New Regulatory Regime for Virtual Asset Service Providers
From November 2020 to January 2021, the Financial Services and the Treasury Bureau (“FSTB”) conducted a public consultation to gauge the views from the public on the proposed legislative amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”). The amendments seek to, inter alia, establish a licensing regime for virtual asset service providers (“VASP”).
The amendments are now incorporated into the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (“Amendment Bill”), which was gazetted on 24 June 2022 and passed by the Legislative Council on 7 December 2022.
Based on the Amendment Bill, this article would address (i) the licensing requirements, and (ii) post-licensing regulatory requirements for VASP and, most importantly, what actions potential and existing VASP should take.
Licensing Requirements under the Amendment Bill
The Amendment Bill makes it mandatory for centralised virtual asset exchanges offering services in Hong Kong to be licensed by the Securities and Futures Commission (“SFC”), which will come into force on 1 June 2023, with a transitional period to allow the SFC more time to work out the implementation details of the new regulatory regime.
A person who, without a VASP licence, carries on a business of providing any virtual asset service, or hold itself, himself or herself out as carrying on a business of providing any virtual asset service will commit an offence.
It will also be an offence for any person to issue advertisements relating to an unlicensed person’s provision of virtual asset service. To put it another way, any company or individual providing marketing services for an unlicensed VASP (including overseas VASP) will commit an offence if they are aware that such VASP has not been licensed by the SFC.
“Virtual assets” under the Amendment Bill broadly refer to a digital representation of value that can be transferred, stored or traded electronically and can be used for payment or investment purposes, irrespective of whether they amount to “securities” or “futures contracts” as defined under the Securities and Futures Ordinance. However, certain digital representations of value will be excluded from the definition of “virtual assets” such as “limited purpose digital token” which is similar to a customer loyalty or reward point or an in-game asset.
“VASP” is defined to mean a service provider operating a virtual assets exchange to provide through means of electronic facilities such services as offering to sell or purchase any virtual assets in exchange for any money or any virtual assets and in providing such services, client money or client virtual assets would come into direct or indirect possession of the service provider. Other forms of virtual asset business such as (i) over-the-counter virtual asset trading, (ii) peer-to-peer virtual asset trading, (iii) stand-alone virtual asset payment and (iv) custodian system currently fall outside the definition of VASP and not subject to the regulation under the Amendment Bill.
SFC will only grant a VASP licence to the applicant if:
(a) the applicant is a locally incorporated company with a permanent place of business in Hong Kong or a non-Hong Kong company but registered in Hong Kong; and
(b) the SFC is satisfied that (among others):
(i) the applicant is a fit and proper person to be licensed for the virtual asset service, having regard to, among other matters, the financial status or solvency of the person, and whether the person has been convicted of certain specified offences; and
(ii) not fewer than two persons are applying to be responsible officers of the applicant to supervise the business of the virtual asset service and each person is a fit and proper person.
Post-Licensing Regulatory Requirements
According to the Legislative Council Brief dated 22 June 2022, the SFC will exercise its power under the AMLO to impose additional regulatory requirements upon VASP licensees. Detailed requirements will be provided in codes and guidelines to be published by the SFC, subject to consultation, upon the passage of the Amendment Bill.
During the Hong Kong Fintech Week 2022, the SFC stated that they received a lot of feedback from Legislative Council members and the public on whether access to SFC-licensed VASP should be restricted to professional investors only. People who are in favour of retail access to SFC-licensed platforms argued that denying access would push retail investors to trade on online virtual asset trading platforms located overseas that are subject to little or no regulation. In light of the feedback, the SFC is prepared to consult the public on whether the professional investor-only requirement could be relaxed, and if so, how retail investors may be given a suitable degree of access to virtual assets under the new licensing regime.
Next Steps Forward
Potential and existing VASP or any persons engaging virtual asset related business may wish to consider taking the following recommended next steps in the lead up to 1 June 2023:
- Review your business model and consider whether a VASP licence is required for business operations in Hong Kong.
- If a VASP licence is required, consider whether there is a need to change the corporate or business operational structure.
- If the company intends to apply for a VASP license, review whether the company and relevant personnel will fulfill the fit and proper requirements.
- Closely monitor consultations, guidelines and other related guidance from the SFC on the regulatory regime for VASP.