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Hong Kong proposes licensing regime for virtual asset service provider

  • Hong Kong
  • Licensing

11-12-2020

If your business involves any type of virtual asset services in or for Hong Kong, the new licensing regime for virtual asset service provider will be relevant to you.

On 3 November 2020, the Financial Services and the Treasury Bureau of the Government of Hong Kong launched a public consultation1 on legislative amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO) to enhance anti-money laundering and counter-terrorist financing (AML/CFT) regulation in Hong Kong through:

  • The introduction of a licensing regime for virtual asset service providers (VASP), whereby any person seeking to conduct the regulated business of “virtual asset trading platforms” (i.e. a virtual asset exchange) in Hong Kong will require a licence from the Securities and Futures Commission (SFC) subject to the meeting of a fit-and-proper test; and
  • Subjecting VASPs to AML/CTF requirements relating to customer due diligence (CDD) under Schedule 2 of AMLO and other regulatory requirements for investor protection purposes.

Hong Kong currently operates an “opt-in regime”2 for virtual assets (VA) trading platforms, but as the name suggest, this regime is voluntary and only applies to those platforms which enable clients to trade virtual assets that fall under the definition of “securities” under the Securities and Futures Ordinance (Cap. 571) (SFO). The proposed regime will apply to platforms that trade any type of VAs, even if none of them are classified as securities and ensure a level playing field by making reference to the opt-in regime in determining the parameters of the proposed VASP regime under the AMLO3.

The legislative amendments are intended to bring Hong Kong’s regulatory regime in relation to VASPs in line with the recommendations made by the Financial Action Task Force (FATF)4.

The consultation will last for three months until 31 January 2021.

It is clear that Hong Kong is keen to maintain the momentum in combating money laundering and terrorist financing following the successful assessment of Hong Kong’s AML/CFT systems in the FATF Mutual Evaluation Report published in September 2019. The proposed amendments are also timely because Hong Kong is scheduled to undergo further FATF assessments in 2023/2024.

Whilst the government considers VASPs as risky both in terms of money laundering and terrorist financing, the stated “guiding principles” in drawing up the legislative proposals are to strike the right balance between the need for regulation and maintaining competitiveness by not imposing undue burden on the industry. Whether these principles are in fact reflected in the proposed legislation will become clear in due course.

Hong Kong has a fast developing market for VAs and there are several local players operating VA exchanges who will be directly impacted by the proposed amendments. The new licensing regime proposes to empower the SFC to impose certain licensing conditions on the VASP, including requiring that VASP services should be provided to professional investors initially. It is crucial that they keep this development under review and start considering how the proposed regulatory regime will impact their business and the steps they will need to take to be compliant.


https://www.fstb.gov.hk/fsb/ppr/consult/doc/consult_amlo_e.pdf. The consultation also proposes a two-tier registration regime for “dealers in precious metals and stones” (DPMS), and miscellaneous technical amendments under the AMLO.

https://www.sfc.hk/web/files/ER/PDF/20191106%20Position%20Paper%20and%20Appendix%201%20to%20
Position%20Paper%20(Eng).pdf
 

3 For example, see the speech of Mr Ashley Alder (CEO, SFC) dated 3 November 2020, at https://www.sfc.hk/-/media/EN/files/ER/PDF/CEO_speech_FinTechWeek_Nov2020.pdf 

4  https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf 
(in particular FATF Recommendation No. 15).