, entities without a genuine pre-existing operation do not qualify for this grace period and must obtain full licensing before commencing business.
If the SFC determines that an applicant fails to meet licensing criteria, it may revoke deemed licensing status. In such cases, the platform must cease operations by May 31, 2024, or within three months of notification—whichever is later.
Core Compliance Frameworks
Token Listing and Oversight
Platforms must establish a formal Token Listing and Review Committee responsible for:
- Evaluating new tokens for listing
- Suspending or delisting underperforming or risky assets
- Conducting due diligence on team background, jurisdictional legality, liquidity, technology, and legal risks
All tokens available to retail investors must meet specific eligibility criteria, including minimum market capitalization and trading volume thresholds.
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Smart contract audits by independent firms are mandatory before any token listing—a critical step in preventing exploits and fraud.
Anti-Money Laundering (AML) Compliance
All licensed platforms must adhere to the SFC’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing. Key obligations include:
- Robust Know-Your-Customer (KYC) procedures
- Transaction monitoring and suspicious activity reporting
- Geolocation controls to block users from restricted jurisdictions
- Ongoing staff training on AML practices
Financial Soundness and Transparency
Platforms must maintain sufficient liquid assets in Hong Kong to cover operational risks. They are also required to provide clear, accurate disclosures on:
- Token prices and trading volumes
- Project team backgrounds
- Jurisdictional restrictions on trading
These transparency measures enhance market trust and informed decision-making.
Frequently Asked Questions (FAQ)
Q: Can retail investors trade crypto on licensed platforms in Hong Kong?
A: Yes, but only on approved large-cap virtual assets and under strict conditions including knowledge testing and platform oversight.
Q: What happens if a platform fails to get fully licensed after being “deemed licensed”?
A: The platform must wind down its Hong Kong operations by May 31, 2024, or within three months of SFC notification—whichever is later.
Q: Are derivatives allowed on licensed virtual asset platforms?
A: Currently prohibited, but the SFC is consulting on potential future frameworks for regulated derivative products.
Q: Is insurance still mandatory for user protection?
A: Not exclusively—platforms may now choose between insurance or setting aside reserved funds in trust.
Q: How does the SFC define a “meaningful and substantial business”?
A: The SFC evaluates multiple factors including local presence, staffing, customer base, transaction volume, and operational history in Hong Kong.
Q: Do existing Type 1/7 license holders need to apply for a VASP license?
A: Yes—even current licensees like OSL and Hashkey must apply separately for VASP status under a simplified process.
Final Thoughts
Hong Kong’s regulatory framework sets a high bar for virtual asset platforms—prioritizing security, transparency, and investor protection. With clear rules on custody, listing standards, AML compliance, and dual licensing, the city positions itself as a trusted hub for institutional-grade digital asset trading.
As the ecosystem matures, ongoing engagement with regulators and proactive compliance planning will be crucial for long-term success.
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