Published on December 18, 2024, the latest circular from the Securities and Futures Commission (“SFC”) outlines an updated licensing process for virtual asset trading platforms (“VATPs”), including new procedures for the Second-phase Assessment, which is designed to enhance the effectiveness of the licensing process. If you’d like more information about the licensing process for virtual asset trading or the new procedures for the Second-phase Assessment, please contact one of our DLT & FinTech lawyers.
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1. Proactive Engagement with VATPs
Since June 2024, the SFC has been directly engaging with senior management and ultimate controllers of deemed-to-be-licensed VATPs (“deemed applicants”) to communicate regulatory expectations.
This approach will continue with the Second-phase Assessment.
2. Revamped Second-phase Assessment
The Second-phase Assessment has been revamped to ensure VATPs’ policies, procedures, systems, and controls (“Policies and Procedures”) are appropriately designed and implemented.
The assessment will be conducted as a direct assurance engagement, with the SFC supervising and providing feedback throughout the process.
3. Licensing Process for VATPs
After the SFC conducts on-site inspections, it provides feedback to deemed applicants and requires them to submit a rectification plan.
A conditional licence will be granted once the rectification plan is agreed upon, with the VATP required to complete the measures and perform penetration testing and vulnerability assessments, conducted by independent third parties, before operating on a restricted scope of business.
The penetration test and vulnerability assessment must identify, rank, and address vulnerabilities that could compromise the VATP's IT systems, including security tests on network devices, firewalls, wallets, and user applications.
4. External Assessor Involvement
VATPs are required to hire an External Assessor (“EA”) to evaluate their revised Policies and Procedures following the SFC’s feedback.
The EA must provide an opinion on whether the VATP’s Policies and Procedures are designed and implemented in accordance with regulatory guidelines, including those related to anti-money laundering and counter-terrorism.
5. Licensing Conditions
The VATP will operate under a restricted scope until the Second-phase Assessment is completed, with the SFC uplifting those restrictions once the VATP meets the necessary requirements.
6. Changes to Policies and Procedures
VATPs must notify the SFC and EA of any material changes to their Policies and Procedures and report any breaches or failures identified during the Second-phase Assessment.
7. Direct Assurance Engagement
The Second-phase Assessment must be signed off by a certified public accountant and conducted under a tripartite agreement involving the SFC, VATP, and EA.
For more detailed procedures, VATPs should contact their case officers.