The Securities and Futures Commission (SFC) has observed some unlicensed virtual asset trading platforms (VATPs) engaging in improper practices. This statement warns VATPs of the potential legal and regulatory consequences of these improper practices and reminds investors to be wary of the risks of trading virtual assets on unregulated VATPs.
Falsely claiming to have submitted an application to the SFC
Some unlicensed VATPs claim to have submitted licence applications to the SFC when in fact they have not done so. These untrue and misleading claims give the public a false sense of assurance that the VATP is in compliance with the SFC's regulatory requirements.
It is an offence for any person to make a fraudulent or reckless misrepresentation for the purpose of inducing another person to trade in virtual assets (Note 1). The SFC will take into account any misrepresentation made by an unlicensed VATP in considering its fitness and properness to be licensed should it eventually submit licence applications to the SFC.
VATPs which do not comply with the SFC's requirements
The transitional arrangements under the new regime to regulate virtual asset service providers were designed to provide reasonably sufficient time for VATPs which provided virtual asset services in Hong Kong before 1 June 2023 to prepare for compliance with the legal and regulatory requirements applicable to licensed VATPs (Note 2). VATPs which consider themselves eligible for deeming under the transitional arrangements are reminded that the SFC may decide that deeming is inapplicable if it does not see a reasonable prospect for the VATPs to successfully show that they are capable of complying with the applicable legal and regulatory requirements (Note 3).
It has come to the attention of the SFC that, anticipating the transitional arrangements, some unlicensed VATPs set up new entities to provide virtual asset services in Hong Kong. They also publicly announced their intention to apply for licences for these new entities. However, the services and products offered by some of these new entities may not be in compliance with the legal and regulatory requirements under the new regime.
The SFC has also noticed that some unlicensed VATPs continue to launch new services and products under their existing entities that may not comply with the applicable legal and regulatory requirements.
For example, they may, under new or existing entities, launch certain virtual assets for trading by retail clients, trading services in virtual asset derivatives, or arrangements involving virtual assets such as virtual asset "deposits", "savings" or "earnings" which are not allowed under the new regime.
These non-compliant activities may raise concerns about the VATPs' intention to comply with the SFC's legal and regulatory requirements and fitness and properness to be licensed, amongst other issues.
Where there have been past non-compliant activities, VATPs are reminded that in considering their licence applications, the SFC will take into account whether such activities could have reasonably been avoided. In particular, the SFC may take a dim view of past non-compliant behaviours which result in the need to unwind client transactions or withdraw a virtual asset admitted for retail trading if such unwinding or withdrawal could have reasonably been avoided in anticipation of the legal and regulatory requirements under the new regime. Separately, in assessing the licence applications of VATPs, the SFC will also consider whether they can demonstrate a genuine intention to rectify non-compliant activities, including gradually unwinding impermissible transactions in an orderly manner.
Unlicensed VATPs' established entities operating in Hong Kong
The SFC also reminds unlicensed VATPs that in addition to new entities set up in anticipation of the transitional arrangements, any other established entities of unlicensed VATPs which are operating a business in Hong Kong of providing virtual asset services will also be subject to the new virtual asset service provider regime (Note 2). These established entities will also need to apply for SFC licences or they should proceed to close their business in Hong Kong. Conducting unlicensed activities in Hong Kong is a criminal offence.
Warning to investors
The SFC takes this opportunity to warn investors that some unlicensed VATPs are misleading the public by claiming to have submitted licence applications to the SFC when in fact they have not done so. Other unlicensed VATPs may have publicly announced an intention to apply for a licence from the SFC. Investors should be aware that these unlicensed VATPs may, or may not, submit a licence application after all.
Most VATPs currently accessible by the public are unregulated. As and when the SFC approves a VATP to provide services to retail investors, the list of virtual asset trading platforms published on the SFC's website will be updated.
Once again, the SFC warns investors to be wary of the risks of trading virtual assets on an unregulated VATP. Investors may face the possible risk of losing their entire investment held on the VATP if it ceases operation, collapses, is hacked or otherwise suffers from any misappropriation of assets. If in doubt about the licensing status of any VATP, please refer to the SFC's list of virtual asset trading platforms.
For enquiries, please contact the SFC Fintech unit at fintech@sfc.hk.
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Notes:
- Under section 53ZRG of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), a person commits an offence if the person makes any fraudulent misrepresentation or reckless misrepresentation for the purpose of inducing another person to enter into, or offer to enter into, an agreement to acquire, dispose of, subscribe for or underwrite any virtual assets. A person who commits this offence is liable: (i) on conviction on indictment to a fine of $1,000,000 and to imprisonment for seven years; or (ii) on summary conviction to a fine at level 6 and to imprisonment for six months.
- Under the AMLO, any person who carries on a business of providing a virtual asset service (ie, operating a virtual asset exchange) in Hong Kong, or holds itself, himself or herself out as carrying on such a business, is required to apply for a licence from the SFC. VATPs which are providing a virtual asset service in Hong Kong before 1 June 2023 may continue to provide such services in Hong Kong from 1 June 2023 to 31 May 2024 (ie, within the first 12 months from 1 June 2023) without being in breach of the licensing requirements under the AMLO by virtue of the non-contravention arrangement.
- See section 3 of Schedule 3G to the AMLO.
Last update: 7 Aug 2023