Jennifer Baccanello: Virtual Asset Regulation in Hong Kong
Understanding the related terminology and regulatory framework is crucial for industry participants as virtual assets evolve. In Hong Kong, two key terms often emerge in this context: “Virtual Asset Service Provider” (VASP) and “Virtual Asset Trading Platform” (VATP). While these terms are related, they are not identical. VASP is a broad concept covering various entities involved in virtual asset activities, whereas VATP refers explicitly to platforms that facilitate virtual asset trading.
Hong Kong’s Securities and Futures Commission (SFC) has specific regulatory guidelines for VATPs and other VASPs. Since VATPs are directly involved in trading and custody of virtual assets, they are subject to stricter regulations, particularly regarding security measures, anti-money laundering (AML) and counter-terrorism financing (CTF) compliance, and investor protection. On the other hand, VASPs, such as virtual asset fund managers and advisors, are also regulated. Still, their regulation focuses on risk management, client disclosures, and operational integrity.
Defining "Virtual Assets" in Hong Kong
Before discussing the differences between a VASP and a VATP, Jennifer Baccanello suggests reviewing the definition of "virtual assets" in Hong Kong.
According to the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (AMLAO), virtual assets are defined as a cryptographically secured digital representation of value that can be transferred, stored, or traded electronically and either:
- is intended to be used as a medium of exchange accepted by the public for payment of goods or services, discharge of a debt, or investment purposes; or
- provides rights, eligibility or access to vote on the management administration or governance of the affairs in connection with, or to vote on any change of the terms of any arrangement applicable to, any cryptographically secured digital representation of value (e.g. governance tokens).
Conversely, the following categories do not fall within the scope of “virtual assets” in Hong Kong:
- Digital representations of value issued by a central bank or government
- Digital tokens with limited use
- Securities or futures contracts
- Any float or deposit related to a stored value facility
Why Is This Definition Important?
As Jennifer Baccanello highlights, the AMLAO limits the definition of virtual assets to “non-securities,” thereby excluding virtual assets defined under the Securities and Futures Ordinance (SFO). However, when we think of the Type 1 (dealing in securities) license issued by the SFC, we know it relates to activities involving "securities” dealing. Therefore, virtual assets defined under the AMLAO initially fall outside the SFC’s regulatory scope. However, under Hong Kong’s new regulatory regime for virtual assets, if you hold an SFC license and your business involves virtual assets, you must comply with both the regulations related to securities and non-securities. As a result of this dual-regulation approach by the SFC, you must adhere to both the SFO and the AMLAO and other relevant laws, regulations, and guidelines.
The Broad Umbrella: Virtual Asset Service Provider (VASP)
The Financial Action Task Force (FATF) defines the concept of VASP in its guidance, and Hong Kong follows this definition. According to the FATF, a VASP includes any natural or legal person who conducts one or more of the following activities or operations for or on behalf of another person:
- Virtual assets and fiat currencies exchange.
- Exchange between one or more forms of virtual assets.
- Transfer of virtual assets (in this context, "transfer" refers to any transaction on behalf of another person that moves a virtual asset from one address or account to another).
- Safekeeping or administration of virtual assets or instruments enabling control over virtual assets.
- Participation in and provision of financial services related to an issuer's offer and sale of virtual assets.
Under this broad definition, a VASP may be any of the following:
- virtual asset fund manager
- virtual asset advisor
- virtual asset custodian
- virtual asset wallet provider
- financial service providers involved in the issuance, offer, or sale of virtual assets, such as service providers in ICO projects
Licence type
| Licence Type | Description | Examples of Relevant Activities |
|---|---|---|
| Type 1 | Dealing in securities | Conducting securities trading, including trading of security tokens. |
| Type 4 | Advising on securities | Providing investment advice regarding securities, including advice on virtual assets. |
| Type 7 | Automated trading services | Providing automated trading services for virtual assets and securities. |
| Type 9 | Asset management | Managing assets on behalf of clients, including virtual asset funds. |
Different VASPs play a unique role in the virtual asset ecosystem and are subject to various regulatory requirements depending on their specific activities. For example, virtual asset fund managers who manage portfolios that include virtual assets must implement robust risk management frameworks to protect investors. They must also provide their clients with clear and accurate risk disclosures regarding virtual assets. Similarly, virtual asset advisors who offer investment advice on virtual assets are expected to uphold high standards of conduct and ensure that their advice suits their clients’ needs. Custodians who hold virtual assets on behalf of others must implement strict security measures to prevent theft or loss of these assets.
The definition of a VASP also includes entities engaged in the following types of transactions and operations:
- virtual-to-virtual transactions
- virtual-to-fiat currency transactions
Other licenses may be required depending on the nature of the business activities. For instance, entities involved in trading futures contracts must apply for a Type 2 license, while those advising on corporate finance must apply for a Type 6 license.
Small Umbrella: Virtual Asset Trading Platform (VATP)
Now that we have clarified what a VASP is, what exactly is a VATP?
A VATP is a specific type of VASP that facilitates the trading, exchange, and often custody of virtual assets. VATPs act as intermediaries, connecting buyers and sellers of virtual assets and allowing them to trade in a secure and regulated environment.
Jennifer Baccanello explains that VATPs play a vital role in the virtual asset ecosystem by providing liquidity for virtual assets. In Hong Kong, VATPs are subject to specific regulations the SFC sets. If a VATP is involved in trading at least one virtual asset classified as a security, it must be licensed in Hong Kong. As a result, if a VATP offers trading in security tokens, the platform operator will need to obtain the following licenses in Hong Kong:
- Type 1 license (dealing in securities); and
- Type 7 license (automated trading services).
If a VATP does not trade any virtual assets falling within the scope of “securities” under the SFO, an SFC license is not required under the current framework. However, it must still comply with other relevant regulations (e.g., AML/CTF requirements).
When regulating VATPs in Hong Kong, the SFC adopts a focused regulatory approach targeting centralised platforms. These platforms operate as intermediaries, holding custody of clients' virtual and fiat assets and matching buy and sell orders within a closed ecosystem. Centralised platforms introduce systemic risks due to the custodial nature of operations, including counterparty risk, operational risk, and heightened susceptibility to cyberattacks, internal fraud, or insolvency events. As such, the SFC mandates strict compliance with regulations concerning:
- asset segregation
- cold storage solutions
- liquidity management
- real-time reporting
- adherence to robust KYC and AML/CFT requirements.
In contrast, peer-to-peer (P2P) trading markets, where investors retain control over their virtual assets in self-custody and interact directly with counterparties without platform intermediation, fall mainly outside the scope of SFC supervision. P2P transactions introduce distinct risks, such as counterparty default and fraud, but lack the operational risks inherent in centralised custody models. The SFC’s focus on centralised VATPs reflects these platforms' greater complexity and potential market contagion risks, particularly as they serve as significant liquidity hubs.
Concluding remarks
Understanding the difference between a VASP and a VATP is crucial for anyone involved in Hong Kong’s virtual asset industry. As discussed in this article, VASP covers various entities, including virtual asset fund managers, advisors, and custodians. VATP, however, is a specific subcategory of VASP that focuses on facilitating virtual asset trading.
This distinction is significant because it affects how different entities are regulated under Hong Kong law. Due to the high risks associated with virtual asset trading and custody, VATPs are subject to demanding regulatory requirements. For VASPs other than VATPs, regulation tends to focus on risk management, client disclosures, and ensuring the integrity of operations. Therefore, entities operating in Hong Kong need to develop tailored compliance strategies based on the specific services provided by VASPs to ensure safe and sound operations.
Disclaimer: Man Kun Advisory Limited (曼昆咨询有限公司) is a commercial advisory firm and does not provide any legal services. Any information provided is for general business purposes and should not be construed as legal advice or a substitute for legal counsel.
By Jennifer Baccanello, Head of Hong Kong Man Kun Advisory Limited (affiliate of Man Kun Law Firm, Shanghai).