Recap for the HKSFC Consultation on VATP

By Chenr（晨儿姐）, co-founder of BusyWhale (a decentralized negotiation protocol).

The Hong Kong Securities and Futures Commission (SFC) launched a market consultation on the regulation of virtual asset trading platforms, delineating a few key points.

-Consultation on whether Virtual Asset Trading Platform (VATP) licensees can match retail clients.

-VATPs are required to ensure that their clients have received training and risk tolerance tests. This requirement is reasonable. It is consistent with the requirements of existing banks and brokerages.

-VATP is responsible for due diligence on token listing. The due diligence requirement is similar with IPO in tradFi. STOs cannot be traded under VATP license.

-VATP is required to insure the products on the platform to cover no less than 95% of the risk of the inventory value.

-Currently neither VATP nor the Type 7 license can trade derivatives for the time being. But SFC is willing to consult on an ongoing basis and issue a separate policy for derivatives trading in the future.

-Platforms that already have substantial operations (operating before June 1, 2023) have one year to apply for a transition to May 31, 2024, when they must be licensed to operate.

-Total capital cannot be less than HK$5 million.

-VASP platform assets and client assets must be separated, client assets need to be hosted in a 100% owned subsidiary and 98% must be placed in a cold wallet, otherwise it has to be approved to SFC on a case by case basis.

-VASP cannot have proprietary trading (except for offline back-to-back trading) and cannot participate in market making.

The market focus is on opening up to retail investors. But I think there are more points to mull over.

1. Mainstream coins will probably be open to retail investors. In the future, individual investors want to buy BTC will be more convenient. There may be the situation of each platform in price competition However, considering the high operating costs of VASP (including middle and back office, legal affairs, risk control, custodian, insurance and other costs), it is expected that the offer on the VASP platform will not be very good. For individual investors who are less price sensitive, this is not a big issue.

2. The overall regulatory process is highly similar to that of licensed companies. This benefits traditional finance practitioners more than it benefits web3 nature people.

3. Custodianship may become a larger threshold. It will also reduce liquidity. This requirement is more difficult to implement, which means that VATP must have someone to operate the cold wallet 24 hours a day, especially in an environment without derivatives hedging, if a big drop or rise in BTC in the middle of the night, how to serve customers who want to trade?

4. STO and derivatives, will later on separate legislation. Don't worry too much about this point, because currently the eligible Type 7 license is able to trade STO, and Type 9 license is able to trade crypto asset derivatives. The case is just when it will be opened to a larger group.

5. VASP/VATP will assume almost full responsibility for what products can be traded on the platform, including due diligence, custody, etc.

6. Significantly favorable virtual asset insurance! But it will also boost user transaction costs, after all, the wool is on the sheep's back.

7. Defi is not regulated, is this a major loophole? Imagine when HKMA implemented a regulatory policy for stable coins, the threshold for retail investors to enter crypto is lowered, uniswop is not going to sweep all the VATP?

8. It is not yet clear which specific crypto assets will be affected, especially the "Hong Kong concept" coins.

Summary: Not many surprises, but enough weight.