Response to Public Consultation on Legislative Proposal to Regulate Dealing in Virtual Assets
Release Date: 2025-08-05
| Division 5, Financial Services Branch | By email |
| Financial Services and the Treasury Bureau | vadealing-consult@fstb.gov.hk |
| 24/F, Central Government Offices | |
| Tim Mei Avenue, Tamar Central, Hong Kong |
Response to Public Consultation on Legislative Proposal to Regulate Dealing in Virtual Assets
Question 1 Do you agree with the proposed definition and scope of VA dealing services? Are there any potential exemptions which you consider appropriate?
Response 1 Furthermore, the current draft allows for mechanisms to conduct case-by-case assessments of peer-to-peer (P2P) trading platforms, which require refinement. Specifically, the concept of "business manner" needs further clarification. It should encompass any facilitation, custody, or transfer services of virtual assets offered professionally or commercially, regardless of whether the underlying transactions technically qualify as P2P. Referring to the EU's MiCA regulation, it is recommended that the Hong Kong framework explicitly excludes activities that are fully decentralized and without intermediary involvement. At the same time, platforms or individuals providing infrastructure, support, or services (especially those involving compensation, control, or continuous involvement) should be considered as operating in a "business manner" to ensure that the regulatory scope remains technology-neutral, risk-based, and aligned with global standards.
Question 2 Do you have any comments on the proposed scope of allowed activities?
Response 2 Taking Dubai as an example, VARA has adopted a more structured classification framework that explicitly allows Virtual Asset Service Providers (VASPs) to "execute client orders, allocate virtual assets, and manage inventory in a proprietary capacity (including as riskless principals)," while requiring adherence to best execution standards that comprehensively consider factors such as price, speed, and settlement possibility (see Part A.1 and B.1).To enhance regulatory certainty and align with international practices, it is recommended that Hong Kong amend Article 2.17 to:
• Clearly distinguish between proprietary and agency trading;
• Specify the licensing conditions for proprietary trading;
• Introduce a unified execution standard applicable to all VA trading activities;
- Clarify the scope of "inducement" in digital platforms, automated interfaces, and algorithmic trading environments.
Question 3 If licensees or registrants providing VA dealing services are allowed to acquire or dispose of VAs for clients via non-SFC-licensed VATPs or liquidity providers, what are your comments on the safeguards that should be put in place?
Response 3 The committee notes that the proposal allows licensees to trade virtual assets for clients through non-SFC licensed VATPs or liquidity providers. However, such sources of liquidity carry inherent risks, primarily due to differences in regulatory standards, lack of direct oversight by the SFC, and the possibility that unlicensed entities may not meet Hong Kong's stringent investor protection and anti-money laundering/counter-terrorist financing (AML/CFT) requirements.The EU's MiCA regulation (preamble clause 75 and Articles 63 and 111) adopts a stricter stance, requiring third-country crypto-asset service providers offering services to EU clients to be authorized, otherwise prohibiting solicitation of business. To mitigate risks and align with international standards, the committee recommends establishing a dual-tiered framework:First Tier: Direct Supervision
• Mandatory Licensing Requirement: It is strongly recommended that non-SFC licensed VATPs or liquidity providers be required to obtain the relevant SFC license to ensure direct supervision, accountability, and full compliance with local standards.Second Tier: Enhanced Due Diligence and Transparency
• Strict Screening and Approved List: If mandatory licensing cannot be enforced, an "approved list" should be established, allowing partnerships only with foreign entities that meet extremely high regulatory, operational, and AML/CFT standards.
• Enhanced Risk Disclosure: Comprehensive disclosure of risks associated with trading through unlicensed entities should be required, including differences in legal frameworks, insufficient consumer protection, and lack of direct SFC oversight.
Question 4 If licensees or registrants providing VA dealing services are required to hold client VAs via regulated VA custodians, what are your comments on a commercially viable and AML-compliant operational flow to conduct VA dealing activities?
Response 4 To ensure that the operational flow of holding client virtual assets through regulated custodians is both commercially viable and compliant with AML requirements, the following key points should be emphasized:
- Asset Custody and Segregation
- Client VAs should be held in trust in independent wallets managed by SFC-licensed or registered custodians (TCSPs) or equivalent foreign regulatory bodies.
- Any operational use (such as settlement or staking) requires explicit client consent and comprehensive risk disclosure, in accordance with the Securities and Futures Ordinance (Cap. 571) and Section 405 of the U.S. Digital Asset Market Clarity Act of 2025 (prohibiting asset commingling).
- AML Compliance Processes
- Risk-based transaction monitoring, on-chain analysis, and enhanced due diligence on counterparties must be implemented in accordance with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), particularly when involving unlicensed or foreign platforms.
Question 5 Do you think the regulatory requirements proposed suffice in addressing potential ML/TF risks and offering adequate investor protection?
Response 5 It is recommended to refer to Section 405 of the U.S. Digital Asset Market Clarity Act of 2025 to further strengthen the requirements for client asset custody and segregation, including:
- Mandating that qualified custodians hold client assets in separate accounts, strictly prohibiting commingling;
- Imposing requirements on custodians regarding capital adequacy, governance, cybersecurity, and operational resilience.
These enhancements will improve legal clarity and investor protection in bankruptcy scenarios, align with the "same activity, same risks, same regulation" principle, and reinforce Hong Kong's position as a leading jurisdiction for digital assets.
Question 6 Do you agree with the proposed transitional arrangement?
Response 6 Agree.
Question 7 Do you agree with the expedited licensing or registration arrangement?
Response 7 Agree.
Question 8 Based on the “user-pays” principle, do you have any comments on aligning the licensing application fee and annual fee for a licensee or registrant providing VA dealing services with those for Type 1 regulated activity under the SFO?
Response 8 No comment.
Question 9 Do you agree that, for the purpose of protecting the investing public, persons not licensed by or registered with the SFC should not be allowed to actively market VA dealing services to the public of Hong Kong?
Response 9 Agree.
Question 10 Do you agree that the SFC and the HKMA should be provided with the proposed powers?
Response 10 Agree.
Question 11 Do you agree with the proposed sanctions, which are comparable to those under the existing regulatory regimes for VATPs?
Response 11 Agree.
Question 12 Do you agree that a review tribunal mechanism should be put in place to handle appeals against the decisions to be made by the SFC or the HKMA in implementing the licensing regime?
Response 12 Agree.
Should you have any inquiries regarding this letter, please feel free to contact me (Phone: / Email: ) or Dr. Ricky Yeung, Officer (Phone: / Email: ).
[Signature and Chop]
Your sincerely,
Mofiz Chan
Chairman
Hong Kong Securities & Futures Professionals Association