The new regulations on virtual assets in Hong Kong have come into effect, this article will give you a quick and comprehensive understanding

A new era of encryption has arrived.

Written by: Jun Entrance

From June 1, the "Guidelines Applicable to Operators of Virtual Asset Trading Platforms**" and "Guidelines on Combating Money Laundering" (hereinafter referred to as "Guidelines") issued by the Hong Kong Securities Regulatory Commission have been officially implemented. From now on, the Hong Kong Securities Regulatory Commission will begin to accept virtual asset trading platform operators to apply for licenses and allow retail investors to use licensed virtual asset trading platforms.

This article will give you a comprehensive understanding of Hong Kong’s 6.1 new regulations on virtual assets from the aspects of official information, trading standards, rating agencies, industry actions, opinions and comments.

Regulatory Framework Public Consultation

**Can retail consumers use licensed exchanges? **

Yes, subject to a set of appropriate investor safeguards covering business relationship with clients, governance, disclosure, and token due diligence and onboarding.

**Do licensed exchanges need to confirm investor knowledge? **

Whether individual professional investors or retail investors, the exchange must ensure that they have sufficient knowledge of virtual assets and have obtained investor protection.

**Should the exchange clearly define the risk taking limit? **

No, the SFC believes that it may not be appropriate for the SFC to prescribe guidance in this regard as the platform operator (rather than the SFC) is best able to data to impose limits.

**Exchanges have disclosure responsibilities for virtual assets? **

Yes, the SFC states that despite difficulties in obtaining and verifying information from issuers, licensed exchanges should act with due skill, care and diligence. All reasonable steps should be taken to obtain information about each virtual asset on which the decision to include it in a token is based.

The Hong Kong Securities Regulatory Commission stated that even if there is a token included by another licensed exchange, it does not mean that other exchanges are exempted from due diligence.

**The exchange also needs to verify the smart contract? **

Just an expectation, the SFC only expects a licensed exchange to appoint an independent valuation expert, or rely on an audit conducted by an independent valuation expert appointed by another party (such as an issuer) where reasonable, to reduce investor risk.

**Which currencies can be listed on the exchange? **

The suggested guidelines are as follows:

• Tokens that can be bought and sold by retail investors should be less susceptible to manipulative market activity
• Tokens must be eligible large virtual assets, i.e. they have been included in the
• Among at least two accepted indices developed by the donor.
• High market capitalization does not mean high liquidity, and the transaction needs to ensure that the token has high liquidity.

**The exchange is temporarily unable to provide stable currency trading? **

Yes, the Hong Kong Securities Regulatory Commission stated that a stablecoin that cannot maintain its pegged function or cannot return investor funds when redeemed cannot be called stable. Before formal regulation, it should not be included in retail transactions. “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.”

**Can exchanges do derivatives trading? **

Not yet decided. The SFC said: “The SFC appreciates the detailed and informative comments submitted by the respondents on this issue. As explained in our consultation paper, the SFC is aware of the importance of virtual asset derivatives to institutional investors. We will Taking into account the large number of comments received and conducting an independent review in due course."

Hong Kong Cryptocurrency Trading Standards

In order to be permitted for retail trading, cryptocurrency tokens must meet the strict regulations of the SFC. First, tokens must have at least 12 months of regulatory compliance. In the interim, the projects to which these tokens belong should not be subject to any criminal charges. On the other hand, these tokens must be on at least two major independent investment firms’ investable indices, and tokens that do not meet these requirements will not be eligible for trading.

Currently compliant tokens include: Bitcoin, Ethereum, Litecoin, Polkadot, Bitcoin Cash, Solana, Cardano, Avalanche, Polygon, and Chainlink.

Hong Kong virtual asset rating agency HKVAC

On May 31, Hong Kong Virtual Asset Rating Agency HKVAC (Hong Kong Virtual Asset Consortium) announced its official establishment and is launching "Virtual Asset Index" and "Virtual Asset Exchange Rating".

The HKVAC Large Cryptocurrency Index reflects the overall performance of cryptocurrencies with high market capitalization in the global cryptocurrency market. The index includes the top 30 cryptocurrencies in the world by market capitalization that qualify as candidates. In addition, virtual asset exchange ratings reflect the creditworthiness of trading platforms and promote transparency and accountability in the virtual asset trading market.

Encryption industry platform / enterprise action

• On May 23, Gate.HK, a virtual asset trading platform in Hong Kong, officially opened its website and opened registration and trading services. Gate.HK focuses on providing virtual asset investors with a high-quality virtual asset trading experience and currently supports BTC, ETH and LTC spot trading will provide more trading services in succession.
• On May 25, Ouyi OKX completed the APP upgrade, providing Hong Kong users with virtual asset spot trading services, supporting Hong Kong users to buy, sell and hold 16 mainstream virtual asset spot (BTC, ETH, ADA, MATIC, SOL, DOT , UNI, LINK, SAND, LTC, AVAX, AXS, ATOM, XLM, USDT and USDC). OKX is committed to complying with Hong Kong Virtual Asset Service Provider (VASP) regulations. *On May 26, ByteDance co-founder Zhang Yiming established a personal investment fund called "Cool River Venture" in Hong Kong.
• On May 26, Huobi announced that it will officially launch Huobi Hong Kong station Huobi HK, and is ready to provide users with a variety of cryptocurrency trading services. From June 1st, users can buy, sell and hold mainstream cryptocurrencies including BTC, ETH and other major cryptocurrencies listed in its independent index through Huobi HK.
• On May 30, BiFinance, an institutional-level digital asset trading platform, announced that its website plans to open registration and trading services for users in Hong Kong. *On May 31, Huobi announced to become the first Hong Kong HKVAC member. This move aims to provide credit ratings for encrypted asset exchanges and trading products through HKVAC, create a venture capital database required by the market, actively participate in public encryption investment education, and strive to provide "one-stop" encrypted asset trading services for Hong Kong traders .
• On May 31, BitMart, a virtual asset trading platform, announced the official launch of its new trading platform in Hong Kong to continue serving institutional and retail investors in Hong Kong. *On June 1, Hong Kong-based digital asset custodian First Digital announced the launch of a new stablecoin, First Digital USD (FDUSD), which will be pegged to the U.S. dollar but regulated in Asia.

Industry insiders/KOL comments and opinions

Yu Jianing, executive director of the Metaverse Industry Committee of the China Mobile Communications Federation, said: The entry into force of the new regulations on virtual asset platform transaction supervision in Hong Kong has strengthened investor education and risk disclosure on the one hand to ensure that investors’ rights and interests are protected; on the other hand, it has required The trading platform establishes strict monitoring and reporting mechanisms to detect and respond to potential illegal activities. In the future, Hong Kong's virtual asset trading industry will gradually become standardized, which is expected to attract more traditional financial institutions and institutional investors to enter the virtual asset market.

In terms of protecting investors, the "Guidelines" stipulate that retail investors are allowed to use licensed virtual asset trading platforms, but virtual asset trading platforms need to follow the regulations and establish a series of rules covering establishing business relationships with customers, governance, disclosure and token due diligence. Appropriate investor safeguards reviewed and incorporated.

Li Qitai, CEO of HashKey Group, a virtual asset group, said: Virtual currency assets are often highly volatile, and investors should choose licensed and compliant trading platforms, and conduct adequate risk assessment and investment decisions. In addition, virtual asset trading platforms should also continue to practice compliance and regulatory standards in the field of virtual assets, and promise investors compliance, security and asset protection, promoting the entire ecosystem to move forward.

Omer Ozden, chairman of Stonewood Capital and international partner of ZhenFund, said: Hong Kong, as a natural financial center, has unique advantages to promote the development of Web 3.0 technology, but it also needs the participation of mainland developers and entrepreneurs. Hong Kong serves as a pilot area to promote the development of the regulatory system, and large capitals around the world will regard Hong Kong as a dynamic jurisdiction, which will not only revitalize Hong Kong's economy, but also promote the economic development of the entire Asia-Pacific region.

Henry Yu, chief partner of L&Y Law Firm, said: Hong Kong has great potential to become a Web 3.0 capital, but the regulatory mindset is also very important. Cryptocurrency is an innovative industry, and its business model is constantly changing, and each institution operates differently. If the Hong Kong Securities Regulatory Commission adopts the regulatory model of the traditional financial field to look at the encryption industry, it will create new regulatory risks.