Utilizing AI Research Summary Tools To Review HKSFC Requirements Under The VATP.

In the first of a series of utilizing research and summary AI tools, we will test a few applications such as Elicit to review HKSFC guidelines versus other jurisdiction requirements in order to ascertain the tool’s usefulness in providing content relevant to the practitioner.

We chose the HKSFC’s Guidelines for Virtual Asset Trading Platform Operators as a case study and utilized this tool to compare it with regulatory frameworks in other major financial centers.

In June 2023 the Hong Kong Securities and Futures Commission published its “Guidelines for Virtual Asset Trading Platform Operators”.

These guidelines provide an end-to-end guide as to regulatory expectations for operating digital asset trading and covers staff competence and training, conduct, finance and operations, market abuse, handling client assets and custody, as well as management controls and cybersecurity.

The guidelines are an excellent reference not only for those operating in this space but also to students, academics and non digital asset market participants to understand the state of regulatory thinking in this sector.

What is Elicit?

Elicit’s website (Elicit: The AI Research Assistant) describes itself as an AI-enabled systematic review that cuts short the time of research by 80% and makes full use of its database of 125 million papers from which to draw data and research from. Elicit allows users to accelerate their literature review and automate systematic reviews. Users may also upload papers as they conduct their research analysis.

In terms of privacy, papers uploaded to Elicit are not shared with others and remain private to the user.

Our research question was simple:

“How do the virtual asset trading operator requirements in Hong Kong compare to regulatory frameworks in other major financial centers?”

Elicit proceeded to process a report summarizing 50 in-scope papers of which 10 were screened to extract the data and prepare the findings. In approximately seven minutes data was extracted and five minutes later, a report named “Comparative Analysis of Virtual Asset Regulations” was generated.

Report Findings

Elicit’s output was very comprehensive.

The report provided a good abstract as to background on Hong Kong’s regulatory regime and what that may entail versus the requirements in the United Stated and the contrast with China.

The report proceeded to provide data on the number of academic papers used and out of that amount, how many papers were used that were most relevant to this query.

The report next provided its screening criteria for the papers used in its search to compile this report. In this instance some examples of what criteria was used in screening papers include those with a regulatory framework focus, that covered jurisdictions of major financial centers, considered whether documents were official or academic papers, and were related to virtual asset trading services.

The data extraction methodology was detailed next and information on what extraction instructions were provided to the large language model the application utilizes were shown. This section is central to see the logic of how the subsequent output may appear.

Results

Studies (author, year of publication) included in the final output were displayed.

Next, a thematic analysis was made whereby the licensing and authorization requirements across the jurisdictions of Hong Kong, US, and China were displayed. Other jurisdictions such as UK, Singapore, and the EU did not have the necessary output according to the instruction and methodology provided and this outcome was detailed here.

The operational and technical standards, which are  the meat of the study and which detailed the comparative analysis between Hong Kong and international standards and the key differences between the two were outlined. This covered areas relating to:

-Risk Management

-Customer Due Diligence

-Asset Custody

-Trading Systems

-ANL

-Investor Protection

-Cybersecurity

-Governance

-Transparency

-Market Integrity

The report concluded that Hong Kong's standards appeared to be “more comprehensive and structured in 9 out of 10 categories analyzed”.

This limitation of the output was also explained as this was limited by the varying levels of detail available for different jurisdictions in our extracted data.

Hong Kong Standards:– the report found specific standards for 9 out of 10 categories–

International Standards:– The report found varied approaches in 4 categories and found similar standards to Hong Kong in 3 categories.

Key Differences:– The report found Hong Kong had more structured or specific requirements in 8 categories.

The report proceeded to provide specific details on comparative approaches between Hong Kong and other jurisdictions in the following categories:

-Investor Protection and Markets Integrity Measures.

-Risk Management and Compliance Frameworks.

-Cross-Border Considerations with China.

A full list of references used in producing the report was displayed and the source material was from 2018 to 2024 inclusive.

Conclusion and Takeaways

Although this was a more simplistic use case of the tool subjected to the limitations as to the search query itself, the tool is certainly impressive in its logic, structure, and approach to the query. The out put was well organized and its value as a tool to conduct research into topical regulatory maters is evident and will continue to improve.

The Future Compliance Journal will continue to use this tool and fine tune its queries to produce more meaningful search results.

Note: The Future Compliance Journal was not compensated nor had sought any advice nor consultation from the application provider during the course of preparing this blog post. This does not constitute any legal or regulatory advice and the Future Compliance Journal is not responsible for any readers use of the application nor applying the results of its findings to the readers circumstances. Readers should seek their own regulatory and legal advice and should also seek advice as to whether this application is suitable for their organization use.