Introduction

On 16 January 2025, the Securities and Futures Commission (“SFC”) published a circular (the “Circular”) on the enhanced licensing procedures for virtual asset trading platform (“VATP”). This is the second circular on this topic, the first one being published on 18 December 2024. This newsletter focuses on the new licensing approach and reformed external assessment as set out in the Circular for VATP applications submitted after 18 December 2024.

Overview

Under the enhanced licensing process, VATP applicants will be required to engage an external assessor (“EA”) to perform an external assessment after deploying all relevant systems and controls. The external assessment to be conducted by VATP applicants, which the SFC shall become a party to, has also been enhanced to focus on ensuring that a VATP applicant’s policies, procedures, systems and controls (“P&P”) are suitably designed and implemented.

New licensing procedures

VATP applicant must submit the following to the SFC via the WINGS portal, the official platform for electronic forms and submission services (“WINGS Portal”):

1.      copies of its written policies and procedures;

2.      documentation showing that a suitable EA has been identified to perform an external assessment for the VATP applicant;

3.      the capability statement of the EA; and

4.      documents relating to the appointment of the EA. 

The SFC will then assess the application from a holistic approach, taking into consideration the applicant’s business structure, competence, fitness and properness of the applicant and entities that shall have dominating influence (such as its ultimate controller(s), proposed responsible officer(s) and Manager(s)-In-Charge), as well as the capability of the proposed EA. The SFC shall have the discretion to reject the application or request additional information should there be any concerns.

Once the application is accepted, the VATP applicant shall implement its systems and controls, including engaging external service providers for compliance measures. When the VATP applicant is ready for an external assessment, the VATP applicant shall enter into a tripartite agreement with the SFC and the EA for such external assessment of its P&P, whereby the SFC will supervise the whole external assessment process, clarify regulatory requirements and offer feedback on the assessment findings.  If the SFC is satisfied with the external assessment results and completion of all outstanding matters, the VATP licence will be granted.

External assessment

The SFC observed that significant revisions to a VATP's P&P are often essential after implementing hardware and software solutions. As such, it is vital to conduct the external assessment only after the VATP has set up its systems and fully adjusted its P&P to facilitate effective operation.

Apart from requiring an external assessment report to assess the P&P design, the SFC has enhanced the assessment process to ensure that the P&P are both well-designed and effectively implemented. Such assessment shall be a direct assurance engagement and signed off by a certified public accountant and the EA must determine if the VATP applicant’s P&P comply with the necessary guidelines.

Takeaway

The streamlined approach demonstrates the SFC’s commitment to fostering a thriving ecosystem and a robust framework for the development of virtual assets in Hong Kong. It is envisioned that the enhanced coordination between SFC and VATP applicants would enable VATPs to provide services to investors more swiftly in compliance of the regulatory standards.