Original Title: "Xiao Sa Team | After the JPEX Case, the Hong Kong Securities and Futures Commission is Taking Action…"

Just a few days ago on September 25th, the Chief Executive Officer of the Hong Kong Securities and Futures Commission, Ashley Alder, Executive Director of Enforcement, Thomas Atkinson, and Head of Fintech, Julia Leung, attended a press conference on issues related to virtual asset trading platforms. At the press conference, the Hong Kong Securities and Futures Commission stated that it will further optimize the regulation of existing virtual asset trading to reduce the risk of cryptocurrency trading.

The industry generally believes that the optimization measures announced by the Hong Kong Securities and Futures Commission at the press conference on September 25th are a response to the JEPX case, and the corresponding measures also reflect the further clarification and transparency of virtual asset regulation in Hong Kong. Today, the Xiao Sa team will analyze the four major optimization regulatory measures proposed by the Hong Kong Securities and Futures Commission at the press conference and the potential impact that may follow.

Current VASP licensing system and related issues in Hong Kong

Since the end of 2022, when Hong Kong began to publicly embrace virtual assets and establish itself as the world's virtual asset center, it has made a series of arrangements in terms of regulatory standards. Overall, Hong Kong's current virtual asset regulatory framework broadly integrates virtual assets into a "licensing-based" financial regulatory system. In order to achieve the above regulatory objectives, the Legislative Council of Hong Kong completed the latest amendment to the "Anti-Money Laundering and Counter-Terrorist Financing Ordinance" on December 7, 2022 (hereinafter referred to as the "AML Ordinance"). The AML Ordinance tailored a licensing system for virtual asset service providers in Hong Kong. This ordinance officially took effect on June 1 of this year. According to the AML Ordinance, virtual asset businesses operating in Hong Kong must hold the corresponding virtual asset license and traditional financial regulatory license (also known as the "dual licensing" system). Given the long application period for virtual asset licenses, the regulatory authorities in Hong Kong have established a "transitional period" arrangement for existing virtual asset trading platforms in Hong Kong that are ready to comply with the Commission's guidelines, providing them with a reasonable and sufficient amount of time to apply for the corresponding licenses. These platforms can continue to operate for 12 months from June 1, 2023, and are required to submit a complete license application to the Commission by February 29, 2024.

In other words, virtual asset trading platforms that have been conducting substantial business in Hong Kong before June 1, 2023, can continue to operate for one year after the AML Ordinance takes effect. However, the problem lies in the fact that the Hong Kong Securities and Futures Commission has not previously disclosed which virtual asset trading platforms are in the "transitional period" and which have already closed. At the same time, there is also a strong dissatisfaction among many virtual asset investors about which platforms are applying for virtual asset licenses, as the Hong Kong Securities and Futures Commission has not disclosed this information either. It is precisely because of the lack of transparency mentioned above that has caused strong dissatisfaction among some investors. The lack of transparency in the VASP licensing application list and the recent JEPX case explosion are the catalysts for the Hong Kong Securities and Futures Commission's latest announcement of regulatory optimization measures.

What are the latest optimization measures?

Transparency of virtual asset platform lists

In response to the lack of transparency in the application list and the resulting doubts about the security of virtual asset platforms among some investors, the Hong Kong Securities and Futures Commission will continuously publish four lists of virtual asset platforms on its website. These four lists include: 1. Licensed platform list; 2. Closed platform list; 3. Virtual asset trading platforms treated as having obtained a license; 4. List of virtual asset trading platform applicants.

The "Licensed platform list" lists the names of operators of virtual asset trading platforms that have been officially licensed by the Commission. Currently, this list only includes two companies, OSL Digital Securities Limited and Hash Blockchain Limited, which obtained virtual asset licenses on December 15, 2020, and November 9, 2022, respectively.

(Above is the Licensed platform list)

The "Closed platform list" lists the names of operators of virtual asset trading platforms that must close within a specified period according to the AML Ordinance. As of September 30, no companies are listed on this list by the Commission.

The "Virtual asset trading platforms treated as having obtained a license" list lists the names of virtual asset trading platform operators treated as having obtained a license by June 1, 2024, i.e., the names of virtual asset trading platforms enjoying the "transitional period." Currently, there are no companies listed on this list on the Commission's website.

The "List of virtual asset trading platform applicants" lists the names of operators of virtual asset trading platforms that have not yet been approved by the Commission. In other words, the platforms on this list have applied for virtual asset trading licenses but have not obtained them. The Commission also reminds traders that such virtual asset trading platform applicants may not necessarily comply with the Commission's requirements. Currently, there are four company names listed on this list, including Hong Kong BGE Limited, Hong Kong Digital Asset Trading Group Limited, Hong Kong Virtual Asset Trading Limited, and Victory Digital Technology Limited.

(Above is the List of virtual asset trading platform applicants)

In addition to the above four lists, the Hong Kong Securities and Futures Commission has previously published a list of "Unlicensed Companies and Suspicious Websites," which as of September 28, 2023, includes the names of six virtual asset trading platforms.

Strengthening investor education and launching public awareness campaigns on virtual asset risks

The Hong Kong Securities and Futures Commission and the Investor Education Center are about to launch a series of public awareness campaigns on virtual asset investment risks and major issues in the virtual asset industry. These campaigns aim to strengthen investors' awareness of fraud and risks in virtual asset businesses in different ways, and to protect the financial security of virtual asset traders as much as possible.

Enhancing cooperation with the police and the collection of intelligence on virtual asset trading-related crimes

The Hong Kong Securities and Futures Commission further emphasizes the need to strengthen cooperation with the police. Measures include establishing dedicated channels to share information on suspicious activities and violations by virtual asset trading platforms, intensifying efforts to combat virtual asset trading-related crimes, and further optimizing the existing virtual asset trading regulatory model based on the current situation.

Conclusion

In view of the optimization measures announced by the Hong Kong Securities and Futures Commission at the press conference, especially the immediate implementation of measures such as transparency of the regulatory list, the impact of the JEPX case on the Hong Kong Securities and Futures Commission is significant. Just as the original intention of the Hong Kong government in formulating virtual asset regulatory provisions was to provide a regulated channel for virtual assets and to safeguard investors' safety as much as possible while developing virtual asset businesses, the public indeed could not know the true licensing status of each platform in a short period of time before the implementation of "transparent application list." This lack of awareness of platforms with violations and suspicious behavior is actually contrary to the original intention of the virtual asset licensing system in Hong Kong. This is why the Hong Kong Securities and Futures Commission, upon discovering the problem, was able to react so quickly.

The Xiao Sa team believes that the latter two measures proposed by the Hong Kong Securities and Futures Commission will be implemented as quickly as the first measure, and the current virtual asset regulatory policies in Hong Kong will not change due to the JEPX case, as Hong Kong still has the ambition to establish itself as the world's virtual asset center.

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