Hong Kong takes a step closer to new VASP regime

Hong Kong’s regime for Virtual Asset Service Providers will be “more rigorous and comprehensive” than most. From next March, firms deemed to offer “VA services” will need an SFC licence. Licensees will need to meet fit and proper requirements as well as comply with AML/CFT and other regulatory requirements. For some, meeting the obligations will require a wholesale review of the compliance framework, so it’s worth understanding the changes now and taking advantage of the transitional period where possible.

Background to the VASP Amendment Bill

In May 2021, the Financial Services and the Treasury Bureau (FSTB) issued consultation conclusions where it announced plans to introduce a new licensing regime to directly regulate all virtual asset (VA) exchanges. An Amendment Bill to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) which echoed FSTB’s proposals was gazetted by the Hong Kong Government on 24 Jun 2022 to enhance Hong Kong’s regulatory regime for combating money laundering and terrorist financing.

Who is in scope?

Under the Amendment Bill, a license is required from the SFC if a person is:

a.     carrying on a business of providing any VA service

b.     holding himself out as carrying on a business of providing any VA service

c.     actively marketing a service, which if provided in Hong Kong would be a VA service, to the Hong Kong public.

What is a VA service?

A VA service is defined to mean “operating a VA exchange”, that is providing services through means of electronic facilities where:

a.     offers to sell or purchase VAs are regularly made or accepted in a way that forms or results in a binding transaction; or

b.     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 VAs in a way that forms or results in a binding transaction; and

c.     a client’s money or VAs comes into direct or indirect possession of the person providing such service.

The Amendment Bill also empowers the Secretary for Financial Services and the Treasury (FST) to vary the meaning of VA service by subsidiary legislation.

Which VAs are in scope?

VA is defined in the Amendment Bill to be a cryptographically secured digital representation of value that:

a.     is expressed as a unit of account or a store of economic value

b.     can be transferred, stored or traded electronically and either

    • is used, or is intended to be used, as a medium of exchange accepted by the public, for payment for goods or services, discharge of a debt or investment purposes;
    • 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;

The Secretary for the FST has powers to prescribe by notice any digital representation of value to be a VA or not.

There are certain exclusions from the definition of VA which, among others, include digital currencies issued by central banks, limited purpose digital tokens (for example, customer loyalty or reward points and in-game assets), securities and futures contracts as defined under the SFO.

Licensing criteria and requirements

Under the proposed licensing regime, a VASP licensee will need to:

  • apply for a licence from the SFC
  • pass a fit and proper person test
  • be either a locally incorporated companies with a permanent place of business in Hong Kong or incorporated elsewhere but registered in Hong Kong under the Companies Ordinance
  • refer to the arrangements for regulating the securities sector in terms of its designated personnel (for example, responsible officers and licensed representatives who are also subject to the fit and proper test)
  • be subject to a set of regulatory requirements to be imposed as licencing conditions by the SFC which cover matters such as having adequate financial resources, knowledge and experience, risk management policies and procedures, VA listing and trading policies etc.

In addition, it is expected that there will be a professional investor requirement to be imposed as a regulatory requirement made by the SFC.  However, the SFC will publicly consult on the whole set of requirements before promulgation.

Travel rule

The Amendment Bill also incorporates the travel rule, which is one of FATF’s recommendations that requires VASPs to communicate the information of the originator and beneficiary of VA transactions that exceed a certain threshold. The travel rule serves as a key AML/CFT measure that enables VASPs and financial institutions to carry out effective sanction screening and detect suspicious transactions.

Powers of SFC and proposed sanctions

Under the Amendment Bill, it is proposed that the SFC be given supervisory powers for enforcing the AML/CFT and other regulatory requirements including entering the licensed VASP’s premises for conducting inspection, requesting the production of documents and records and imposing disciplinary sanctions and penalties for non-compliances of regulatory requirements and so on.

Transitional period

The provisions relating to the VASP regime will come into effect on 1 March 2023.

Existing providers of VA services who are operating in Hong Kong before 1 March 2023 can continue to operate without a license until 29 February 2024.  Thereafter, if they wish to continue to provide VA services, they will need to apply to the SFC for a licence by 31 December 2023.

Although the SFC will still need to publicly consult on the details of regulatory requirements, it is expected those requirements will be similar to those applicable to intermediaries’ provision of VA dealing and advisory services as set out in Appendix 6 of the joint circular issued by the SFC and HKMA on 28 January 2022.

The existing VASPs or potential VASP licensees should start looking into these requirements and prepare themselves for the new VASP licensing regime. This includes having proper policies, procedures and systems in the areas of AML/CFT, conflict of interests, market abuse and surveillance, record keeping and consideration of its financial soundness and operational flow.

How we can help

The global regulatory landscape for VAs is complex and fast moving. We can help you to:

Want more insights like this?

Join our mailing list