Written by: Bai Qin, Mankiw LLP
In the context of the evolving virtual asset landscape, understanding the relevant terminology and regulatory framework is crucial for industry participants. In Hong Kong, there are two key terms that often appear in this context - "Virtual Asset Service Provider" (VASP) and "Virtual Asset Trading Platform" (VATP). Although the two terms are related, they are not exactly the same. VASP is a broad concept that covers a variety of entities involved in virtual asset activities, while VATP refers specifically to platforms that facilitate virtual asset transactions.
It is important to distinguish between these two concepts because it directly affects how different entities are regulated under Hong Kong law. The Hong Kong Securities and Futures Commission (SFC) has formulated specific regulatory guidelines for VATPs and other VASPs. Since VATPs are directly involved in the trading and custody of virtual assets, they are subject to stricter supervision, especially in terms of security measures, anti-money laundering and counter-terrorist financing compliance, and investor protection. On the other hand, VASPs like virtual asset fund managers and advisors are also regulated, but their regulatory focus is more on risk management, customer disclosure, and the integrity of operations.
Before we delve into the differences between VASPs and VATPs, letâs review the definition of âvirtual assetsâ in Hong Kong:
Under the Anti-Money Laundering and Anti-Terrorism Financing (Amendment) Regulations 2022 (AMLAO), virtual assets are defined as:
A cryptographically protected digital representation of value that can be transferred, stored, or traded electronically and can be used for payment or investment purposes, such as cryptocurrencies and other virtual world asset classes.
A cryptographically secured digital representation that confers management rights, governance matters, or rights, qualifications, or access to any cryptographically secured digital representation of value, such as a governance token.
Note: According to AMLAO, the following are not included in the definition of virtual assets:
A digital representation of value issued by a central bank or government
Digital tokens with limited use
Securities or futures contracts
Any floating funds or deposits associated with stored value facilities
So why is the above definition so important? It is important because AMLAO strictly limits the definition of virtual assets to ânon-securitiesâ and does not include virtual assets as defined under the Securities and Futures Ordinance (SFO).
Normally, when we think of the SFCâs Type 1 license, we know that it is related to activities related to âdealing in securitiesâ. Therefore, the above definition of âvirtual assetsâ would have been outside the SFCâs regulatory scope. However, under Hong Kongâs new virtual asset regulatory regime, if you hold an SFC license and your business involves virtual assets, you will need to comply with relevant regulations related to both securities and non-securities. This means that you will need to comply with both the Securities and Futures Ordinance and the Anti-Money Laundering and Anti-Terrorism Financing (Amendment) Ordinance 2022 (AMLAO), as well as other relevant laws, regulations and guidelines.
In Hong Kong, you may hear the term âdual-regulationâ and the regulations mentioned above are exactly what âdual-regulationâ refers to. That is, the SFC adopts a dual-regulatory approach to virtual asset intermediaries to ensure that:
Regulation of virtual assets classified as securities (through the SFO); and
Regulation of virtual assets that are not securities (through the AMLAO).
Segmentation under the umbrella: Virtual Asset Service Provider (VASP)
The concept of VASP is defined by the Financial Action Task Force (FATF) in its guidance, which Hong Kong also follows. According to the FATF guidance, VASP includes any natural or legal person who engages in one or more of the following activities or operations for or on behalf of others:
Conversion between virtual assets and legal tender;
Exchange between one or more virtual assets;
Transfer of virtual assets (in this context, âtransferâ means a transaction on behalf of another natural or legal person that moves a virtual asset from one virtual asset address or account to another);
The custody or management of virtual assets, or tools that enable a person to control virtual assets;
Participate in financial services related to the issuance and sale of virtual assets by issuers.
As can be seen from this broad definition, it covers a variety of entities, including but not limited to:
Virtual asset fund managers;
Virtual asset consultant;
Virtual asset custodian;
Virtual asset wallet providers; and
Financial service providers related to the issuance, offering or sale of virtual assets, such as service providers in ICO projects.
Each entity plays a unique role in the virtual asset ecosystem and is subject to different regulatory requirements depending on its specific activities.
For example, virtual asset fund managers that manage portfolios containing virtual assets need to implement a strong risk management framework to protect investors. They must also provide clients with clear and accurate virtual asset risk disclosures. Similarly, virtual asset advisors that provide virtual asset investment advice are expected to maintain high standards of conduct and ensure that their advice is suitable for their clients' needs. Custodians, who hold virtual assets on behalf of others, must implement strict security measures to prevent the theft or loss of those assets.
In addition, the definition of VASP also includes the following two types of transactions and operations:
Virtual-to-virtual transactions; and
Trading of virtual currencies against legal tender.
Other licenses may also be required depending on the nature of the business activities. For example, an entity that trades in futures contracts would need to apply for a Type 2 license, while an entity that provides advice on corporate finance would need to apply for a Type 6 license.
Focus under the small umbrella: Virtual Asset Trading Platform (VATP)
Now that we have clarified what VASP is, what is VATP?
A VATP can be described as a type of VASP that focuses on facilitating the trading, exchange, and often custody of virtual assets. VATPs act as intermediaries, connecting buyers and sellers of virtual assets, enabling them to transact in a secure and regulated environment.
VATP plays a key role in the virtual asset ecosystem, providing liquidity and driving price discovery for various virtual assets. In Hong Kong, VATP is subject to specific regulation prescribed by the SFC. If VATP is involved in the trading of at least one virtual asset that is considered a security, it must hold a license in Hong Kong. This means that once VATP provides trading in security tokens, the platform operator will need to obtain the following licenses in Hong Kong:
Type 1 licence (securities dealing); and
Category 7 licence (automated trading services).
If the VATP is not involved in any transactions in virtual assets classified as securities, it will still be subject to other relevant regulations (such as AML/CFT requirements), but will not require an SFC license under the existing framework.
In regulating VATP in Hong Kong, the SFC is primarily concerned with regulating centralized virtual asset trading platforms, rather than peer-to-peer trading markets where investors typically retain control over their fiat currency assets or virtual assets.
If an entity applies for the SFCâs VATP license but it only provides routing services rather than actually providing automated trading services related to virtual assets, the SFC will not accept its license application.
Attorney Mankiw's Summary
Understanding the difference between VASPs and VATPs is critical for anyone involved in the virtual asset industry. VASPs are a broad term that covers a wide range of entities including virtual asset fund managers, advisors, and custodians. VATPs, on the other hand, are a specific subcategory of VASPs that focus on facilitating the trading of virtual assets.
This distinction is important because it affects how different entities are regulated under Hong Kong law. Due to the high risks of virtual asset trading and custody, VATPs (virtual asset trading platforms) are subject to strict regulatory requirements. Other VASPs (virtual asset service providers) are also regulated, but their regulatory focus is on risk management, customer disclosure, and ensuring the integrity of operations. Therefore, operating entities in Hong Kong need to develop tailored compliance strategies based on the specific services provided by VASPs, which will help ensure their safe and sound operations.
