On May 21, 2021, Financial Services and the Treasury Office (FSTB) published the conclusions of the public consultation on legislative proposals aimed at strengthening the fight against money laundering and terrorist financing (AML / CFT) regulation in Hong Kong. These include a new licensing regime that will bring virtual asset service providers (VASP) within the regulatory scope of the Securities and Futures Commission (SFC) under the Money Laundering and Combating the Financing of Terrorism Ordinance (chap. 615) (to be amended) (AMLO).
Scope of the proposed licensing regime for VASPs
Under the existing voluntary membership scheme, a company that operates a centralized virtual asset trading platform in Hong Kong and intends to offer trading of at least one security token on the platform. -form may apply for a license from the SFC in accordance with the Securities and Futures Ordinance (chap. 571) (OFS). Under the current regime, the SFC does not have the authority to license or oversee a platform that trades only virtual assets or non-security tokens.
The proposed licensing regime will be more comprehensive and will require a compulsory license for all exchanges of virtual assets, whether or not they trade in security virtual assets. Under the new regime, the business of operating a “virtual asset exchange” will be referred to as a “regulated virtual asset business”, which requires the business to be licensed by the SFC under of AMLO.
Virtual asset exchange
The proposed definition of a “virtual asset exchange” means any trading platform operated for the purpose of enabling an offer or invitation to be made to buy or sell virtual assets in exchange for money or any virtual asset, and which comes into custody, control, power or possession of, or over, money or virtual assets at any time during its business.
Peer-to-peer trading platforms which only provide a forum for buyers and sellers of virtual assets to post their offers or offers, but whose trading is carried out at an outside location, are excluded.
The proposed definition of âvirtual assetsâ means a numerical representation of value that:
- is expressed in unit of account or in reserve of economic value;
- functions (or is intended to function) as a means of exchange accepted by the public in payment for goods or services or for the discharge of debt, or for investment purposes; and
- can be transferred, stored or traded electronically.
On the other hand, are not covered by the definition of âvirtual assetsâ:
- digital representations of fiat currencies;
- financial assets already regulated by the OFS;
- certain closed-loop, limited-use items that are non-transferable, non-exchangeable, and non-fungible in nature (such as airline miles, credit card rewards, gift cards, customer loyalty programs, and game pieces); and
- stored value facilities which are separately regulated under the Payment Systems and Secured Securities Facilities Ordinance (Cap. 584).
The FSTB notes the rapidly changing nature of the virtual asset industry and will therefore introduce flexibility in legislation by empowering the SFC to further prescribe the characteristics that constitute the definition of a virtual asset, and the Secretary of Financial Services and Treasury to determine, either generally or in a specific case, whether a digital representation of value is to be considered as a virtual good.
Proposed license requirements
Only companies incorporated in Hong Kong or foreign companies registered in Hong Kong under the Companies Ordinance (Cap. 622) will be considered for the granting of a VASP license. Natural persons or commercial establishments without legal personality will not be eligible.
Good and good test
Interviewees were generally in favor of VASP applicants being subjected to a fit test and criteria to determine a candidate’s suitability under the AMLO. The fit test is offered to cover all responsible officers and ultimate owners of the corporation, and any change in this relationship would require the prior approval of SFC. In determining whether a candidate is a suitable and appropriate person, the SFC will take into account, among others:
- whether the person has been convicted anywhere of a money laundering / terrorist financing offense or other offense in which the person is found to have acted fraudulently, corrupt or dishonestly;
- if the person has not complied with or may not comply with the AML / CTF or other regulatory requirements applicable to approved VASPs;
- the relevant experience and qualifications of the person; and
- if the person is in good standing and in good financial integrity (for example, is not the subject of any bankruptcy or liquidation proceedings).
To ensure the proper management of an approved VASP, an applicant will need to appoint at least two responsible officers, who will have overall responsibility for ensuring compliance with AML / CFT and other regulatory requirements, and who will be held personally responsible for violation or non-compliance with the requirements. Similar to the SFO requirement for licensed companies, it is proposed that all executive directors of a licensed VASP be made responsible after approval by the SFC.
An authorized VASP will be required to comply with the AML / CFT requirements set out in Annex 2 of the AMLO, which cover customer due diligence and record keeping requirements. In addition, the SFC will be empowered to impose licensing conditions and implement regulatory requirements on licensed VASPs (regarding financial resources, knowledge and experience, business strength, management risk, segregation and management of client assets, financial information and disclosure, prevention of manipulative and abusive activities and prevention of conflicts of interest).
During at least the initial phase of the licensing regime, a licensed VASP may only offer services to professional investors, which include high net worth individuals with a portfolio of at least HK $ 8 million, companies with portfolios of at least HK $ 8 million or total assets of at least HK $ 40 million1, or institutional investors2. This position will be monitored and reviewed as the virtual asset market matures.
Exemption and prohibition
There is no exemption from the VASP license requirement, except for exchanges of virtual assets which are already regulated as a licensed company under the existing voluntary membership scheme overseen by the SFC.
The FSTB has also proposed to prohibit anyone who is not a licensed VASP from actively marketing, whether in Hong Kong or elsewhere, to the Hong Kong public a regulated virtual asset activity or similar activity elsewhere. . This would have an extraterritorial effect on foreign VASPs with no business in Hong Kong, who should avoid conducting active marketing activities targeting the Hong Kong public if they do not want to be caught by the new licensing regime.
Supervisory powers and sanctions
The SFC will be given broad powers of surveillance and response, including the power to (i) enter the business premises of the licensed VASP and associated entities to perform routine inspections and request production of documents, (ii) investigate non-compliance, (iii) impose administrative penalties (including reprimands, corrective actions, civil penalties and license suspension or revocation) for non-compliance, and (iv) impose restrictions and prohibitions against the operation of a licensed VASP and its associated entities when circumstances warrant.
In addition to administrative penalties, engaging in unauthorized activities and failing to comply with regulatory requirements may also result in criminal penalties in the event of conviction on indictment.
The Hong Kong government aims to present the AMLO Amendment Bill to the Legislative Council in the 2021-2022 legislative session. The SFC will also prepare and publish for consultation the detailed regulatory requirements prior to the start of the licensing regime. At the start of the new regime, there will be a 180-day transition period to facilitate license applications by interested parties.