A quick look at the key points of Hong Kong’s new encryption policy this week
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1. Retail investors are allowed to trade qualified virtual currency assets, and there is not only one inclusion criterion
2. Stable currency regulation will be implemented in 23/24, and retail transactions will not be opened before then
3. Licensed platforms are not allowed to participate in staking and other businesses
4. Reiterate and strengthen regulatory restrictions on suspected money laundering
This week, Hong Kong has made frequent moves in the direction of encryption-related policies. Not only did the Securities Regulatory Commission hold a press conference on the 23rd to publish a summary of virtual assets, but it also published a number of guidelines related to cryptocurrencies in the Gazette yesterday. Retail transactions, stable coins, money laundering and other aspects have been further explained and explained. The following is the detailed content summarized by Odaily.
retail trading
In its response on the 23rd, the China Securities Regulatory Commission mentioned relevant news about providing services to retail investors, and its response was as follows:
The Council noted that respondents expressed strong support for allowing licensed virtual asset trading platforms to provide services to retail investors. The Commission will implement the proposal to allow licensed virtual asset trading platforms to provide services to retail investors.
As explained in the consultation paper, the Council agrees that licensed virtual asset trading platforms should comply with a series of sound investment rules covering establishing business relationships with customers, governance, disclosure, and token due diligence and inclusion before providing trading services to retail investors. safeguard measures. We also agree that retail investors must understand the risks involved in investing in virtual assets. Before making any type of investment decision, investors should understand the relevant characteristics and risks, and be prepared to accept losses. The SFC's approval of a licensed virtual asset trading platform to include a virtual asset for retail trading is not a recommendation or endorsement of the virtual asset, nor is it a guarantee of the commercial desirability or performance of the virtual asset. The SFC will continue to work with the Investor and Financial Education Committee to educate investors on all aspects of virtual assets and their transactions.
At the same time, the China Securities Regulatory Commission also supports licensed trading platforms that open retail businesses to establish business relationships with customers to protect general investors. The specific responses are as follows:
The Council welcomes the general support for the imposition of requirements for establishing business relationships with retail customers.
With regard to whether individual professional investors should be exempted from the requirements for establishing business relationships with clients, the proposed rules applicable to individual professional investors are related to the application of intermediaries without exception when providing services to individual professional investors Existing provisions for knowledge assessment and suitability of derivatives are consistent. Given that the requirements for establishing business relationships with clients are designed in the spirit of suitability, we continue to believe that individual professional investors should enjoy protections comparable to retail investors.The Council has given due consideration to proposals to relax certain requirements for establishing business relationships with retail clients in certain circumstances. However, we believe that retail investors are generally unlikely to understand the terms, features and risks of virtual assets. In addition, the buying and selling on the virtual asset trading platform is carried out automatically. Even if a certain transaction is inappropriate, the virtual asset trading platform has no ability to intervene. Therefore, it is extremely important to ensure suitability when establishing business relationships with retail customers. This can only be achieved by fully implementing the recommended regulations for establishing business relations with customers. For example, the proposed requirement to assess a client's risk tolerance is an important part of the existing suitability requirement. Since most virtual assets carry high risks, virtual assets are generally only suitable for customers with higher risk tolerance.
Therefore, virtual asset trading platforms should not be exempted from risk tolerance assessment even if retail customers have knowledge of virtual assets.
Given the importance of ensuring that retail investors have sufficient knowledge of virtual assets before allowing them to trade in virtual assets, the SFC considers that platform operators should conduct a comprehensive assessment of an investor's understanding of the nature and risks of virtual assets, which may include an assessment of the investor's past The virtual asset training or course received, the investor's current or past working experience related to virtual assets, and the investor's past trading experience related to virtual assets. Therefore, we have made corresponding revisions to the Guidelines for Virtual Asset Trading Platforms. Since the knowledge assessment requirements apply to both virtual asset trading platforms and other intermediaries engaged in virtual asset-related activities, we will also make corresponding amendments so that all intermediaries are subject to uniform regulation.
The SFC is fully aware of respondents' request for more guidance on the requirements for establishing business relationships with clients. We will issue further guidance in the form of frequently asked questions (for example, on how to assess customers' risk tolerance and risk tolerance for virtual assets). While we understand that the industry may wish to obtain more precise guidance, such as specifying risk exposure limits for investors with different financial conditions and risk tolerance levels, it may not be appropriate for the SFC to prescribe guidance in this regard because platform operators (rather than the SFC) are best able to impose limits based on best-effort KYC processes.
Virtual Assets and StablecoinsIn addition, the China Securities Regulatory Commission has also given relevant opinions on what kind of virtual assets are allowed to be included in retail transactions, and at the same time revised theGuidelines for Virtual Asset Trading Platforms
, the China Securities Regulatory Commission responded to the relevant questions as follows:
As explained in the consultation paper, in the traditional securities market, investment products offered to retail investors in Hong Kong are subject to the investment offer system and the prospectus system. Retail products are generally regulated by the SFC at the product level. The relevant products must have been reviewed by the SFC or reviewed their offer and promotional documents before the public offering. Regulation does not apply to non-security tokens; admittedly, most, if not all, non-security tokens are not regulated at the product level by regulators anywhere. This explains why the SFC needs approval before tokens can be included on licensed virtual asset trading platforms for retail trading.
Therefore, we recommend that additional minimum guidelines be imposed on tokens before they can be bought and sold by retail investors. The proposed criteria are based on the related principle that tokens that can be traded by retail investors should be less susceptible to manipulative market activity, not only on the platform operated by the platform operator, but also in the virtual asset market in general. impact, as most (if not all) virtual asset trading platforms globally are currently unregulated, or regulated only from AML/CFT aspects. Our proposed regulations therefore require that, to be eligible for trading by retail investors, a token must be a qualifying large-scale virtual asset, i.e. it has been included in at least two accepted indices produced by two independent index providers among.
We thank respondents for submitting comments on accepted indices and the independence of index providers. We agree that index providers should properly compose and manage their indices, including ensuring the quality and robustness of their indices. The criteria used to determine whether an index is an accepted index are developed in accordance with the relevant principles, and the introduction of an index provider should issue a traditional certificate. The additional provision of experience with the index side of the market is intended to increase reliability. We agree that, as raised by some respondents, the reliability of relevant data and possible conflicts of interest will affect the robustness of the index.We therefore consider it appropriate to further require that index providers with experience in publishing indices for traditional securities markets comply with the IOSCO Principles for Financial Benchmarks so that relevant index providers have suitable internal Arrangements to safeguard the robustness of its indices and ensure their quality. In addition to the two index providers being independent from each other, we will also require that they be independent from virtual asset issuers and platform operators. We agree that, as far as virtual assets are concerned, a large market capitalization does not automatically mean that it has high liquidity.
The SFC wishes to reiterate that inclusion in the two accepted indices is not the only criterion for inclusion of a virtual asset. In fact it is only a minimum standard. This underscores the importance of due diligence by licensed virtual asset trading platforms.
Platform operators are required to conduct further due diligence in accordance with the platform’s token inclusion criteria and ensure that tokens admitted for trading comply with the relevant criteria. Where tokens are included for retail trading, the platform operator must also ensure that the tokens are highly liquid. Platform operators should also ensure that the tokens being included continue to comply with the relevant token inclusion criteria. As the admissibility and continued eligibility for trading of tokens is dependent on the due diligence performed by the platform operator, the SFC publishes a list of virtual assets, accepted indices or index providers that are eligible for retail trading and inappropriate.
The response to stablecoins is as follows:
The Hong Kong Monetary Authority (HKMA) has published a summary of its discussion paper on crypto-assets and stablecoins in January 2023, and regulatory arrangements for stablecoins are expected to be implemented in 2023/24. Until stablecoins are regulated in Hong Kong, we believe that stablecoins should not be included for retail trading.
trading platform
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In line with the current situation, many platforms have recently launched the Hong Kong station/Hong Kong version platform. Regarding the relevant issues and details of license application, the CSRC responded as follows:
The Council receives many requests for clarification on various technical matters. For example, some respondents questioned the scope of "providing virtual asset services" as defined in the Anti-Money Laundering Ordinance, including whether over-the-counter virtual asset trading activities and virtual asset brokerage activities are covered.
Regarding the dual licensing arrangement, respondents asked whether it is necessary to obtain licenses under both the SFO and the AMLO, especially since some platform operators may not intend to provide trading of security tokens. Given that non-security tokens may evolve into security tokens, respondents also indicated that platform operators could terminate trading services for that particular security token, or only allow clients to reduce their positions in that token, A license under the Securities and Futures Ordinance is therefore not required. With regard to the dual licensing arrangement, respondents also asked whether a dual-licensed virtual asset trading platform is required to have two or four responsible officers, and whether there is a shortage of personnel with experience in both virtual assets and traditional securities Take a pragmatic approach when assessing competencies, including relevant industry experience of responsible persons.
With regard to the regulations on external assessment reports, the questions raised include whether firms that have drafted policies and procedures for virtual asset trading platform applicants and provided system implementation opinions can serve as assessment experts in the first phase report and the second phase report; Whether the stage report can be submitted together with the license application; whether a platform operator who intends to apply for a license can submit a self-selected external assessment expert’s competence statement to the SFC before submitting the external assessment report; and if it is an established and operating virtual Asset trading platform, can only submit the second phase report.
Regarding the scope of "providing virtual asset services", the regime under the AMLO will cover centralized virtual asset trading platforms that operate in a manner similar to traditional automated trading venues licensed under the SFO. Such platforms usually provide customers with virtual asset trading services using an automated trading system that can match customer trading instructions, and provide additional custody services along with such trading services. Therefore, those who provide virtual asset services (such as off-exchange virtual asset trading activities and virtual asset brokerage activities) without automated trading systems and additional custody services will not fall within the scope of the regime under the AMLO.
As we explained in our consultation paper, given that the terms and characteristics of virtual assets may evolve over time, the classification of a virtual asset may change from a non-security token to a security token (and vice versa). In order to avoid violating the requirements of the licensing system and ensure the continuous operation of its business, the virtual asset trading platform is applying for approval in accordance with the existing system under the Securities and Futures Ordinance and the virtual asset service provider system under the Anti-Money Laundering Ordinance. Prudent approach. This Council has noticed that there are comments that virtual asset trading platforms can only suspend and eventually revoke the trading services of a specific token that has evolved into a security token, instead of obtaining a license under the Securities and Futures Ordinance. Very concerned. Fundamentally, removal of tokens that have been accepted for sale is not necessarily in the best interest of customers and should only be used as a last resort. The statement that clients are only allowed to reduce their positions in a particular token is also based on a misunderstanding, as any reduction order from one client will be matched with a buy order from another client.
We will adopt a simplified application process so that dual license applications only need to submit one consolidated application form. As for the responsible officer, the officer may be approved under both the Securities and Futures Ordinance and the Anti-Money Laundering Ordinance. Therefore, a dual-licensed virtual asset trading platform does not need to have four different responsible officers. For the lack of talents with both virtual assets and traditional securities experience in the industry, we are willing to adopt a pragmatic approach, and the details will be supplemented through more guidelines.As stated in the Consultation Paper, the requirement for an external assessment report is proposed to simplify the application process, especially since the industry may not fully understand our regulatory expectations. We expect external assessment experts to be able to assist the applicant in substance, for example by advising on or drafting the applicant's policies and procedures, advising on system implementation, and when identifying the design of policies, procedures, systems and controls Recommend improvements or corrective actions when there are deficiencies in implementation or effectiveness. Therefore, it is acceptable that external evaluation experts have been involved before and during the Phase 1 and Phase 2 reports. (The scope of the external assessment report (also attached to the consultation paper) and, where appropriate, further guidance will beSFC website
announced. )
As external assessment experts are expected to be involved in the early preparations for the licence, and the Phase 1 reporting requirement was introduced to simplify the application process, the Phase 1 report should be submitted together with the license application. In addition, as the industry may not fully understand our regulatory expectations for the time being, applicants for established and operating virtual asset trading platforms are still required to submit a phase one report. We encourage virtual asset trading platforms to discuss with the SFC’s Fintech Group in advance if they are unsure whether the proposed external assessment experts are sufficiently qualified.
Given the wide range of questions received, we will issue further guidance in the form of FAQs, circulars and licensing manuals on frequently asked questions related to the new virtual asset service provider regime under the AMLO.The coverage of the external assessment report (also included in the appendix of the consultation paper) and additional guidance (where appropriate) can be found atSFC website
view.
As for the relevant business scope of the licensed platform, the China Securities Regulatory Commission has also made a detailed explanation:
We agree that, as is the case with all other intermediaries, platform operators should not offer gratuities in connection with buying or selling specific virtual assets. This principle forms the basis for the requirement that platform operators should not place any advertisements relating to specific virtual assets. In light of the comments received, we have now explicitly prohibited gifts (other than discounts on fees or charges) in the Guidelines for Virtual Asset Trading Platforms. The SFC would also like to take this opportunity to remind platform operators of their responsibility to ensure that any product-specific material they post, whether on or off the platform, is factual, fair and impartial.
The SFC currently does not impose a post-account opening cooling-off period on retail clients of intermediaries carrying on other regulated activities, including the provision of automated trading services. As a platform operator is required to ensure suitability during the process of establishing a business relationship with a client, any retail client who has established a business relationship should have been assessed by the platform operator as suitable for trading virtual assets. A post-trade cooling-off period is also not feasible, as automated trading services involve matching clients' trades, and unwinding or canceling a trade would affect another client of the platform.
Generally speaking, the risks of holding customer virtual assets in offline storage are similar to the risks of custody of customer assets in traditional financial markets (i.e. misappropriation by employees and fraud). We have noticed that customers of traditional financial institutions have not obtained comprehensive insurance protection against the loss of customer assets, so we believe that there is room for lowering the protection threshold for holding customer virtual assets in offline storage, especially because licensed virtual asset trading platforms are subject to the " The Guidelines on Virtual Asset Trading Platforms are governed by a number of provisions regarding the management and custody of private keys, which are intended (among other things) to reduce the risk of employee collusion. However, because the risks of holding customers' virtual assets online and in other storage methods (mainly hacking and other cybersecurity risks) are not the risks usually associated with custody of customer assets in traditional financial markets, we still believe that holding customers' assets online and Customers' virtual assets held in other storage methods should be fully guaranteed by the compensation arrangement of the licensed virtual asset trading platform.
Since customer virtual assets are not fully insured against loss, we believe that a higher level of protection would be provided if the majority of customer virtual assets were held in offline storage where hacking and other cybersecurity risks are generally not present level. Therefore, on the basis that 98% of customers' virtual assets must continue to be held in offline storage, we plan to reduce the protection threshold for holding customers' virtual assets in offline storage to 50%. We note that licensed virtual asset trading platforms may also tend to hold less than 2 % of customer virtual assets.
In terms of what asset classes could form part of the compensation arrangement, we agree that bank guarantees and funds held in demand deposits or term deposits maturing within six months are acceptable. As far as virtual assets are concerned, we believe that holding the same reserve virtual assets as the client's virtual assets that are subject to the protection of the compensation arrangement has the advantage of reducing the market risk arising from the volatility of virtual assets.
We note that respondents have mixed views on whether to enter into an escrow arrangement for compensation arrangements, or whether licensed virtual asset trading platforms should be allowed to hold set aside funds. In our view, both arrangements are acceptable provided that the allocated funds are segregated from the assets of the platform operator and its group companies, set aside on trust and earmarked for the relevant purposes. Funds held by the Platform Operator or its affiliated entities should be held in segregated accounts with accredited financial institutions. The Guidelines for Virtual Asset Trading Platforms have been revised accordingly.
We agree that licensed virtual asset trading platforms should also have the flexibility to jointly or individually set up a fund pool in the form of an insurer to provide protection against the loss of their client assets. The "Virtual Asset Trading Platform Guidelines" have provided for the above flexibility.
Finally, we also agree that virtual assets forming part of compensation arrangements should be segregated from those of the platform operator and its group companies and held in offline storage by its associated entities. This is because associated entities are subject to a number of private key management and custody requirements in the Guidelines on Virtual Asset Trading Platforms, but third-party custodians may have substantially different or even insufficient custody standards.
We believe that to ensure the safekeeping of client assets, the ratio of offline to online storage should not be reduced, and the majority of client virtual assets should be held in offline storage where hacking and other cybersecurity risks generally do not exist. We also wish to remind platform operators that they should implement proper virtual asset withdrawal procedures and disclose these procedures to their clients. In particular, if the platform operator does not execute the customer's withdrawal request in real time, it should specify on its website how long it usually takes to transfer virtual assets to the customer's private wallet after receiving the customer's withdrawal request.
Regarding proprietary trading, we agree that liquidity on the trading platform is very important to clients. Therefore, the China Securities Regulatory Commission allows third-party bookmakers to conduct bookmaking activities. However, the current prohibition on proprietary trading is comprehensive and in fact prohibits even the group companies of licensed virtual asset trading platforms from holding any virtual asset positions. Accordingly, we have amended the requirements in the Guidelines on Virtual Asset Trading Platforms to allow affiliates to conduct transactions through channels other than licensed virtual asset trading platforms.
As far as program trading is concerned, the SFC would like to clarify that although platform operators are prohibited from providing program trading services to their clients, platform customers may use their own program trading systems for transactions conducted through licensed virtual asset trading platforms.
Regarding other common services in the virtual asset market (such as income, deposits and lending), the SFC does not allow licensed virtual asset trading platforms to provide these services, which is covered by paragraph 7.26 of the Guidelines on Virtual Asset Trading Platforms. In the final analysis, the main business of a licensed virtual asset trading platform is to act as an agent and provide a way for customers to match their orders. Any other activities may lead to potential conflicts of interest and require additional safeguards, therefore, licensed virtual asset trading platforms are not allowed to conduct such activities at this stage.
The most and deeply emphasized in the new regulations is undoubtedly the related issues of combating money laundering/terrorist financing. In this regard, the China Securities Regulatory Commission issued the "Guidelines on Combating Money Laundering Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the China Securities Regulatory Commission". "" made certain regulations on the transfer of virtual assets, and responded to related questions:
Fund transfer rules are a key measure for virtual asset service providers and financial institutions in the fight against money laundering/terrorist financing, as they provide the basic foundations needed for sanctions screening and transaction monitoring, among other risk mitigation measures. material. It also helps to prevent virtual asset transfers being processed for criminals and designated persons, and to detect such transfers as they occur.
Fund transfer rules are a key measure for virtual asset service providers and financial institutions in the fight against money laundering/terrorist financing, as they provide the basic foundations needed for sanctions screening and transaction monitoring, among other risk mitigation measures. material. It also helps to prevent virtual asset transfers being processed for criminals and designated persons, and to detect such transfers as they occur.
The Financial Action Task Force (FATF) reiterated that jurisdictions need to implement transfer rules as soon as possible, as the "sunrise problem" cannot be resolved until all virtual asset service providers and financial institutions operating in major jurisdictions comply with transfer rules got resolved.
Other major jurisdictions such as the US, Singapore, UK and Europe have implemented or are about to implement transfer rules 9 . Any delay in the implementation of the money transfer rules in Hong Kong will affect the competitiveness of our licensed virtual asset trading platforms as virtual asset service providers and financial institutions operating in other major jurisdictions will face risk management concerns Unable or unwilling to transact with them.
However, developing systems to facilitate the immediate submission of required information to collection agencies may take time, even though licensed virtual asset trading platforms have been well aware that the FATF has been advocating compliance with transfer rules for the past few years.
Respondents' doubts about submitting information immediately will be resolved over time, given that the active and rapid development of technology programs and networks of transfer rules in recent years has gradually eased the difficulty of exchanging required information between agencies. Furthermore, more and more virtual asset service providers and financial institutions operating overseas will be subject to the transfer rules.
If the required information cannot be submitted to the collection agency immediately, the SFC considers that it is an option to submit the required information as soon as practicable after the transfer of the virtual asset, having regard to the implementation of transfer rules in other major jurisdictions. Accepted interim measures until January 1, 202410. Licensed virtual asset trading platforms should comply with all other transfer rules and related provisions in paragraphs 12.11 to 12.13 from 1 June 2023, including securely submitting required information to collection agencies while taking the above temporary measures. Paragraph 12.11 has been revised to reflect the above.
Certain customers of licensed virtual asset trading platforms may conduct virtual asset transfers to and from non-custodial wallets. This may present a higher risk of money laundering/terrorist financing as there is usually no intermediary to enforce AML/CFT measures against the owner of the non-custodial wallet.
Therefore, we set out in paragraph 12.14 the regulations governing transfers to and from non-custodial wallets. These rules are similar to or even stricter than the transfer rules. Licensed virtual asset trading platforms should obtain the required information from customers and conduct sanctions screening. In addition, licensed virtual asset trading platforms should consider the screening of virtual asset transactions and related wallet addresses.
Only virtual asset transfers to and from non-custodial wallets that are assessed to be reliable will be accepted after review and assessment of ownership or control of non-custodial wallets. See also the discussion in paragraphs 106 to 109 of this summary document.
The transfer rules have been implemented in the US and Singapore and will come into effect in the UK on September 1, 2023, and are expected to come into effect in Europe in January 2025.
This means that paragraphs 12.11.10 and 12.11.13 will come into effect on 1 January 2024. If the required information cannot be submitted to the collection institution immediately, the licensed virtual asset trading platform shall adopt the above temporary measures before January 1, 2024. The SFC will issue FAQs to clarify its regulatory requirements in this regard.
Licensed virtual asset trading platforms should only do so in appropriate circumstances and when there is no suspicion of money laundering/terrorist financing, and when considering counterparty due diligence for virtual asset transfers and screening of virtual asset transactions and associated wallet addresses After the result, the virtual assets will be returned. In addition, the relevant virtual assets should be returned to the account of the remittance institution, not the account of the remitter. Paragraph 12.11.22 provides additional guidance.At the same time, the Gazette of May 25 has also published guidelines related to the regulation of money laundering/terrorist financing,Details can be inquired。
Gazette of May 25 on the official website of the Special Administrative Region Governmentofficial websiteofficial websiteLink。
