New guidelines for the regulation of Hong Kong's encryption trading platform: integrating global liquidity and promoting diversified product services.

Source: Hong Kong Securities and Futures Commission official website

Organized by: Golden Finance

The Hong Kong Securities and Futures Commission (SFC) published two new regulatory guidance documents on November 3: “Circular on the Sharing of Liquidity by Virtual Asset Trading Platforms” and “Circular on Expanding Products and Services of Virtual Asset Trading Platforms.” The documents outline the expected standards for SFC-licensed virtual asset trading platform operators (platform operators) and provide significant guidance in promoting the connectivity of virtual asset trading platforms to global liquidity and expanding the range of products and services offered.

One of the circulars states that the Securities and Futures Commission (SFC) allows platform operators to merge trading instructions with related overseas virtual asset trading platforms into a shared order book. This move is the first step under Pillar A (Access) of the ASPIRe roadmap, aimed at attracting global platforms, trading flows, and liquidity providers. Through seamless cross-platform matching and execution of transactions, Hong Kong investors can expect to benefit from increased market liquidity and more competitive pricing, while also reducing additional risks under robust safeguards. The SFC's next step will be to explore the feasibility of allowing licensed brokers to transfer client trading instructions to regulated overseas liquidity pools under the same group, and then consider whether to further expand this arrangement.

In order to optimize the pillar P (Products) aimed at expanding new products and services within the roadmap, the Securities and Futures Commission (SFC) has allowed platform operators to offer virtual assets without a 12-month track record to professional investors and stablecoins licensed by the Hong Kong Monetary Authority, as well as to sell tokenized securities and investment products related to digital assets in another circular. Furthermore, related entities of platform operators may provide custodial services for virtual assets or tokenized securities that are not traded on the relevant platform.

1. Licensed virtual asset trading platforms share liquidity

In the document “Circular on the Sharing of Liquidity by Virtual Asset Trading Platforms,” the Hong Kong Securities and Futures Commission outlined the regulatory guidelines and expected standards for licensed virtual asset trading platform operators (platform operators) to integrate their order books with those of their global affiliated virtual asset trading platform operators (overseas platform operators). The circular states that trade instructions from different platforms will be allowed to merge into a consolidated liquidity pool to enable cross-platform matching and execution of trades (shared order books).

1.1 Background

The Hong Kong Securities and Futures Commission (SFC) stated that virtual asset trading is essentially borderless, with liquidity dispersed across trading platforms around the world. According to Pillar A (Access) of the ASPIRe roadmap, the SFC is committed to facilitating the connection of Hong Kong with overseas liquidity to promote the continued development of the local virtual asset ecosystem. Platform operators will be allowed to integrate liquidity through a shared order book within the group. This strategy aims to enhance market efficiency, provide Hong Kong investors with deeper global liquidity, narrow price discrepancies, and optimize price discovery. Currently, the trading settlement risk for platform operators is relatively low, as all trading orders have been pre-paid in accordance with the SFC's Guidelines for Virtual Asset Trading Platform Operators (the “Guidelines”), and on-market trades will be settled immediately by the platform operators.

The Hong Kong Securities and Futures Commission (SFC) stated that after the introduction of the shared order book, the trading instructions of platform operators' clients may be matched with the trading instructions of clients from overseas platform operators that have already been pre-paid outside Hong Kong, thus creating settlement risks. The implementation of shared liquidity also complicates the operation of market surveillance, so coordinated measures must be taken to address potential market misconduct. The SFC indicated that the risks arising from the operation of the shared order book must be properly managed to protect client interests and maintain market integrity and stability. Therefore, platform operators providing a shared order book must implement the measures outlined in the circular.

1.2 Regulatory Provisions

1.2.1 Qualified overseas platform operators and customers

The Hong Kong Securities and Futures Commission stated that the shared listing register should be jointly managed by platform operators and overseas platform operators licensed to conduct their activities in the relevant jurisdictions. The jurisdiction in which the overseas platform operator operates should: (a) be a member of the Financial Action Task Force (FATF) or a regional organization that performs functions similar to those of the FATF; and (b) have effective regulation that is broadly aligned with the recommendations of the FATF and the International Organization of Securities Commissions (IOSCO) regarding market misconduct and the protection of client assets as outlined in the “Policy Recommendations for Crypto and Digital Asset Markets.”

1.2.2 Transaction and Settlement Risks

The Hong Kong Securities and Futures Commission stated in a circular that when a platform operator's client trading instructions match those of an overseas platform operator, and the assets required for settlement (settlement assets) are not held by a related entity of the platform operator, there may be settlement risks. Settlement may face potential delays or failures due to operational difficulties or external factors (such as counterparty bankruptcy or cross-border asset transfers).

Trading operation

The circular states that the shared order book should operate according to a comprehensive set of rules (the shared order book rules), which must clearly define the procedures and operations for all participants (platform participants) involved in using the shared order book both before and after trades. These rules should cover pre-payments, issuing trade instructions, executing trades, changes in liability (if applicable), settlement, and breach management. Furthermore, the rules should clearly outline the roles, rights, obligations, and responsibilities of all parties involved, including the platform operators acting as joint platform operators, overseas platform operators, platform participants, and designated custodians. The platform operators must ensure that the shared order book rules are binding and enforceable for overseas platform operators, platform participants, and designated custodians.

The shared listing book should only accept fully prepaid transactions, and the settlement assets must be held in custody by one or more custodians designated by the platform operator or an overseas platform operator. The platform operator should implement an automated pre-trade verification mechanism to confirm that the prepayment has been received and to ensure that sufficient assets are available for settlement.

The platform operator should ensure that transactions on the shared order book are fair and orderly; and that all platform participants have equal rights to access the data of the order book.

Settlement monitoring measures

The circular document states that the operation of shared liquidity may not always be settled immediately, as the settlement assets may be stored in different locations, resulting in a delay between the trading pair and the settlement. Platform operators should design their operational processes to effectively reduce the risks of unsettled transactions and related operational risks.

The key point is the delivery-versus-payment (DVP) settlement mechanism, which ensures that assets can be exchanged simultaneously between platform operators and overseas platform operators, thereby reducing the risk of non-delivery. Overseas platform operators are responsible for delivering the settlement assets related to the transaction instructions of the overseas platform operators. The asset exchange process should account for actual time variables, including delays in transferring assets from cold wallets to hot wallets; potential interruptions due to blockchain network outages; and delays in fiat currency settlements caused by bank holidays. The relevant processes should minimize delays and continuously adhere to the DVP principle to safeguard customer assets.

Platform operators should settle all transactions with overseas platform operators at least once a day, and after the settlement, the customer's virtual assets should be held in custody by a related entity of the platform operator.

In addition, given the volatility of trading volume, platform operators should conduct intraday settlements to ensure that the risk of unsettled trades is limited to a predetermined cap (unsettled trade limit). Platform operators should implement robust real-time monitoring measures to track the risk of unsettled trades.

Compensation arrangement

The document states that operators of platforms providing shared listing books must demonstrate robust financial capabilities to manage the shared listing books and must assume full responsibility for transactions executed through the shared listing books for their clients, just as if such transactions were executed on the operators' own listing books.

The circular document stipulates that platform operators must establish a reserve fund in Hong Kong, which shall be held in trust by the platform operators and designated for customer compensation to cover losses incurred due to settlement failures. The scale of the reserve fund should not be less than the upper limit of unsettled transactions and should be adjusted according to the expected risks of unsettled transactions.

According to paragraph 10.22 of the “Guidelines for Virtual Asset Trading Platforms”, platform operators must have compensation arrangements in place to safeguard against potential losses of customer virtual assets under custody. For settlement assets that are to be delivered, customers of the platform operator should enjoy an equivalent level of protection. Therefore, platform operators should purchase insurance or establish compensation arrangements to cover potential losses of settlement assets (such as losses arising from theft, fraud, or misappropriation), with an amount that shall not be less than the amount required by the “Guidelines for Virtual Asset Trading Platforms”.

1.2.3 Market Misconduct Risk

The circular document states that, according to paragraphs 8.1 to 8.4 of the “Guidelines for Virtual Asset Trading Platforms”, platform operators should implement internal policies and monitoring measures to appropriately monitor trading activities on their trading platform and adopt effective market surveillance systems. According to paragraphs 9.8 to 9.10 of the “Guidelines for Virtual Asset Trading Platforms”, platform operators should reasonably believe the clients who initially issued the instructions and the ultimate beneficiaries.

When trading crosses jurisdictions with different regulatory standards, the risk of market misconduct may increase. Platform operators should implement a unified market surveillance program that covers shared order books in collaboration with overseas platform operators, rather than conducting surveillance separately based on the jurisdiction where their clients are registered.

The platform operator should designate at least one responsible person or core functional supervisor to oversee the joint market surveillance program, ensure compliance with the regulations of the Securities and Futures Commission, participate in the decision-making process and parameter selection on the surveillance system, supervise the handling of warnings about potential misconduct, and regularly assess the effectiveness of the program.

The document states that platform operators shall immediately provide the data of the shared order book to the Securities and Futures Commission upon request, including all trading instructions and trading data, information on the persons issuing trading instructions as specified in paragraph 9.8 of the “Guidelines for Virtual Asset Trading Platforms”, and records of market surveillance.

1.3 Other Provisions

The Hong Kong Securities and Futures Commission stated in the document that platform operators should ensure that the operation of the shared order book complies with the regulations on trading on the platform as outlined in the “Guidelines for Virtual Asset Trading Platforms”, including the reliability and security of trading platforms under sections 5.1(g), 7.22, and 7.27, as well as sections XII and XIV, and comprehensive trading and operational rules, network security, and record retention. Platform operators must maintain sufficient records to demonstrate the design, development, testing, operation, and modifications of the shared order book.

Before providing trading services through the shared listing book, platform operators should clearly disclose the main risks, allowing customers to make informed decisions. The disclosure should include potential conflicts of interest for platform operators and overseas platform operators; settlement mechanisms; the parties responsible for settlement and associated risks; various scenarios involving settlement failures and the parties involved; accountability management; risk mitigation measures; customer protection scope; and the rights and recourse that customers should have.

Platform operators may only provide shared order book services to retail investors after clearly explaining the additional risks of trading and settlement involving overseas jurisdictions (including that the level of client protection may be lower than that in Hong Kong) and in the case where clients explicitly choose to participate.

The document concludes by stating that platform operators intending to operate a shared listing book must obtain written approval from the Hong Kong Securities and Futures Commission in advance. The Commission will impose the provisions of the “Terms and Conditions Applicable to Operating a Shared Listing Book” on the licenses of platform operators.

2. Expansion of Licensed Virtual Asset Trading Platform Products and Services

In the document “Circular on Products and Services of Extended Virtual Asset Trading Platforms,” the Hong Kong Securities and Futures Commission stated that the document aims to expand the types of products and services that can be offered by licensed virtual asset trading platforms under the Commission, as part of a plan to promote the sustainable and robust development of Hong Kong's digital asset ecosystem.

2.1 Background

This circular indicates that under pillar P (Products) of the ASPIRe roadmap issued by the Hong Kong Securities and Futures Commission on February 19, 2025, the Commission expects to review the types of digital asset products and services in the regulated market in Hong Kong to meet the diverse needs of different categories of investors. The proposed policies aim to promote the continued development of the market while implementing robust safeguards to protect retail investors.

The document also points out that the Hong Kong Securities and Futures Commission has expanded the products and services that can be provided by licensed virtual asset trading platforms through the following methods in this circular: ( i ) modifying the regulations regarding the inclusion of tokens; ( ii ) clarifying the existing regulatory requirements applicable to the distribution of tokenized securities and investment products related to digital assets on virtual asset trading platforms; and ( iii ) updating the regulations applicable to virtual asset trading platforms for providing custody services for digital assets that customers may not buy or sell on the platform.

2.2 Vocabulary Definitions

The circular points out that the term “digital assets” includes virtual assets, tokenized securities (which belong to a category of digital securities), and stablecoins. “Digital asset-related products” refer to investment products related to digital assets.

2.3 Token Inclusion Regulations

The circular states that in order to expand the range of products, the Hong Kong Securities and Futures Commission no longer requires that virtual assets (including stablecoins) offered to professional investors on virtual asset trading platforms must have a track record of 12 months. Furthermore, stablecoins issued by licensed stablecoin issuers are not required to meet the 12-month track record requirement and can be offered to retail investors. Nevertheless, the 12-month track record requirement still applies to other virtual asset products offered to retail investors.

The document also points out that while the requirement for a 12-month track record for products offered to professional investors has been abolished, the Securities and Futures Commission refers to paragraph 7.6 of the “Guidelines for Virtual Asset Trading Platform Operators” (“Virtual Asset Trading Platform Guidelines”) and reiterates:

a( Virtual asset trading platforms should conduct all reasonable due diligence on any virtual assets (including stablecoins) before incorporating them for buying and selling, and ensure that they continue to meet all the inclusion criteria set forth by the Token Inclusion and Review Committee; and

If a virtual asset trading platform provides virtual assets (including stablecoins) with a track record of less than 12 months to professional investors on its platform, it should make sufficient disclosures.

The Hong Kong Securities and Futures Commission stated that to avoid any doubts, the requirement for a 12-month track record under the “Guidelines for Virtual Asset Trading Platforms” does not apply to tokenized securities or other digital securities.

2.4 Virtual asset trading platforms distribute digital asset-related products and tokenized securities.

The circular points out that, under the standard licensing conditions, licensed virtual asset trading platforms can operate centralized virtual asset trading platforms for digital asset trading, as well as conduct digital asset trading business outside the platform. To enable licensed virtual asset trading platforms to provide a wider range of services and products, the Securities and Futures Commission recommends amending the set of standard licensing conditions to explicitly allow:

a) The virtual asset trading platform issues digital asset-related products and tokenized securities in accordance with the laws, codes, guidelines, and regulatory provisions of the Financial Secretary.

The virtual asset trading platform b(, in accordance with the requirements of the distribution arrangement, agrees to open trust accounts or client accounts with certain custodians of digital asset-related products or tokenized securities for the purpose of holding digital asset-related products or tokenized securities on behalf of its clients.

The Hong Kong Securities and Futures Commission also stated that it encourages virtual asset trading platforms willing to comply with the revised licensing application standards to submit approval applications to the SFC.

2.5 Tokens that are not traded on virtual asset trading platforms

The circular states that the Hong Kong Securities and Futures Commission (SFC) has noted that certain virtual asset trading platforms may wish to provide custody services for digital assets that are not traded on their platforms through their affiliated entities. This action is not permitted under the current licensing conditions. However, to promote a more diversified development of digital asset custody services, the SFC now allows virtual asset trading platforms seeking to provide such services to apply for amendments to the relevant licensing conditions.

The Hong Kong Securities and Futures Commission stated in a circular that virtual asset trading platforms should comply with the existing “Guidelines for Virtual Asset Trading Platforms” and the tokenization circular when providing such custodial services to clients through their connected entities, particularly regarding custodial-related regulations.

Virtual asset trading platforms should continuously assess and monitor the developments related to all digital assets for which they intend to provide custody services, such as technological changes, the robustness of distributed ledger technology networks, and the emergence of security threats. Virtual asset trading platforms must also ensure that their internal monitoring measures, technological infrastructure, and anti-money laundering monitoring and market surveillance tools can effectively manage any specific risks associated with such digital assets.

The circular also points out that the Hong Kong Securities and Futures Commission may allow virtual asset trading platforms that have not yet completed the second-phase assessment to custody tokenized securities on a case-by-case basis. When assessing the relevant applications, trading platforms must demonstrate that effective measures have been established to safeguard client assets, such as implementing management monitoring measures for transfer restrictions, establishing a whitelist for client wallet addresses or wallet addresses used for deposits and withdrawals, especially when the tokenized securities are on a public non-permissioned network. However, the relevant virtual asset trading platforms must complete the second-phase assessment before applying to the SFC for custody services for digital assets other than their non-tradable tokenized securities.