Interview with a former Hong Kong Securities and Futures Commission expert: What are the details that need to be paid attention to in Hong Kong license application?

On November 17, the Hong Kong Securities and Futures Commission’s list of applicants for virtual asset trading platforms showed that a total of six companies are currently applying for virtual asset trading platform licenses, and the six virtual asset trading platforms are: BGE, HKbitEX, HKVAX, VDX, Meex, and PantherTrade.

Among them, Victory Fintech Company Limited, a company of Hong Kong-based digital asset platform VDX, is a company invested by Victory Securities, a well-established local securities brokerage, and its executive directors include Gao Juan, chairman of the Hong Kong Securities Association. Shengli Securities has been active in virtual asset investment in recent years and holds SFC Type 1 (virtual asset trading), Type 4 (virtual asset advisory services) and Type 9 (virtual asset management services) licenses.

To learn more about VDX’s licensing efforts, BlockBeats interviewed Donald, VDX’s chief operating officer.

Donald was previously an expert in the field of digital assets at the Hong Kong Securities and Futures Commission (SFC), co-authored regulatory frameworks and managed VA applications, and led the regulation of virtual asset trading platforms and fund managers, and was also a co-founder of Bletchley Park, an institutional-grade crypto hedge fund, a quantitative strategist and trader at Deutsche Bank, and a manager at Accenture, building trading systems for exchanges such as Deutsche Börse, Shanghai Stock Exchange, and Tokyo Stock Exchange.

BlockBeats: Could you please briefly introduce yourself, I heard that you have worked at SFC before, how did you get into the crypto industry?

Donald: Prior to joining Victory Fintech as COO, I spent more than 3 years at the SFC, the regulator of Hong Kong, with a primary focus on the regulation of virtual assets. I assisted in the development of a virtual asset licensing regime for fund managers and trading platforms, and I was a core reviewer for all virtual asset applications. During my time at SFC, I created regulatory rulebooks and conducted a number of SFC in-house seminars and trainings to build regulators’ foundation and understanding of virtual assets. I was also given a seat on the SEC’s IOSCO DeFi Working Group.

I first started in the virtual asset industry when I was the COO of an OTC derivatives brokerage firm. In 2017, I co-founded the first institutional-grade crypto hedge fund in Hong Kong with several colleagues in the industry, during which time I was responsible for automating and systematizing arbitrage trading. By chance, I got in touch with regulators. I was impressed by the high level of work of the regulators during the communication process. Working in regulators has helped me have a profound impact on my understanding of the regulation of the virtual asset class, giving me a very different perspective on financial markets and building lasting relationships with regulators around the world.

BlockBeats: The market is very interested in the Hong Kong Crypto license, but there are many types of licenses, and we still don’t know what each license is suitable for, can you help us sort out the common Hong Kong Crypto licenses?

Donald: Okay, no problem. Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) are the core licenses for brokers/dealers in Hong Kong. Therefore, if existing brokers in Hong Kong wish to provide VA-related services to their clients, they will need to apply to the SFC for approval of the so-called “upgrade” of their licences to cover VA. This application includes answering a detailed questionnaire and demonstrating that the company employs people with sufficient knowledge and experience.

Secondly, a Type 9 asset management license. The license, which was created for asset managers to manage client assets, can likewise be “upgraded”, allowing asset managers to be able to invest more than 10% of their assets under management (AUM) in virtual assets. Similarly, applicants need to demonstrate that they have the knowledge, ability, and experienced staff to invest in virtual assets.

Finally, applications that run a virtual asset trading platform (VATP) or now a virtual asset service provider (VASP) require a Class 1 and Type 7 (automated trading platform) license. The VATP/VASP application process is much more complicated than any other application because the subject matter is much more complex. The core concerns of general regulators include, but are not limited to, custody, AML/KYC, trading operations, market regulation, cybersecurity, and risk management.

BlockBeats: VDX is also applying for a license now, how is it going?

Donald: I can’t give you the specifics, but we’ve been doing a lot of things. We submitted our application in November 2022 and it was officially accepted in February 2023, and we have been in communication with regulators in all core areas. We have been proactive in providing high-quality submissions to the SFC and ensuring that we respond in a timely manner so that the application process is as smooth as possible.

BlockBeats: Some previous reports said that the cost of applying for a license on an exchange is around 100 million RMB, why is the cost so large?

Donald: It depends. There are additional costs associated with setting up a compliant and regulated trading platform, as companies need to ensure that they comply with all relevant regulations and laws. And there are a lot of factors that can affect the actual overall cost of setting up such a company, including team size, vendor selection, which features are built in-house, which are off-the-shelf, and so on. Of course, we strongly believe that this process is not only worthwhile, but that regulation is the future of the asset class. In the near future, most virtual asset businesses, including trading, will only be conducted on regulated and compliant exchanges.

BlockBeats: Can you elaborate on the process and key steps involved in the SFC’s approval of a virtual asset trading platform license, and how long does the process typically take from the preparation of the application to the final issuance of the SFC’s operating license?

Donald: First, applicants need to assemble an experienced, motivated core team of people who will create the required processes, documents, and systems. The team then had to develop policies and procedures in eight core areas and meet the requirements of the VASP Operator Guidelines. In addition, the team needed to obtain an independent assessment report from an independent evaluator on guideline coverage and a few other considerations. Once the above has been completed and the required core personnel have been selected, including the future responsible person and the manager responsible for the core functions, the application can be submitted.

At this time, the SFC will review the application itself (not its contents) and ask any relevant questions. Once they are satisfied with the response, the SFC will decide whether to accept the application. Once the application has been formally accepted, there will be a detailed communication between the applicant and the SFC on the core areas and any other areas deemed important by the regulator. Usually this conversation takes the form of written questions, and sometimes in the form of presentations and demos. There is no set timeline for this stage, and it all depends on how the applicant answers the questions and responds to the regulator’s comments.

Once the regulator is satisfied that the proposed systems and procedures have demonstrated their competence and met the requirements set out in the guidelines, they will issue an In-Principle Approval (AIP). The SFC issued this document primarily to enable applicants to continue working with external partners, such as opening bank accounts and obtaining escrow insurance. At this stage, the applicant must complete the Independent Assessment Report – Phase 2, which verifies the effectiveness of the system’s implementation and operations. Other reports required include vulnerability scans and penetration tests. The SFC may grant a licence if all issues are properly addressed.

Once all of the above steps have been successfully completed and reviewed and the SFC conditions have been met, and all matters have been resolved, the SFC may grant a license.

BlockBeats: What are the key preparations for virtual asset trading platforms to improve the likelihood of being granted an operating license and facilitate the efficient application process?What are the most common application pitfalls?

Donald: As mentioned earlier, having a team with a background in traditional finance, especially in compliance, trading operations, and systems is a key factor. The other is mindset – it takes a lot of perseverance and faith to get a license. Of course, it is important to provide regulators with high-quality submissions, answer their questions comprehensively and completely, and always strive to design solutions that comply with all relevant regulations.

BlockBeats: SFC has issued several licenses recently, will there be any trends in the licensing field in the future?

Donald: We’ve recently seen further explanations of tokenisation from the SFC. Therefore, the area that we can reasonably expect to be further included in the framework is derivatives, as it provides institutional investors with a standard toolkit for risk management. Of course, the framework can be extended in many different ways, and it provides a reliable guarantee for starting, building, and growing a business.

BlockBeats: How many licensed exchanges do you expect to end up in Hong Kong?**

Donald: It’s hard to give a specific number. To further establish itself as a global leader in institutional virtual assets, Hong Kong needs a fully functional virtual asset capital market. This requires not only a value chain of service providers with products and services at its core, but also a sufficient number of providers to choose from so that participants and end customers can make an informed choice between multiple intermediaries and services.