In this study, we will
Share a comparison of the licensing status and business chain analysis of three leading digital asset management companies and exchanges with the Hong Kong Securities Regulatory Commission.
Consolidate and record interviews with a Hong Kong professional law firm and compliance personnel regarding Hong Kong 1479 license.
Analysis of VASP Virtual Asset Service Provider License
Analysis of the application path for CSOP Bitcoin Futures ETF & Ethereum Futures ETF
1. Licensing cases of leading digital asset management companies in Hong Kong Securities Regulatory Commission
Case Study 1:
Xinhuo Technology Licenses:#L4& L9
At present, New Huo Technology's subsidiary "New Huo Asset Management (Hong Kong) Limited" has successfully obtained Type 4 (providing advice on securities) and Type 9 (providing asset management) licenses issued by the Securities and Futures Commission of Hong Kong; New Huo Asset Management (Hong Kong) Limited has also obtained the money service business registration license (MSB) issued by the U.S. Financial Crimes Enforcement Network (FinCEN); and obtained the MSB license issued by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
At the same time, the company's subsidiaries are also actively applying for Type 1 (securities trading) and Type 7 (providing automated trading services) licenses issued by the Hong Kong Securities and Futures Commission, hoping to operate a virtual asset trading platform in compliance with regulations in Hong Kong.
According to the financial report of Xinhuo Technology, virtual asset lending and over-the-counter trading business accounted for more than 90% of the total revenue, which contributed HK$9.057 billion, accounting for 96% of the group's total revenue. The virtual asset ecosystem includes asset management, virtual asset trading platform, virtual asset lending and over-the-counter trading and virtual asset mining related businesses.
Note: If you want to manage the client’s financial account in real time, you need a Type 9 license, such as Xinhuo Technology.
Xinhuo Technology currently holds: North America MSB / Singapore MAS / Hong Kong SFC L4 & L9
Case Study 2: HashKey Group (Hashkey Holding Limited)
As the second virtual asset trading service provider, HashKey Group's subsidiary Hash Blockchain Limited operates a trading platform that provides trading services including cryptocurrencies and virtual commodities, such as Bitcoin, Ethereum, stablecoins and security tokens. Obtaining the license means that Hashkey Group will be approved as a qualified professional institution and can provide brokerage and automatic trading services to professional investors and assist them in participating in tokenization projects.
Hashkey Brokerage Service Ltd.:#L1& L4
Hash Blockchain Limited:#L1& L7
HashKey Pro is HBL's institutional-grade virtual asset trading platform, which will provide professional investors with automated trading services (electronic transactions conducted by customers on online exchanges) for cryptocurrencies such as Bitcoin and Ethereum, as well as stablecoins, security tokens and other innovative assets.
Hashkey Capital Limited: #L9:
The investment arm of HashKey Group is one of the leading crypto asset management institutions in Asia. HashKey Capital focuses on investment funds in digital assets and blockchain ecosystems.
Case Study 3: OSL Digital Securities Limited, a subsidiary of BC Technology Group
OSL Digital Securities Ltd. #L1& L7)
OSL Exchange, a subsidiary of BC Technology Group, is the first digital exchange in Hong Kong that can conduct compliant licensed transactions.
OSL provides software as a service (SaaS), brokerage services, electronic trading platforms and digital asset custody services to institutional clients and professional users.
OSL Exchange provides an institutional-level 24/7 trading system with order matching technology, digital asset traceability tracking technology, and transaction monitoring system. Customers can trade digital assets through OSL Exchange, including Bitcoin, Ethereum, and security tokens that have been strictly screened by the platform and the China Securities Regulatory Commission.
OSL’s services also include over-the-counter trading, smart quotation and electronic trading services, allowing traders to use high-volume asset pools for digital asset lending services while ensuring timely and secure settlement of digital assets.
OSL Digital Securities Limited:#1& 7
BC Assets Management:#1& 9
BC Global Asset Management Limited:#1& 4 & 9
2. Interview records with senior law firms in Hong Kong:
Q1: What are the business scopes that applicants for#L4& L9 licenses can engage in, and what kind of company structure is required?
A1: Whether the Type 9 license is compliant depends on what kind of virtual assets you want to manage, or what kind of assets are in your fund manager's portfolio. If the asset categories in the portfolio do not meet the regulatory requirements, you need to apply for a Type 9 license. However, purchasing or holding Bitcoin, Ethereum or other types of stablecoins does not require the support of a Type 9 license. Only the buying and selling of securities products and securities tokenization products, such as STO, require a Type 9 license.
About asset classes
The trading of digital currencies such as Bitcoin/Ethereum is defined by the Hong Kong Securities and Futures Commission as commodity transactions, just like gold and natural gas, and is not under the jurisdiction of the SFC.
ETF: If the ETF portfolio includes bond/STO products, it must hold a Type 9 license. The SFC will strictly review the content of the investment portfolio of each fund. If it does not comply with the rules, the fund's related illegal products must be closed.
Suggestion: You can set up a company overseas, such as in the Cayman Islands, and collect overseas or Hong Kong funds. This is a gray area for the supervision of small and medium-sized asset management companies.
Q2: What is the regulatory scope of VASP?
A2: VASP mainly regulates centralized virtual digital asset trading platforms, such as OSL & Hashkey,
Please note that digital asset trading platforms cannot trade bond-type products (STO), and the platform needs to have good and compliant STO products to be included in the list of compliant platforms & websites by VASP (for example, OSL, Hashkey, both companies hold#L1& L7 financial licenses)
Hong Kong License Compliance Consultant Interview Record:
Q1: After obtaining the asset management license No. 9, what specific businesses can you engage in and what businesses can’t you engage in?
A1: You definitely cannot do quantitative business or other business related to Active Management Trading. Because the Hong Kong Securities and Futures Commission (SFC) does not understand your business, the SFC will look at each fund you manage and your Fund Strategy one by one, check who your trading counterparty is, and your operation will also be checked after you get the license. It will be subject to comprehensive supervision. In short, it is very inefficient and is not recommended to apply. In addition, if you only buy and sell BTC, ETH, and do buy & hold spot transactions, you do not need a No. 9 license.
Summary: Applying#L9pays great attention to RO experience, shareholder background, fund strategy, operation, due dividend, custody, counterparty risk, etc. In theory, if small and medium-sized asset management companies want to play by the rules, especially in digital asset-related businesses, they should be careful. Recently, the SFC has a tougher attitude and will issue an enforcement letter to force closure if the product is not compliant. It is recommended that if you do not want to apply for a No. 9 license, you can place the company entity overseas and use a No. 1 license to distribute in Hong Kong.
Q2: If we only manage our own money, or the money of less than 5 investors, and are not retail investors, do we need a Type 9 license?
A2: In theory, you do not need a license to manage your own funds. If you invest through shareholding (shareholder investment), you do not need a license either.
For example, if there are only 3 or 4 investors with good relationships, the risk of being regulated by the SFC is very low. However, if you go to the formal channels of HK to raise funds, you need No. 9. In short, this is a gray area. As long as you don’t do business like hospitality and financial management, the risk is relatively small, so just be careful.
Q3: Our company has clients in exchanges and would like to obtain license No. 1479, which requires No. 7. What is the procedure for obtaining No. 7 license and the requirements for the applicant?
A3: When preparing to apply for a Type 7 license, you must clean up your company's background and system. The SFC will review whether your company's external business is compliant and legal before applying, and whether your company and the applicant are a Proper Person who can meet the SFC's requirements for compliance personnel.
Summary: It is recommended to clean up and re-organize the company first (it is recommended to use a new Hong Kong company, separate the main company, and use the subsidiary to apply for relevant licenses)
Case time OSL: 2 years; Hashkey: 2 years
As a new platform, you may not be able to obtain a license, but it is recommended to start business in Hong Kong first (SFC will see whether your products are qualified and the product quality), then clean up the company structure and background, and then comply with VASP regulations before submitting an application. This can give your company more lifelines during the application period (the premise is that you cannot do securitized virtual assets, (STO)
Q4: The issue of bank supervision: You need to understand whether your bank is sensitive to VA, because many banks will close accounts if you design virtual assets, and banks are not very supportive.
It is recommended to open an account with an overseas bank for record support
The bank will ask a lot of questions about the transfer.
Singapore DBS Bank? Not very open, need to use their own trading platform
Q5: When applying for #1479, should I apply all at once or separately? What is the application agency service fee?
7. Separate and apply separately because it is an electronic exchange.
It is recommended to find at least 3 ROs to apply for a No. 7 license, but considering that it is difficult to find a No. 7 RO, it is difficult to find an RO, and it is even more difficult to find an RO with experience in No. 7 licenses, so the application is more difficult. It is recommended to prepare for 2 years.
Shortcut: Find experienced people outside to help the internal RO to manage the business (3 ROs are better because the requirements are high)
Staffing: 10+ (mic+operation)
Do company personnel have to pay taxes in Hong Kong?
There is no requirement, but important people in the company system need to be present in Hong Kong, and the RO needs to be in Hong Kong, because if the company violates the regulations, the SFC will find the person responsible.
#1 It is easier to comply with the regulations
#4，9
It depends on the RO. If the RO is strong, the chances of application are great, the fastest is 6-9 months and the longest is 2 years.
Check whether the funds strategy is compliant.
Requires 2 ROs: 1 big name RO, the other can be conditional, just have experience
Does the RO need to resign immediately? You can apply in your name first and come later.
In addition, 2 mic and 2 operations personnel. Funds: Prepare one year's working capital: HK$20 million
The agency application service fee is about 300,000-600,000 yuan per case
VASP Virtual Asset Service Provider License (for retail customers)
1. Application Requirements
The VASP Amendment Draft will come into effect on March 1, 2023.
Any individual or organization that operates or provides any virtual asset services in Hong Kong needs to obtain a VASP license issued by the Securities and Futures Commission, otherwise it will be a criminal offense.
From March 1, 2023, virtual asset service providers (such as cryptocurrency exchanges, asset management platforms, etc.) must obtain a VASP license issued by the Hong Kong government before they can conduct virtual asset service business and marketing in Hong Kong.
All exchanges operating before March 1, 2023 will have a nine-month transition period until November 30, 2023 to apply to the SFC for a VASP license. If the application is rejected, the applicant must close its business and move out of Hong Kong within three months of receipt of the rejection notice or before the end of the 12-month clearance period.
What are virtual asset services?
Institutions under the jurisdiction:
Mainly a platform for centralized virtual asset trading services (CEX)
Cryptocurrency exchanges based in Hong Kong
Offshore exchanges actively marketed to the Hong Kong public
Unregulated institutions:
Institutions that have been approved by the CSRC and obtained License No. 1 (Securities Trading) and License No. 7 (Providing Automated Trading Services).
Stored value instruments that are already regulated by the payment system; virtual assets in gaming are not within the scope of the new licensing system.
It is not yet clear whether NFTs will be covered by the new licensing system.
Requirements for exchanges:
The first step is to have a compliant trading platform approved by the Hong Kong Securities and Futures Commission. Currently, two virtual asset trading platforms in Hong Kong have completed registration, such as OSL and HashKey.
The second step is to have products. The trading platform needs to have well-designed security token products that can be legally promoted on the platform.
Specific requirements (basically the same as the application process for a financial license):
A Hong Kong registered company with a fixed place of business in Hong Kong;
Hong Kong VASP license applicants are required to appoint at least 2 responsible officers to oversee the operations of the VASP and ensure compliance with AML/CTF and other regulatory requirements.
Provisions for VASP Responsible Personnel:
a. At least one of the responsible officers must be the executive director of the VASP;
b. If the VASP has more than one executive director, they must all be appointed as responsible officers;
c. At least one responsible officer must be resident in Hong Kong;
d. There must be at least one responsible officer available to oversee all operations related to virtual assets at all times.
Licensed representatives need to obtain approval from the Securities and Futures Commission.
Hong Kong VASP applicants, their responsible officers, licensed representatives, directors and the ultimate license holders must meet the appropriate person criteria (subject to due diligence by the Hong Kong Securities and Futures Commission)
The CSRC will publish a list of suspicious companies regularly in 2023
The Hong Kong Securities and Futures Commission's website regularly publishes the "List of Unlicensed Companies and Suspicious Websites", which lists companies that have not obtained a VASP license in Hong Kong and have attracted the attention of the Securities and Futures Commission.
#JP-EX
CSOP Bitcoin Futures ETF & Ethereum Futures ETF
CSOP is the first asset management company established overseas by a mainland China fund company. It not only has strong assets and a solid background, but also has been operating well.
Southern East China Asset Management has been planning for Hong Kong licenses many years ago, and has been approved by the Hong Kong Securities Regulatory Commission to hold licenses No. 1, No. 4, and No. 9. In addition, Southern East China Asset Management has always had a good vision and is very interested in virtual assets. When the concept of the Metaverse was hot in February last year, it also launched the Metaverse/Web3 concept ETF.
CSOP recently officially launched virtual asset ETFs, namely CSOP Bitcoin Futures ETF and CSOP Ethereum Futures ETF, which will be officially listed and traded on the Hong Kong Stock Exchange on December 16.
The virtual asset ETF launched by CSOP does not invest directly in virtual assets, but mainly invests in Bitcoin futures and Ethereum futures of CME Group. The two ETFs adopt an active investment strategy to achieve long-term capital growth.
ETF Application:
As the first ETF of this type approved by the Mandatory Provident Fund Schemes Authority of Hong Kong, CSOP has also made extensive preparations for the approval. According to He Xian (Deputy Managing Director), CSOP had previously put forward demands and suggestions with industry elites, hoping to promote the passage of relevant bills to provide MPF members with more diversified investment options, so as to better grasp the development opportunities of the mainland bond market.
CSOP has also been paying close attention to the relevant regulatory and legal trends, and applied for it as soon as the regulations came into effect, and finally succeeded in becoming the first approved ETF. As for the follow-up work, the company pointed out that it will continue to deepen cooperation with the MPF scheme to better provide services for MPF scheme investors.
1. What is a virtual asset ETF?
ETFs are classified into stock ETFs, bond ETFs, cross-border ETFs, commodity ETFs, and exchange-traded money funds according to the types of target assets or operating modes. Cryptocurrency ETFs are special ETFs that use a certain type of cryptocurrency as an investment target. So far, they are both traditional and new: the traditional aspect is that, in essence, a cryptocurrency ETF is still a fund; the new aspect is that it uses cryptocurrency as an investment target to operate.
The Hong Kong Securities and Futures Commission explained the relevant regulations for operating Bitcoin ETFs in 2017. The Hong Kong Securities and Futures Commission determined that Bitcoin futures have the traditional characteristics of "futures contracts". Even if the related assets of Bitcoin futures are not regulated by the Securities and Futures Ordinance, Bitcoin futures are still regarded as futures contracts.
Therefore, persons or institutions operating Bitcoin/Ethereum futures trading services must hold a Type 2 license (Futures Contract Trading).
In addition, promoting a fund that invests in Bitcoin futures requires a Type 1 license (securities trading), managing such a fund requires a Type 9 license (providing asset management), and providing advisory services on Bitcoin futures requires a Type 5 license (providing advice on futures contracts).
2. How to operate a virtual currency ETF in compliance with regulations in Hong Kong?
(Analysis of its background information and licensing status)
1. Regarding the issue of licensing
According to the above-mentioned "Circular" issued by the Hong Kong Securities Regulatory Commission, operating a virtual asset ETF in Hong Kong requires a Type 2 license. The reason why Southern China Asset Management was able to land first without a Type 2 license is that the virtual asset ETF launched by Southern China Asset Management is not a direct investment in virtual asset "futures contracts", but is operated through investments in Bitcoin futures and Ethereum futures of the Chicago Mercantile Exchange.
In this way, from the perspective of investment structure, the Bitcoin & Ethereum ETF issued by Southern East China Securities is already a third-tier financial product, which can be achieved with a No. 149 license. In other words, Southern East China Securities’ ETF is just a fund product, and Southern East China Securities’ business actually belongs to “promoting “funds investing in Bitcoin futures”” and “managing” the fund. In this way, it can be allowed by the Hong Kong Securities Regulatory Commission to open an ETF on the basis of holding No. 1 and No. 9 licenses. If you want to operate futures contracts that directly invest in virtual assets, you can’t escape the application for No. 2 license (futures contracts).
(II) Requirements for professional investors
Currently, the entry threshold for investing in the virtual asset ETF is HK$7.8 million. This is completely different from the "professional investor standard" previously required by the Hong Kong Securities and Futures Commission for investing in virtual asset financial products (HK$8 million for individuals and HK$40 million for institutions). Is this the Hong Kong Securities and Futures Commission relaxing the entry threshold for investors? The answer is no.
Hong Kong's financial regulators always do the most conservative things in the most cutting-edge fields. For financial stability considerations, the threshold for "professional investors" involved in virtual asset financial products may be gradually lowered in a short period of time, but it will never be directly released. As for the Bitcoin & Ethereum ETF issued by a certain British company in the south, as mentioned earlier, the two are actually funds that do not directly invest in virtual assets, so they do not need to be subject to the "professional investor" rules. If futures contracts that directly invest in virtual assets appear in the future, investors will still need to meet the corresponding thresholds.
(3) Can mainland investors purchase virtual asset ETFs?
no.
In the announcement, CSOP explicitly stated that legal persons or natural persons in mainland China may not directly or indirectly purchase virtual asset-related products of CSOP without obtaining all necessary government approvals in mainland China in advance. The announcement also stated that financial products sold in Hong Kong are only open to Hong Kong residents, and mainland Chinese citizens who want to purchase such financial products can only choose to go abroad to buy them.
The approval of the issuance of two virtual asset ETFs by Hong Kong is a milestone event in the field of virtual assets. It not only promotes the concept of virtual assets, but also indicates that virtual assets and related financial products have broad development space in Hong Kong in the future. Hong Kong is indeed down-to-earth and moving forward step by step.
about Us
JZL Capital is a professional institution registered overseas, focusing on blockchain ecosystem research and investment. The founder has extensive work experience and has served as CEO and executive director of many overseas listed companies, and has led and participated in eToro's global investment. Team members come from top universities such as the University of Chicago, Columbia University, University of Washington, Carnegie Mellon University, University of Illinois at Urbana-Champaign, and Nanyang Technological University, and have served internationally renowned companies such as Morgan Stanley, Barclays Bank, Ernst & Young, KPMG, HNA Group, and Bank of America.
