On 8 February 2024, the Financial Services and the Treasury Bureau (FSTB) proposed to expand the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to regulate providers of virtual asset (VA) over-the-counter (OTC) trading services: any person or entity that (i) operates a business through a physical outlet or a digital platform for servicing spot trading of VA (VA OTC Business) in Hong Kong or (ii) actively markets VA OTC services to the Hong Kong public, within or outside of Hong Kong, will need to be licensed for the VA OTC Business under the expanded AMLO.
This proposal responds to the various fraud scandals associated with unregulated OTC trading of VA in the second half of 2023, and will align the AMLO with the VA regulatory requirements of the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) by limiting retail investor access to VAs that are publicly issued or offered by HKMA and SFC regulated entities only. The public consultation on this legislative proposal will close on 12 April 2024.
In-scope operators
The legislative intent is to license providers of VA automated teller machine or exchange services, market makers of VA, and inter-dealer brokers conducting back-to-back trading on VA as principal. Provision of temporary custody/escrow services for VA during the course of VA OTC trading may also be regulated. The FSTB is considering whether a separate VA custody regulatory regime should be established and is seeking public views on the matter.
The proposed licensing scope will exclude operation of Hong Kong licensed virtual asset trading platform (VATP) operators, peer-to-peer proprietary VA trading activities between individuals, and trade facilitation activities by providers who are not counterparties of the facilitated VA trades. Additionally, financial institutions licensed by SFC or HKMA (such as SFC licensed VA dealers and in the future, HKMA licensed stablecoin issuers) will be exempt from licensing under the AMLO for conducting VA OTC Business.
Obtaining a VA OTC Business licence
VA OTC Business operators will need to apply to the Commissioner of Customers and Excise (CCE) for licences and satisfy the regulatory requirements set by the CCE.
The CCE will refer to the existing regulatory requirements for money service operators (MSO) and SFC licensed VATPs to formulate the final regulatory requirements for VA OTC Business operators. The proposed regulatory requirements include:
- Having suitable operating premises in Hong Kong for a physical VA OTC outlet, or a management office, correspondence address, and books and records storage in Hong Kong for an online digital VA OTC platform;
- Employing at least one competent compliance officer and one money laundering reporting officer;
- Demonstrating competency by having a proper corporate governance structure staffed by experienced and knowledgeable personnel to operate the VA OTC Business;
- Operating the VA OTC Business in a prudent and sound manner for the protection of clients’ and the public’s interests;
- Conducting the VA OTC Business honestly and fairly with due skill, care, and diligence;
- Implementing proper risk management measures, including appropriate policies and procedures for managing Anti-Money Laundering and Counter-Terrorist Financing (and cybersecurity) risks; and
- Maintaining accessible records of transactions and fund flows, as well as providing a full list of wallets for the VA OTC Business operation to the CCE.
Licence limitation and restrictive services
Licensed VA OTC Business operators will have the following limitations on their services:
- They will not be permitted to convert VA to VA, but they can provide conversion services between VA and fiat currency. To provide fiat-to-fiat currency conversion services, they will also need an MSO licence.
- With respect to services to retail investors, they cannot offer VAs that are neither accessible by the retail investors on SFC licensed VATPs nor issued by HKMA licensed stablecoin issuers. However, these restrictions do not apply to services to professional investors.
- Other prohibited services include VA advisory or referral, offering VA derivatives or financial products, staking, lending, and margin trading (Prohibited Services).
The licence period for operating a VA OTC Business will be two years, with the option for renewal upon application.
Transitional arrangements
Existing VA OTC Business operators in Hong Kong will be given a transitional period of six months (Transitional Period) before the commencement of the expanded AMLO licensing regime. During the Transitional Period, they can continue to operate their VA OTC Business if they have submitted licence applications to the CCE within the first three months of the Transitional Period.
The operational details of the transitional arrangements are expected to be provided after the public consultation. The FSTB will either:
- require the pre-existing VA OTC Business operators which do not submit licence applications to the CCE within the first three months of the Transitional Period to close down their business by end of the first four months of the Transitional Period; or
- grant a deemed licence for the pre-existing VA OTC Business operators which submit licence applications within the first three months of the Transitional Period and are able to meet the CCE’s licensing requirements, to continue their operations beyond the Transitional Period until the CCE’s final determination on their licence applications.
Impact
The Hong Kong presence requirement for VA OTC Business operators will deter foreign VA OTC trading platforms from remotely providing services or targeting services to Hong Kong investors, unless they have established meaningful presence in Hong Kong.
Existing VA OTC Business operators in Hong Kong need to plan for restructuring their businesses if they want to continue with their operations in Hong Kong. They will need to remove any Prohibited Services and plan for compliance with the CCE’s requirements.
Custodians of VAs should observe the legislative development and provide their views on regulations for VA custody services.
SFC or HKMA regulated entities should assess their VA trading activities and consider the potential AMLO licensing obligations.
