Introduction
The Hong Kong Securities and Futures Commission (SFC) announced on 16 January 2025 that new applicants for a virtual asset trading platform (VATP) licence will be subject to a revamped and expedited external assessment process.
Previous external assessment process
VATP licence applicants who had submitted their application on or before 18 December 2024 were required to submit external assessment reports covering their policies, procedures, systems and controls in two phases: the first report at the point of submitting the licence application (the Phase 1 Report) and the second report after approval-in-principle was granted by the SFC (the Phase 2 Report). The policies, procedures, systems and controls subject to the external review cover issues such as market surveillance, anti-money laundering/know your customer, custody and cybersecurity.
The Phase 1 Report focuses on the design effectiveness of the VATP’s proposed policies, procedures, systems and controls, whereas the Phase 2 Report focuses on the implementation and effectiveness of the actual adoption of the policies, procedures, systems and controls.
New external assessment process
As part of the existing licensing process, the SFC took a more direct approach to evaluating the four deemed-to-be-licensed VATP licence applicants through on-site inspections. As this approach has proven to be effective, the SFC has decided to extend this swift licensing process to all VATP licence applicants applying after 18 December 2024.
We discuss below the key features of this new process.
Single external assessment post-implementation
VATP licence applicants will no longer be required to produce separate Phase 1 and Phase 2 Reports. Instead, they will only be subject to one single external assessment. Specifically, an external assessor will only be required to be engaged after the VATP applicant has implemented its policies, procedures, systems and controls, with the external assessment focusing on both the design and implementation of such policies, procedures, systems and controls.
Based on the SFC’s experience with previous VATP licence applicants, in many cases substantial changes to policies and procedures were required to be put in place on implementation and deployment of the applicants’ systems and controls. Having the external assessment post-implementation allows VATP licence applicants to make changes to their policies and procedures to ensure that these can operate as intended.
Tripartite agreement among SFC, VATP applicant and external assessor
Under the new licensing process, the SFC will become a party to the external assessment engagement, alongside the VATP applicant and the external assessor – with all three parties to agree on the terms and scope of the external assessment before it commences.
As party to the agreement, the SFC will supervise the entire external assessment process, clarify regulatory requirements and offer feedback on the findings of the external assessor. The SFC also expects that most findings identified by the SFC, and external assessor will be resolved during the external assessment process itself, such that once the external assessment (and all other outstanding matters) is complete, the VATP applicant will be granted a licence.
Higher standards for external assessors
The SFC has also taken steps to ensure the suitability and quality of appointed external assessors, by requiring new applicants to submit (as part of their licensing application bundle) documentation to prove that the proposed external assessor is suitable and sufficiently capable. The SFC may not accept the application if it opposes the appointment of the external assessor.
The external assessment must also be performed as a direct assurance engagement and signed off by a certified public accountant.
The streamlined approach designed to substantially shorten the VATP application timeline is welcome and allows VATPs to rectify any defects in their compliance and operational arrangements in a more seamless manner. This bodes well for the prospect of more VATP licences being awarded by the SFC this year under the new licensing process, both as a result of existing applications being processed more quickly and prospective applicants being more attracted by the streamlined assessment process.