Exclusive interview with VDX's Chief Operating Officer: What are the details to pay attention to when applying for a Hong Kong license?

November 17th, the list of applicants for virtual asset trading platforms of the Hong Kong Securities and Futures Commission showed that there are currently six companies applying for virtual asset trading platform licenses. These six virtual asset trading platforms are: BGE, HKbitEX, HKVAX, VDX, Meex, and PantherTrade.

Among them, Victory Fintech Company Limited, the company behind Hong Kong digital asset platform VDX, is a subsidiary of local veteran securities firm Victory Securities Investment, with directors including Gao Juan, chairman of the Hong Kong Securities Industry Association. Victory Securities has been active in virtual asset investment in recent years, and holds licenses from the China Securities Regulatory Commission for No. 1 (virtual asset trading), No. 4 (virtual asset consulting services), and No. 9 (virtual asset asset management services).

To further understand the branding details of VDX, BlockBeats conducted an exclusive interview with Donald, the Chief Operating Officer of VDX.

Donald has served as the digital asset subject matter expert at the Securities and Futures Commission (SFC) in Hong Kong. He co-authored regulatory frameworks and managed VA applications, and led the regulatory work on virtual asset trading platforms and fund managers. He was also a co-founder of the institutional-grade crypto hedge fund Bletchley Park, a quantitative strategist and trader at Deutsche Bank, and a manager at Accenture, building trading systems for exchanges such as Deutsche Börse, Shanghai Stock Exchange, and Tokyo Stock Exchange.

BlockBeats: Could you please give a brief self-introduction? We heard that you used to work at SFC. How did you enter the crypto industry?

Donald: Before joining Victory Fintech as the Chief Operating Officer, I worked for more than 3 years in the Hong Kong regulatory agency, the Securities and Futures Commission, mainly focusing on the regulation of virtual assets. I assisted in formulating the virtual asset licensing system for fund managers and trading platforms, and I was the core reviewer for all virtual asset applications. During my time at the SFC, I created a regulatory rulebook and held many internal seminars and training sessions to establish the foundation and understanding of virtual assets for the regulatory agency. I also obtained a seat in the SFC IOSCO DeFi working group.

When I first entered the virtual asset industry, I was working as the Chief Operating Officer at an over-the-counter derivatives brokerage firm. In 2017, I co-founded one of the first institutional-grade crypto hedge funds in Hong Kong with several industry colleagues, during which time I was responsible for automated and systematic arbitrage trading. Through a fortuitous turn of events, I established a connection with regulatory authorities. During the communication process, the high-level working style of the regulators left a deep impression on me. Working with regulatory agencies has had a profound impact on my understanding of virtual asset management, and has given me a very different perspective on financial markets. As a result, I have established lasting relationships with regulatory agencies around the world.

BlockBeats: The market is very interested in Hong Kong's crypto license, but there are many types of licenses and it is not clear which license is suitable for which content. Can you help us sort out the common Hong Kong crypto licenses?

Donald: Okay, no problem. Category 1 (securities trading) and Category 2 (futures contract trading) are the core licenses for Hong Kong brokers/traders. Therefore, if existing brokers in Hong Kong wish to provide virtual asset-related services to their clients, they need to apply to the SFC for approval to "upgrade" their licenses to cover virtual assets. This application includes answering detailed questionnaires and proving that the company employs personnel with sufficient knowledge and experience.

Next, the Type 9 Asset Management License. This license is created for asset management companies to manage client assets, and the license can also be "upgraded" to allow asset management companies to invest more than 10% of their assets under management (AUM) in virtual assets. Similarly, applicants need to demonstrate that they have knowledgeable, capable, and experienced employees to invest in virtual assets.

Finally, running applications for virtual asset trading platforms (VATP) or current virtual asset service providers (VASP) requires a Type 1 and Type 7 (automated trading platform) license. The VATP/VASP application process is much more complex than any other application because the subject matter is much more complex. Core issues of concern for regulators typically include but are not limited to custody, AML/KYC, trading operations, market supervision, network security, and risk management.

BlockBeats: How is the progress of VDX's license application?

Donald: I cannot disclose specific details, but our progress has been smooth. We submitted the application in November 2022, and it was officially accepted in February 2023. We have been communicating with regulatory agencies in all core areas. We have been actively providing high-quality submission materials to the China Securities Regulatory Commission and ensuring timely responses to make the application process as smooth as possible.

BlockBeats: Some reports previously stated that the cost of applying for a license for an exchange is approximately 100 million RMB. Why is the cost so high?

Donald: It depends on the specific situation. Establishing a compliant and regulated trading platform will incur additional costs because the company needs to ensure compliance with all relevant regulations and laws. There are also many factors that can affect the actual overall cost of establishing such a company, including team size, supplier selection, which features are built internally and which are off-the-shelf, and so on. Of course, we believe that this process is not only worthwhile, but regulation is the future direction of this asset class. In the near future, most virtual asset businesses, including trading, will only be able to be conducted on regulated and compliant exchanges.

BlockBeats: Can you describe in detail the specific processes and key steps involved in the approval process for virtual asset trading platforms by the Hong Kong Securities and Futures Commission? How long does the entire process typically take, from preparing the application to ultimately obtaining the operating license issued by the Hong Kong Securities and Futures Commission?

Donald: First, the applicant needs to form an experienced and proactive core team who will create the necessary processes, documents, and systems. Then, the team must also develop policies and procedures for eight core areas and meet the requirements of the VASP operator guidelines. In addition, the team needs to obtain an independent assessment report from an independent assessor on the scope of the guidelines and other considerations. Once the above work is completed and the required core personnel (including future responsible personnel and managers responsible for core functions) are selected, the application can be submitted.

Currently, the China Securities Regulatory Commission (CSRC) reviews the application itself (rather than the content) and raises any relevant questions. Once they are satisfied with the response, the CSRC will decide whether to accept the application. Once the application is formally accepted, the applicant and the CSRC will engage in detailed communication on core areas and any other areas deemed important by regulatory authorities. Typically, this dialogue takes the form of written questions and sometimes demonstrations and demos. There is no fixed timetable for this stage, and it depends entirely on how the applicant answers questions and responds to regulatory feedback.

Once regulatory agencies have demonstrated satisfaction with the proposed system and program's capabilities and compliance with the requirements outlined in the guidelines, they will issue a principle approval (AIP). The China Securities Regulatory Commission (CSRC) issues this document primarily to allow applicants to continue working with external partners, such as opening bank accounts and obtaining custody insurance. At this stage, the applicant must complete an independent assessment report - Phase 2, which verifies the effectiveness of the system's implementation and operation. Other required reports include vulnerability scanning and penetration testing. The CSRC may grant a license if all issues are properly addressed.

Once all the above steps are successfully completed, reviewed and meet the requirements of the China Securities Regulatory Commission, and all issues are resolved, the Commission may grant a license.

BlockBeats: What key preparations can be done for virtual asset trading platforms to increase the likelihood of obtaining operating licenses and promote efficient application processes? What are the most common application misconceptions?

Donald: As previously mentioned, having a team with a traditional financial background, especially in compliance, trading operations, and system experience, is a key factor. Another factor is mindset - obtaining a license requires great perseverance and belief. Of course, providing high-quality submission materials to regulatory agencies, answering their questions comprehensively and completely, and always striving to design solutions that comply with all relevant regulations are very important.

BlockBeats: Recently, SFC has issued several licenses. What trends can we expect in the field of licenses in the future?

Donald: We have recently seen further clarification from the China Securities Regulatory Commission on tokenization. Therefore, we can reasonably expect that the field to be further included in this framework is derivatives, as it provides institutional investors with a standard toolkit for risk management. Of course, this framework can be expanded in many different ways, and it provides reliable protection for starting, establishing, and developing businesses.

BlockBeats: How many licensed exchanges do you expect to see in Hong Kong in the end?

Donald: It is difficult to give a specific number to confirm this. To further establish Hong Kong's global leading position in institutional virtual assets, what is needed is a fully functional virtual asset capital market. This not only requires a value chain of service providers with products and services at its core, but also a sufficient number of providers to choose from so that participants and end customers can make wise choices among multiple intermediaries and services.

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