Explainer: The SFC-HKMA Joint Circular Provides Regulatory Clarity Allows Banks, Asset Managers to Trade Digital Assets With Licensed Platforms

The joint SFC-HKMA circular released late Friday is a big step forward in the development of Hong Kong’s regulated digital asset ecosystem. 

The circular provides the first official regulatory green light for banks and Type 1-licensed intermediaries to enter digital assets (also referred to as virtual assets or VA) at scale in Hong Kong. At BC Group and OSL, we’ve been talking to these institutions for several years and we know that they’ve been waiting for this regulatory clarity to enter the market.

Navigating the nuances of such an announcement can be a challenge, so we’ve put together this explainer to highlight four key impactful points from the document:

1. Licensed brokers and banks must work with a regulated VA partner platform

Licensed brokers and banks in Hong Kong must partner with SFC-licensed VA platform operators – which are those that are licensed to conduct Type 1 (dealing in securities), and Type 7 (automated trading systems) regulated activities – to offer VA dealing services.

OSL is currently the only SFC licensed VA trading platform in Hong Kong and built its institutional and B2B solutions to help banks and brokers enter the market quickly, securely and in compliance with regulatory obligations.

We already service global and regional banks with our software-as-a-service, custody, exchange and prime brokerage solutions, and maintain the pole position to service institutions under the regulatory guidance. We provide the expertise and systems built for institutional-grade regulatory compliance.

2. There are two ways that a licensed Type 1 bank or broker can partner with an SFC licensed VA trading platform: 

• As an introducing broker to the VA trading platform 

• Through an omnibus account structure with the VA trading platform 

OSL provides immediate access to VA facilities for banks and Type 1-licensed intermediaries that wish to offer their end clients VA trading through either of the above models.

Licensed brokers and banks will need to notify the SFC or HKMA (as appropriate) before they start offering VA dealing services. 

There are obvious advantages to dealing with a SFC licensed VA trading platform, including: 

• Investors, licensed brokers and banks have the full protection of the HK regulatory regime

• Client assets are held under Hong Kong’s client asset segregation and protection rules

• Investors can take comfort in financial transparency and stability at every level of the trading arrangement

OSL has deep specialist knowledge of regulatory compliance in Hong Kong and will assist intermediaries to implement solutions to meet the regulatory requirements within the required time-frames.

3. Services still only available to professional investors – and only licensed VA asset platforms can handle VA

According to the circular, VA dealing services can only be offered to professional investors, and the SFC and HKMA will only allow banks and brokers to handle fiat assets, leaving the important task of managing VA wallet infrastructure and “heavy lift” cybersecurity controls to the SFC-licensed VA platform partner.

OSL is a leader in VA security and provides industry leading insured custody for VA, including comprehensive protection of customer assets for cold wallets and insurance against loss, or theft of VA.

With the right licensed VA platform partner managing VA wallet infrastructure and related cybersecurity risks, time-to-market will be reduced for licensed brokers and banks entering the VA ecosystem for the first time. 

4. Controls to prevent market manipulation or abusive activities are robust

Investors using VA dealing services offered by licensed brokers and banks can expect a safer trading environment, as these licensed intermediaries are required to have controls for identifying and mitigating risks of abusive or manipulative trading activities. 

This is the same kind of protection investors can expect when trading in traditional assets with traditional financial institutions, and we anticipate that licensed brokers and banks are already well equipped to meet this requirement. 

OSL already operates with strict market surveillance, and can provide institutional and B2B solutions to help financial institutions implement VA dealing market controls to meet regulatory requirements. 

In summary, the circular is a blueprint for operators and investors in the regional regulated VA ecosystem and will accelerate the development and acceptance of regulated VA in Asia and globally.

We expect that this will usher in a new era of institutional participation in regulated digital assets in Hong Kong and the region.

As the first and only SFC-regulated VA platform in Hong Kong, regulatory compliance and customer safety is built into OSL’s DNA. OSL’s VA trading platform and SaaS solutions are designed to provide the shortest time-to-market for regulated institutions entering the digital asset ecosystem to service their end-clients. Should you have further questions on the guidance, or if you would like to discuss how your organization can access the regulated digital asset market in Hong Kong via OSL’s comprehensive suite of solutions, please contact us at:  [email protected]