The government acknowledges that the VASP licensing regime will be more rigorous and comprehensive than those in Singapore, the UK and Japan.
The Hong Kong government has gazetted amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to enhance Hong Kong’s anti-money laundering and counter-terrorist financing (AML/CFT) regulatory regime. The amendments will be introduced into the Legislative Council (LegCo) for first reading on 6 July 2022.
A LegCo brief sets out an overview of the amendments, which follows the consultation conclusions published by the Financial Services and the Treasury Bureau in May 2021 on the proposed changes (see our 2021 briefing).
VASP licensing regime
Of most interest are the long-awaited amendments that introduce a new licensing regime for virtual asset service providers (VASPs) to be administered by the Securities and Futures Commission (SFC).
It is proposed that the AMLO amendments relating to the VASP licensing regime will come into effect on 1 March 2023. Once in force, any person who seeks to carry on a business of providing a virtual asset service (currently limited to operating a virtual asset exchange (VA exchange)) will be required to apply to the SFC for a licence.
Operating a VA exchange entails providing services through means of electronic facilities where:
Firstly –
- offers to sell or purchase virtual assets are regularly made or accepted in a way that forms or results in a binding transaction; or
- persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of virtual assets in a way that forms or results in a binding transaction; and
Secondly –
- client money or client virtual assets comes into direct or indirect possession of the person providing such service.
Licensees will need to meet fit and proper requirements as well as comply with AML/CFT and other regulatory requirements.
Operating a VA exchange in Hong Kong without a licence, or actively marketing (whether in Hong Kong or elsewhere) to the public of Hong Kong the services of an overseas VA exchange that is not licensed in Hong Kong, without a reasonable excuse, will be an offence punishable on conviction on indictment, to a fine of HK$5 million and to imprisonment for seven years and, in the case of a continuing offence, to a further fine of HK$100,000 for every day during which the offence continues. A summary conviction will see fines of HK$500,000 and imprisonment of 2 years, and a further fine of HK$10,000 for every day during which the offence continues.
Virtual assets in scope
The broad definition of “virtual asset” (see below) will capture Bitcoin and “altcoins” as expected. Stablecoins and certain governance tokens will also be in scope. While NFTs are not usually recognised as a medium of exchange accepted by the public, it is possible that they may be brought in scope in the future as the Secretary for Financial Services and the Treasury will be empowered to prescribe by notice published in the Gazette whether a particular asset is to be considered a virtual asset under the AMLO.
“Virtual asset” will be defined under the AMLO as a cryptographically secured digital representation of value that:
- is expressed as a unit of account or a store of economic value; and
- either
- is used (or is intended to be used) as a medium of exchange accepted by the public, for any one or more of the following purposes – (a) payment for goods or services, (b) discharge of a debt, or (c) investment; or
- provides rights, eligibility or access to vote on the management, administration or governance of the affairs in connection with, or to vote on any change of the terms of any arrangement applicable to, any cryptographically secured digital representation of value; and
- can be transferred, stored or traded electronically; and
- satisfies other characteristics prescribed by the SFC by notice published in the Gazette; Or alternatively:
- is a digital representation of value prescribed as a virtual asset by the Secretary for Financial Services and the Treasury by notice published in the Gazette.
Not currently in scope are:
- digital representations of fiat currencies (including digital currencies issued by central banks (CBDCs));
- financial assets already regulated under the Securities and Futures Ordinance;
- stored value facilities which are regulated under the Payment Systems and Stored Value Facilities Ordinance; and
- closed-loop, limited purpose items that are non-transferable, non-exchangeable and non-fungible in nature, such as air miles, credit card rewards, gift cards, customer loyalty programmes and gaming coins.
Individual licensing requirements and personal accountability
Licensees will need to appoint at least two SFC-approved responsible officers (ROs) to assume the general responsibility of overseeing operations and ensuring compliance with AML/CFT and other regulatory requirements. The ROs are expected to be held personally accountable in case of non-compliance. Only ROs may become executive directors of a licensee.
Only individuals who are licensed by the SFC as representatives will be able to carry out regulated functions on behalf of a licensee. Licensed representatives will be expected to meet qualification requirements as determined by the SFC and should be competent to carry out virtual asset trading services.
Investor protection – professional investors only
The LegCo brief acknowledges that the Hong Kong VASP regulatory regime will be more rigorous and comprehensive than similar regimes in Singapore, the UK and Japan, among other jurisdictions.
It includes additional elements of investor protection such as:
- consideration of applicants’ company and management structure;
- a requirement that the business model is sound, with detailed risk management policies and other listing and counter-market manipulation measures in place; and
- at the initial stage, a requirement that VASPs will only be able to provide services to professional investors (this will likely be included as a licence condition, so there will be flexibility for the SFC to allow certain VA exchanges to provide services to retail investors at a later date).
Broad supervisory powers
The SFC will have broad supervisory powers to enable it to enforce the AML/CFT and other regulatory requirements
Such powers will include the power to enter business premises of the licensed VASP and its associated entities (a wholly owned subsidiary of a licensee that receives or holds, or is to receive or hold, in Hong Kong client assets of the licensee) for conducting routine inspections, to request the production of documents and other records, to investigate non-compliance and impose disciplinary sanctions (including reprimand, order for remedial actions, civil penalty and suspension or revocation of licence) against licensed persons involved with any non-compliance.
The SFC may also appoint an auditor to look into the affairs of a licensee and its associated entities if it has reason to believe that the licensee, or any of its associated entities, has failed to comply with any specified requirements (these include any provision of AMLO, any code or guideline published under AMLO).
Transition period
Corporations that have been carrying on the business of operating a VA exchange in Hong Kong immediately before 1 March 2023 that file an application with the SFC within the first nine months after the commencement of the VASP regime (ie, before 1 December 2023) and confirm that they will comply with the regulatory requirements set by the SFC will be deemed to be licensed until the SFC has made a decision on their licence application.
Any VA exchange looking to enter the Hong Kong market should do so as soon as possible if they wish to take advantage of the licensing transition period.
We can expect further rules and guidelines to be issued by the SFC in due course.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
