The Hong Kong regulators, the Securities and Futures Commissions (SFC) announced that from June 1, 2023, centralized virtual asset trading platforms (VATPs) trading in Hong Kong will need to apply for a license under its new regulations.
Under the Securities and Futures Ordinance (Cap. 571) (SFO) and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO), centralized VATPs operating in Hong Kong, or actively marketing their services to Hong Kong investors, are required to be licensed and regulated by the SFC.
Hong Kong regulators publish circular on the new licensing regime
On May 31, 2023 the SFC issued a circular on transitional arrangements of the new licensing regime for VATPs under the AMLO.
The circular applies only to VATPs offering trading services in non-security tokens and does not cover compliance with the SFO for security tokens.
VATPs planning to provide trading services in security tokens must obtain the relevant license under the SFO before commencing their business.
Eligibility requirements for VATPs seeking to make an application in Hong Kong
VATPs providing a Virtual Asset (VA) service in Hong Kong before June 1, 2023, can continue to operate until May 31, 2024, without breaching licensing requirements.
However, they must comply with the SFC’s standards and review and revise their systems and controls to meet the legal and regulatory requirements.
The VATP Licensing Handbook provides a handy licensing guide for virtual asset trading platform operators.
It sets out how to apply for a license, details about the relevant ongoing notifications and which further applications are needed after obtaining a license.
Requirements for obtaining a license include capital of at least 5 million Hong Kong dollars.
To be eligible for the transitional arrangements, pre-existing VATPs must meet certain criteria, including:
- Be incorporated in Hong Kong.
- Having a physical office and key personnel in Hong Kong.
- Having a genuine business presence in the region.
Mere incorporation or having “shell” operations in Hong Kong is insufficient.
VATPs that did operate in Hong Kong before 1 June 2023 are not eligible for transitional arrangements and should not commence any business activities or active marketing to Hong Kong investors until licensed by the SFC.
Regulatory requirements for VATPs in Hong Kong
Anti-money laundering (AML) and counter-terrorist financing (CFT) legislative and regulation guidance requirements shall apply to SFC-licensed virtual asset trading platforms – as set out in the AML/CFT Guideline (for Licensed Entities and SFC-licensed Virtual Asset Providers).
The regulatory and legal requirements will legally bind any VATP lawfully authorized by the SFC.
This aims to ensure that VATPS will exercise the highest level of due diligence while preventing potential activities associated with money laundering or terrorist financing.
These requirements are:
- Customer Due Diligence (CDD): VATPs must authenticate customer identities to prevent financial fraud using Know Your Customer (KYC) processes to gather and verify personal customer information and Enhanced Due Diligence (EDD) for potentially higher-risk customers.
- Record-Keeping: VATPS must keep accurate and up-to-date transaction records to facilitate future investigations if needed. According to the guidelines, records must be kept throughout the business relationship and for a period of at least five years after the end of the business relationship.
- Suspicious Activity Reporting (SAR): VATPs must establish a system to identify and report suspicious transactions that may be related to money laundering or terrorist financing.to appropriate authorities.
- Risk Assessment: VATPs must conduct frequent risk evaluations of activities and transactions to identify potential money laundering or terrorist financing vulnerabilities.
- Internal Controls: VATPs must implement internal controls, including appointing a compliance officer, providing ongoing AML/CFT training for employees, and implementing independent audit functions to test the program.
- Compliance with Sanctions: VATPs must ensure compliance with applicable sanctions by screening customers and transactions against sanctions lists.
- Policies, Procedures, and Controls: VATPs must design and implement their policies, procedures, and controls to meet the relevant AML/CFT statutory and regulatory requirements.
The impact of the new licensing regime on the crypto industry in Hong Kong
The licensing regime for VATPs is a significant step forward for the growth and widespread acceptance of the crypto industry. It has several potential implications for the cryptocurrency industry, especially in Hong Kong.
The authorities of Hong Kong are working on various policies and regulations to establish the city as a center for digital assets. The government’s invitation to experts and industry participants to provide their input on the proposed regulations shows its commitment to develop a regulatory environment conducive to a flourishing industry.
Security for retail investors
This regulatory framework in Hong Kong can help mitigate allegations of misuse of client assets and address solvency concerns and to protect investors. Stringent onboarding processes, governance, disclosure, and token due diligence should offer more security for retail investors.
This could increase investor confidence and foster a healthier trading environment, preventing the recurrence of the issues during the FTX case.
Instil a culture of stability and innovation
By having to meet the SFC’s requirements, firms will look to hire established and competent leaders who understand their responsibilities and further train their staff in the same way.
As a result, this may help reduce the confusion and complexity in the digital asset space, contributing to market stability. This could also lead to further innovation and development related to cryptocurrencies in Hong Kong and attract Fintechs to the region while safeguarding the interests of investors and maintaining market integrity.
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