Hong Kong's virtual asset industry operates under the strict supervision of the Securities and Futures Commission (SFC). Since its 2018 statement on the regulatory framework for virtual asset portfolio managers, fund distributors, and trading platform operators, the SFC has actively engaged in extensive industry research. This led to the 2019 launch of a regulatory sandbox program, allowing experimental oversight of voluntary platforms meeting specific criteria.
On November 6, 2019, the SFC issued a warning on virtual asset futures contracts and a position paper outlining the regulatory framework for virtual asset trading platforms. These documents confirmed the SFC's readiness to supervise platforms offering trading services for security tokens.
Recent Licensing Developments
Notable players in the crypto space have recently secured Hong Kong licenses. Huobi announced in March that its subsidiary received Type 4 (advising on securities) and Type 9 (asset management) licenses. Similarly, OSL, the digital asset platform under BC Technology Group, obtained Type 1 (dealing in securities) and Type 7 (providing automated trading services) licenses, making it the first SFC-licensed digital asset trading platform globally.
Key License Types for Crypto Businesses
The SFC regulates ten types of financial activities. For crypto-related operations, Type 1 (dealing in securities), Type 7 (providing automated trading services), and Type 9 (asset management) are the most relevant.
Important Considerations
- Virtual Asset Trading Platforms: Companies operating in Hong Kong that plan to offer trading for at least one security token must obtain Type 1 and Type 7 licenses. OSL's approval set a precedent as the first globally recognized platform under this framework.
- Type 1 License Variations: The Type 1 license has two tiers. A full license allows firms to act as brokers, directly offering securities trading services to clients. A restricted license permits firms to operate as intermediaries or introducers, referring clients to full brokers for securities purchases. The SFC has issued only a little over a thousand Type 1 licenses since 2003, highlighting the high barrier to entry.
- Type 9 Asset Management License: Often pursued by mainland Chinese私募机构 (private fund institutions), especially well-known ones, this license is challenging to acquire due to high costs, talent shortages, and unpredictable processing times. Some firms opt to partner with existing licensed asset managers to enter the market quickly and cost-effectively.
- Expanding Type 9 for Crypto: A standard Type 9 license covers traditional financial services only. Firms wishing to manage compliant digital currency funds must submit a report to the SFC requesting permission to allocate a portion of the fund to virtual assets. This allocation can be gradually increased as the fund demonstrates performance.
- License Combinations: Firms offering both trading services and investment advice often combine Type 1, Type 4 (advising on securities), and Type 9 licenses. The Type 4 license is specifically required for providing investment advice to clients in Hong Kong.
How to Obtain a License
There are two primary pathways to obtaining an SFC license: direct application or acquisition.
Direct Application
Company Requirements
The applicant must be a Hong Kong-registered company with a straightforward shareholder structure. All ultimate beneficial owners (UBOs), shareholders, and directors must meet the SFC's "fit and proper" criteria. The application involves detailed background checks on major shareholders (those holding 10% or more of the licensed corporation, or 35% in a holding company) and directors, assessing their financial status and character.
Capital Requirements
The required capital varies by license type. Applicants must provide proof of legitimate funding sources, meet the capital requirements for their planned business activities, and comply with legal capital requirements. Licensed corporations must submit regular financial resource returns: monthly for most, but semi-annually for Type 9 licensees that do not hold client assets.
Personnel Requirements
A minimum of two Responsible Officers (ROs) must be appointed to manage the company. ROs come in two categories: those with prior experience managing a licensed corporation (major RO) and those who have passed the Hong Kong Securities and Investment Institute (HKSI) exams and possess relevant industry experience (minor RO).
Salaries for ROs vary significantly. As of 2017 data, a non-participating, "name-only" RO could cost HK$50,000–60,000 per month. An RO actively involved in management and operations could command HK$100,000 or more, especially if they have experience at a prestigious firm.
A Warning on "Name-Only" ROs: While using a RO who does not participate in actual business operations might seem like a cost-saving measure (reducing monthly costs to HK$30,000–50,000), this practice is a serious violation of SFC rules. The consequences of being caught can be severe, including public reprimand and license revocation. It is strongly advised to follow the proper licensing procedures and avoid regulatory shortcuts.
Acquisition Route
Acquiring an existing licensed corporation involves a "change in substantial shareholder" process, governed primarily by the Securities and Futures Ordinance. If the target is a listed company, additional rules like the Takeovers Code apply.
The Acquisition Process
- Application for Change: The licensed corporation must apply to the SFC for approval to change or add a major shareholder. The core of this process is the SFC's vetting of the new shareholder's suitability.
- Proof of Funds: The acquiring entity must provide proof of sufficient assets (e.g., bank statements or financial reports) to complete the acquisition and support the licensed corporation's future operations.
SFC Scrutiny: The SFC rigorously assesses the acquirer's qualifications. Acquirers from the same industry are generally viewed more favorably. Those from other sectors must submit a comprehensive and rational business plan. The SFC will examine:
- Potential changes to the business model.
- Conflicts of interest (e.g., cross-trading or market manipulation between the acquirer's main business and the licensed entity).
- The adequacy of proposed risk control systems and segregation measures.
- The suitability of the management team.
Post-Acquisition Responsibilities
The newly acquired firm must:
- Maintain its "fit and proper" status.
- Comply with all applicable provisions of the Securities and Futures Ordinance.
- Submit regular audited accounts and financial returns.
- Notify the SFC promptly of any material changes to its business.
Risks of Acquisition
- Hidden Liabilities: Risk of inheriting unknown debts or facing claims from the target company's creditors.
- Sunk Costs: The process involves significant time, financial, and human resources with no guarantee of success.
- High Valuation: Demand from mainland Chinese companies has driven acquisition prices for Hong Kong-licensed corporations to steep levels.
- Policy Risk: The SFC has expressed skepticism about certain acquisition structures, particularly those where senior management may not be properly supervising the regulated activities. This could lead to disciplinary action, including public censure or license withdrawal.
Application Timeline
A direct application for an SFC license generally takes about six months. Acquiring an existing licensed corporation is faster, typically taking three to four months. However, similar to applying for a Singapore Payment Services Act (PSA) license, these are estimates. The actual timeline can vary based on the applicant's specific circumstances and whether they have professional guidance.
For those navigating this complex landscape, thorough preparation and understanding of regulatory expectations are key. 👉 Explore professional licensing guidance to ensure a smoother process.
Frequently Asked Questions
What is the main difference between a Type 1 and Type 9 license?
A Type 1 license primarily allows a firm to deal in securities, acting as a broker. A Type 9 license allows a firm to manage portfolios and discretionary accounts on behalf of clients. They govern different activities but can be held by the same firm.
Can a foreign company apply directly for an SFC license?
The applicant must be a company incorporated in Hong Kong. A foreign company would need to establish a Hong Kong subsidiary to serve as the license applicant.
Is a Type 9 license sufficient to start a Bitcoin fund?
No. A standard Type 9 license does not automatically permit digital asset management. You must first obtain the Type 9 license and then apply to the SFC for specific approval to include virtual assets in your fund's portfolio, starting with a limited allocation.
What defines a 'fit and proper' person for the SFC?
The SFC assesses a person's financial status, integrity, reputation, and competence. This includes a clean regulatory record, sound financial standing, and the necessary qualifications and experience to perform their role.
How does the SFC's sandbox work for crypto businesses?
The sandbox allows the SFC to supervise eligible virtual asset trading platforms on a trial basis. It provides a controlled environment for the regulator and the business to understand operational risks and ensure compliance before full licensing.
What is the most significant risk when acquiring a licensed firm?
Beyond financial risks like overpaying, the largest regulatory risk is the SFC rejecting the change of control application. This could happen if the acquirer is deemed unsuitable or if the proposed business plan raises concerns about investor protection or market integrity.