An Overview of Hong Kong’s Virtual Asset Trading Platform Licensing Strategy

The supervision of Hong Kong’s securities and futures markets is entrusted to the Securities and Futures Commission (SFC), which in recent times has turned its attention to digital assets, particularly in relation to crypto-focused businesses and regulated financial market participants.

A significant regulatory change unfolded in June of 2023 with the introduction of a licensing system for Virtual Asset Trading Platforms (VATPs) by the SFC. Under this regime, crypto exchanges, brokers, and custodians catering to clients in Hong Kong are mandated to adhere to compliance standards encompassing areas like anti-money laundering (AML) transaction monitoring and custody protocols. As of February 2025, a total of nine entities have received a Hong Kong Virtual Asset Service Provider (VASP) license, with the initial license being granted to a customer of Fireblocks.

Implications of VASP Licensing:

The advent of the licensing regime translates into notable implications for market participants, particularly concerning compliance and regulatory responsibilities.

Licensing Requirements:

Both traditional financial institutions (TFIs) and virtual asset service providers (VASPs) are now obliged to secure licensing from the SFC. The license conditions entail:

Asset Protection: Platforms with licenses must implement rigorous custody standards to safeguard assets against potential fraud and theft.

Know-Your-Client (KYC) and AML: Platforms must incorporate KYC processes, adhere to AML criteria, conduct enhanced due diligence (EDD) for high-risk customers, and engage in transaction monitoring.

Market Integrity: Platforms must steer clear of conflicts of interest, deter market manipulation, and uphold fair trading practices.

Continuous Compliance: Licensed VASPs must sustain ongoing compliance by fulfilling reporting and auditing duties.

Ongoing AML and Custody Responsibilities:

Entities that acquire licenses are bound by certain obligations, including:

Customer Due Diligence: Financial institutions are required to conduct thorough customer due diligence, track suspicious transactions, and abide by Travel Rule stipulations.

Asset Custody: The segregation of client assets from proprietary funds is enforced, and all assets must be shielded against misappropriation. The key management process must comply with stringent security standards encompassing key generation, storage, and disposal.

Strategic Considerations for Market Participants:

Navigating these new regulations mandates a proactive approach to compliance with a focus on the following strategic considerations:

End-to-end security architecture: A multi-layered zero-trust cybersecurity system is recommended to adhere to the SFC regulations and mitigate vulnerabilities exposed by the Bybit hack in February 2025.

Modular Custody Technology: Adaptable custody solutions are essential to meet the evolving regulatory framework, such as key management and temperature solutions aligning with Hong Kong’s 98% cold storage requirement.

Increased Scrutiny and Documentation: Platforms must possess the right systems and reporting mechanisms to meet heightened scrutiny, addressing any compliance gaps identified during the VASP application process.

Regtech Solutions for AML and Trade Monitoring: The adoption of regtech solutions for AML monitoring and transaction tracking is crucial in ensuring compliance with regulatory standards like those set by the SFC.