The Hong Kong Securities and Futures Commission (SFC) announced on May 28 that it will begin onsite inspections of cryptocurrency trading platforms seeking to operate as licensed virtual asset trading platforms (VATPs) in the region. This move comes as the "non-contravention period" for VATPs operating in Hong Kong ends on June 1.

The SFC emphasized that these platforms, currently categorized as "deemed-to-be-licensed," will be subject to onsite inspections to ensure compliance with the SFC's regulatory requirements. These inspections will particularly focus on safeguarding client assets and verifying know-your-client (KYC) processes.

"The SFC will conduct on-site inspections to ascertain their compliance with the SFC’s regulatory requirements, with a particular focus on their safeguarding of client assets and know-your-client processes," the announcement stated.

Platforms that fail to meet the compliance standards will face license denial and potential regulatory actions as necessary. Presently, 18 entities are labeled as "deemed-to-be-licensed," a temporary designation pending the completion of the licensing process. After the June 1 deadline, any unlicensed platform offering services will be in direct violation of anti-money laundering and counter-terrorism laws.

The SFC further clarified that "deemed-to-be-licensed" VATP applicants are not formally licensed and are prohibited from marketing their services or onboarding retail users. If an application is rejected, the VATP must submit a plan for an orderly wind-down of its business in Hong Kong, ensuring the protection of client interests.

Currently, only two entities, OSL Digital Securities Limited and Hash Blockchain Limited, are fully licensed VATPs. Some applicants have already withdrawn their applications after failing to meet the stringent requirements set by the Hong Kong authorities. Notably, the Hong Kong arm of crypto exchange Gate.io withdrew its application on May 22, followed by crypto exchange OKX, which halted its services in Hong Kong and withdrew its application on May 24.

These licensing requirements come amidst a rise in cryptocurrency-related scams in Hong Kong. In March, the SFC warned about platforms impersonating the region’s two licensed entities, OSL Digital Securities and Hash Blockchain Limited.

The SFC's proactive measures highlight its commitment to establishing a secure and compliant environment for cryptocurrency trading in Hong Kong, protecting investors and maintaining market integrity as the digital asset landscape evolves.