What are the differences between VASP and VATP in the Hong Kong Virtual Money license application? | Mandel Web3 Popularization of Law

Author: Bai Zhen, Man Kun Law Firm

In the context of the evolving virtual assets, it is crucial for industry participants to understand the relevant terminology and regulatory frameworks. 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 these two terms are related, they are not exactly the same. VASP is a broad concept that covers various entities involved in virtual asset activities, while VATP specifically refers to platforms that facilitate virtual asset trading.

It is important to distinguish between these two concepts, as it directly affects the regulatory approach of different entities under the laws of Hong Kong. The Securities and Futures Commission (SFC) of Hong Kong has developed specific regulatory guidance for VATPs and other VASPs. As VATPs are directly involved in the trading and custody of virtual assets, they are subject to stricter regulation, especially in terms of security measures, anti Money Laundering and Combating the Financing of Terrorism Compliance, and investor protection. On the other hand, VASPs such as virtual asset fund managers and advisors are also regulated, but their regulatory focus is more on Risk Management, client disclosures, and operational integrity.

Before delving into the differences between VASP and VATP, let's first review the definition of "virtual assets" in Hong Kong:

According to the 2022 Anti-Money Laundering and Combating the Financing of Terrorism (Amendment) Ordinance (AMLAO), virtual assets are defined as:

• A digitally represented form of value that is protected by cryptography and can be transferred, stored, or traded electronically, and can be used for payment or investment purposes, such as Crypto Assets and other asset categories in the virtual world.
• A digital representation, protected by cryptography, that grants management rights, governs affairs, or provides rights, qualifications, or access permissions to any cryptographic representation of value, such as governance tokens.

Note: According to AMLAO, the following content does not fall within the definition scope of virtual assets:

• The digitized representation of value issued by the Central Bank or government issuance
• Limited-use digital Token
• Securities or Futures Contracts
• Any floating funds or deposits related to the stored value facility

So why is the above definition so important? Its importance lies in the fact that AMLAO strictly defines virtual assets as "non-securities," excluding virtual assets defined under the Securities and Futures Ordinance (SFO).

Usually, when we think of Type 1 licenses of the SFC, we know that it is related to activities of "securities trading". Therefore, the definition of "virtual assets" mentioned above was originally beyond the scope of SFC regulation. However, under the new virtual asset regulatory regime in Hong Kong, if you hold an SFC license and your business involves virtual assets, you will need to comply with both securities-related and non-securities-related regulations. This means that you need to comply with the Securities and Futures Ordinance and the Anti-Money Laundering and Combating the Financing of Terrorism (Amendment) Ordinance 2022 (AMLAO), as well as other relevant laws, regulations, and guidelines.

In Hong Kong, you may hear the term “dual-regulation” (dual-regulation), and the regulations mentioned above refer to the content of “dual-regulation”. That is to say, the SFC has adopted a dual-regulation approach to virtual asset intermediary institutions to ensure:

• Regulate virtual assets classified as securities (through SFO); and
• Regulate non-securities virtual assets (through AMLAO).

Segmentation Under the Big Umbrella: Virtual Asset Service Providers (VASPs)

The concept of VASP is defined by the Financial Action Task Force (FATF) in its guidance, which Hong Kong also follows. According to FATF guidance, VASP includes any natural or legal person who conducts one or more of the following activities or operations for or on behalf of another person:

• Exchange between virtual assets and fiat currencies;
• Exchange between one or more virtual assets;
• The transfer of virtual assets (in this context, 'transfer' refers to transactions on behalf of another natural person or legal entity, transferring virtual assets from one virtual asset Address or account to another Address or account).
• The custody or management of virtual assets, or tools that enable individuals to control virtual assets;
• Participate in Financial Service related to the issuance and sale of virtual assets with the issuer.

From this broad definition, it encompasses multiple entities, including but not limited to:

• Virtual Asset Fund Manager;
• Virtual asset advisor;
• Virtual Asset Custodian;
• Virtual asset wallet provider; as well as
• Financial Service providers related to the issuance, sale, 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 based on its specific activities.

For example, virtual asset fund managers managing virtual asset investment portfolios need to implement a strong Risk Management framework to protect investors. They must also provide clear and accurate virtual asset risk disclosure to clients. Similarly, virtual asset advisors providing virtual asset investment advice are expected to maintain high standards of conduct and ensure that their recommendations are suitable for client needs. Custodians holding virtual assets on behalf of others must implement strict security measures to prevent theft or loss of these assets.

In addition, the definition of VASP also includes the following two types of transactions and operations:

• Virtual-to-virtual trading; as well as
• Trading virtual currencies for legal tender.

Other licenses may also be required based on the nature of the business activities. For example, entities engaged in Futures Trading need to apply for a Type 2 license, while entities providing advice for corporate financing 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?

VATP can be described as a type of VASP (Virtual Asset Service Provider) that focuses on facilitating virtual asset trading, exchange, and typically custody. As an intermediary, VATP connects the buyers and sellers of virtual assets, enabling them to trade 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 regulated by the SFC. If VATP engages in the trading of virtual assets that are considered securities, it must hold a license in Hong Kong. This means that once VATP offers trading of security tokens, the platform operator will need to obtain the following licenses in Hong Kong:

• Class 1 license (securities trading); and
• Class 7 license (automated trading services).

If VATP does not involve any virtual asset transactions classified as securities, it still needs to comply with other relevant regulations (such as AML/CFT requirements), but does not require an SFC license under the existing framework.

When regulating VATP in Hong Kong, SFC mainly follows the regulation of centralized virtual asset trading platforms, rather than regulating peer-to-peer trading markets where investors typically retain control over their legal tender assets or virtual assets.

If an entity applies for an SFC VATP license, but only provides routing services instead of automated trading services related to virtual assets, the SFC will not accept its license application.

Summary by Lawyer Mankun

Understanding the difference between VASP and VATP is crucial for anyone involved in the virtual asset industry. VASP is a broad term that encompasses a wide range of entities, including virtual asset fund managers, advisors, and custodians. VATP, on the other hand, is a specific subcategory of VASP that focuses on facilitating the trading of virtual assets.

This distinction is very important because it affects the regulatory approach of different entities under Hong Kong law. Due to the high risks involved in virtual asset trading and custody, Virtual Asset Trading Platforms (VATPs) are required to comply with strict regulatory requirements. Other Virtual Asset Service Providers (VASPs) are also subject to regulation, but their regulatory focus is on Risk Management, customer disclosure, and ensuring operational integrity. Therefore, Hong Kong's operating entities need to develop tailored Compliance strategies based on the specific services provided by VASPs, which helps ensure their safe and sound operation.