On November 3, the Hong Kong Securities and Futures Commission (SFC) issued two important circulars: "Circular on Expanding the Products and Services of Virtual Asset Trading Platforms" and "Circular on Sharing Liquidity among Virtual Asset Trading Platforms." These two circulars significantly relaxed restrictions on licensed (VATP-licensed) cryptocurrency trading platforms regarding "the products and services they can provide" and "connecting to overseas cryptocurrency market liquidity." They not only updated and clarified a series of rules but also created a new "shared listing list" system to achieve the goal of connecting to global virtual asset liquidity. Of particular note is the circular, "On Expanding Products and Services of Virtual Asset Trading Platforms," which for the first time provides a relatively clear explanation of the connotation of "digital assets," a rather complex legal concept under Hong Kong law: "The term 'digital assets' includes 'virtual assets,' 'tokenized securities' (a category within digital securities), and stablecoins. 'Digital asset-related products' refer to investment products related to digital assets." This greatly facilitates market participants' correct understanding of regulatory requirements. Due to space limitations and the sheer volume of new regulations, today our team will focus on a detailed analysis of the changes brought about by the "Circular on Expanding Products and Services of Virtual Asset Trading Platforms," as well as noteworthy points. We'll discuss the "Circular on Sharing Liquidity among Virtual Asset Trading Platforms" in a couple of days. I. Licensed Exchanges Caught in the Regulatory "Impossible Triangle"? The so-called "impossible triangle" of regulation, simply put, means that regulatory authorities cannot "have it all." Currently, licensed exchanges in Hong Kong are in a situation that evokes this feeling. Previously, our team discussed the current operating status of licensed cryptocurrency exchanges with our partners in an article, summarizing it in one sentence: "Not very profitable." One reason for this is the overly stringent compliance requirements of the Securities and Futures Commission (SFC)—licensed exchanges face strict restrictions on the types of businesses they can conduct, the products they can trade, and the services they can provide, somewhat like "too much of a good thing." In fact, the Hong Kong SFC has taken note of this issue and is working to find a "suitable path" that balances compliance requirements with stimulating market activity. The "Circular on Expanding the Products and Services of Virtual Asset Trading Platforms" is a product of this current effort, and the specific "loosening" content and policies are described below. II. Relaxing the Listing Regulations for Licensed Exchanges The Hong Kong Securities and Futures Commission (SFC) has long required licensed exchanges to list only cryptocurrencies (including stablecoins) with a 12-month track record. In simpler terms, this means that any listed coin must have been active for at least a year. Projects with questionable track records and those prone to manipulation are discouraged, emphasizing stability and comprehensive investor protection. However, this presents a problem: a year is indeed too long for the cryptocurrency market, where "a day in the real world is a year in the crypto world," making it extremely difficult for licensed exchanges to list a coin with a market capitalization, thus hindering overall exchange liquidity. The new regulations significantly revise this requirement. First, there's the easing of restrictions on cryptocurrencies offered to "professional investors." The new regulations completely eliminate the "12-month track record" requirement for cryptocurrencies offered to "professional investors," regardless of whether they are stablecoins or market capitalization coins; they are no longer required to have been in existence for more than a year. This means that cryptocurrency exchanges will be able to provide "professional investors" with a wider range of crypto asset investment services. Second, there's the easing of restrictions on cryptocurrencies offered to "retail investors." Considering that "retail investors" have less investment experience and risk tolerance than "professional investors," the "12-month track record" requirement will still be partially applied to cryptocurrencies offered to "retail investors." On the one hand, for licensed stablecoins, licensed exchanges can directly sell them to retail investors. On the other hand, other virtual currencies (market capitalization coins) are still subject to the restriction of a 12-month track record. However, it should be noted that this does not mean a significant reduction in the listing requirements. Licensed exchanges must still conduct "reasonable due diligence" on the coins to be listed in accordance with the requirements of the "Guidelines for Virtual Asset Trading Platforms." If the coin does not survive for a year, full disclosure is still required; otherwise, it is still considered a violation of listing regulations. III. Confirmation of the Compliance of Licensed Exchanges in Distributing Digital Asset-Related Products and Tokenized Securities VATP licenses are not explicitly authorized to distribute digital asset-related products and tokenized securities (limited to virtual assets already approved for trading on licensed exchanges). Previously, there was no clear answer to this question. This is mainly because the Hong Kong "Collection of Standardized Licensing Regulations and Normative Documents," comprised of a series of laws, codes, rules, manuals, guidelines, circulars, etc., did not clarify this matter. Based on regulations such as the "License Issuance Manual for Virtual Asset Trading Platform Operators" and the "Guidelines for Virtual Asset Trading Platforms," licensees, in addition to conducting virtual asset transactions through their platforms, can also provide virtual asset trading services and related services to clients outside the platform (limited to virtual assets already approved for trading on licensed exchanges). However, this regulation is overly vague. Does virtual asset trading outside the platform include virtual asset financial derivatives trading? Does it include crypto asset custody services? Market participants have varying understandings of these issues, generally believing it's permissible but hesitant to act. This new regulation clarifies the regulatory rules surrounding this issue. First, licensed exchanges are explicitly permitted to engage in the following two businesses: Second, licensed exchanges are explicitly prohibited from engaging in the following businesses: Providing custody services, either directly or through affiliated entities, for digital assets that are not traded on virtual asset trading platforms. However, this prohibition doesn't completely block the path. In principle, the Hong Kong Securities and Futures Commission (SFC) currently allows exchanges to submit applications to amend relevant licensing conditions, or to conduct case-by-case reviews of projects to be custodied by the exchange. If a project is truly so compelling that it cannot be refused, an exemption may be granted. In conclusion, change is never instantaneous. While the Hong Kong SFC has indeed only taken a small step in regulatory requirements, it is still a milestone in the history of virtual asset regulation in my country. After all, this is a truly meaningful rule update after Hong Kong completed the establishment of standardized licensing rules, and it genuinely considers the pain points and difficulties faced by market participants in their operations, making every effort to address them. The Sa Jie team commends this regulatory progress and looks forward to further easing measures from the Hong Kong Securities and Futures Commission. We will subsequently update our analysis of the "Circular on Shared Liquidity for Virtual Asset Trading Platforms," providing a complete interpretation of the new regulations.
Alex
Clement
Jasper
Catherine
Hui Xin
Kikyo
YouQuan
Brian