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The SFC published a consultation paper on the proposed regulatory requirements for VATP operators, acting as a reminder to applicants to start planning now to get ahead of the upcoming deadline.
The updated licensing regime for Virtual Asset Trading Platform (VATP) operators (otherwise known as the AMLO VASP regime) will become effective on 1 June 2023. The SFC has issued VATP Guidelines and requested feedback on the proposed requirements.
Essential proposals to be aware of
1. Dual licensing regime
Currently, VATPs providing trading services in at least one security token are governed under the SFC (existing SFO regime). Given that a virtual asset (VA) may change its nature from non-security token to a security token and vice versa, VATPs are encouraged to apply for approvals under both the existing SFO and new AMLO VASP regimes to become dually licensed and approved. The VATP Guidelines will be applicable to VATPs under both regimes replacing the previous Terms and Conditions for VATP operators issued in December 2020.
2. Safeguarding retail investors
The SFC has proposed safeguards intended to protect retail investors, including:
- suitability assessments
- governance by setting up token admission and review committee
- reasonable token due diligence and admission criteria
- disclosure obligations.
We expect to see the SFC providing more guidance on the design and contents of the VA knowledge assessment to facilitate the development of standards and consistency across the industry. More guidance on suitability specific to VAs is also expected to be added to the current FAQs. In the meantime, operators are advised to create their own test to access the VA knowledge of retail investors.
3. Insurance / compensation arrangement
The consultation paper offers the following modifications:
- A compensation arrangement which can include a combination of third-party insurance and funds of VATP operators.
- Daily monitoring of the total value of client VAs under custody.
- Segregation of funds from VATP operator assets.
Combining third-party insurance and funds set aside by the licensed VASP, or a corporation within its same group of companies, can provide additional protection.
4. Trading in VA derivatives
The current regime does not allow licensed platform operators to offer, trade or deal in VA futures contracts or related derivatives. The SFC aims to understand more about the business model and VA derivatives which VATP operators intend to offer and their market demand to formulate policies accordingly.
Given that VA derivatives are likely to be complex products, we expect that VA derivatives won’t be suitable for retail investors unless they have passed the suitability assessment.
5. Travel rule, suspicious transactions and screening
The SFC has drafted a stand-alone Guideline on AML/CFT including a requirement of travel rule which is one of the Financial Action Task Force’s (FATF) recommendations requiring VASPs to communicate the information of the originator and beneficiary of VA transactions that exceed a certain threshold. Operators should also be aware of requirements for the identification of suspicious transactions and screening of all relevant parties involved in a VA transfer.
6. Mandatory external assessments
The SFC proposes that VATP applicants should engage an external examiner to assess their proposed structure, governance, operations, systems and controls, and submit reports to the SFC when (i) registering their licence application (Phase 1 Report) and (ii) after approval-in-principle is granted by the SFC (Phase 2 Report) which covers the implementation and effectiveness of adopting planned policies, procedures, systems and controls.
These proposed regulatory changes will likely result in a more time-consuming application process, so you should plan ahead to meet these requirements before the June deadline.
How can we help
We can support you with the VATP licensing application by conducting independent assessments for the Phase 1 and Phase 2 reports.
We work with global VATP operators to design effective internal control frameworks that meet SFC proposed requirements, tapping into our global experts across the business.
Get in touch if you’d like to discuss any tailored support or advice options with us.
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