The Financial Services and the Treasury Bureau (“FSTB”) published a consultation paper (the “Consultation”) on 3 November 2020 seeking views on legislative reforms to enhance anti-money laundering and counter-terrorist financing (“AML/CTF”) regulation in Hong Kong. Amongst the areas covered, the FSTB proposed to introduce a licensing regime for virtual assets services providers (“VASPs”). The consultation period ended on 31 January 2021.
In recent years, trading in cryptocurrencies and other virtual assets (“VAs”) has significantly increased. For all their potential, they pose significant money-laundering and terrorist financing risks because they are in general anonymous and decentralised. VAs also pose challenges for investor protection as they are highly speculative in nature and are frequently associated with fraud, security breaches and price manipulation.
Under the licensing regime for VASPs, any person seeking to conduct the regulated business of VA trading platforms in Hong Kong will be required to apply for a licence from the Securities and Futures Commission (“SFC”) and be subject to the full range of AML/CTF obligations currently applicable to other financial institutions in Hong Kong.
The licensing regime is mandatory for any person who, as a business, engages in specified activities involving VAs, namely, (i) exchange between VAs and fiat currencies; (ii) exchange between one or more forms of VAs; (iii) transfer of VAs; (iv) safekeeping and/or administration of VAs or instruments enabling control over VAs; and (v) participation in and provision of financial services related to an issuer’s offer and/or sale of a VA. As the operation of a VA exchange (“VA Exchange”) will typically involve the aforesaid types of activities, it will fall within the ambit of the proposed licensing regime.
Currently, peer-to-peer trading platforms (to the extent that the actual transaction is conducted outside of the platform and the platform is not involved in the underlying transaction), VA payment systems and VA custodian services operating as a stand-alone business, over-the-counter trade and crypto-ATMs are not within the scope of the proposed licensing regime.
The proposed licensing requirements are summarised as follows:-
The FSTB proposes to empower the SFC to impose licensing conditions and regulatory requirements covering, amongst other things, the following:-
|Open-ended Licence||It is proposed that a licensed VASP will be granted an open-ended licence, i.e. it will remain valid until the licensed VASP is revoked by the SFC, for example, due to misconduct or if the licensed VASP ceases its operation|
|Supervisory Powers||The SFC will be empowered to supervise the AML/CTF conduct of licensed VASPs and enforce other regulatory requirements in accordance with the AMLO’s stipulations. Such will include the power to enter business premises of the licensed VASP and its associated entities for conducting routine inspections; to request the production of documents and other records; to investigate non-compliance and to impose administrative sanctions (including reprimand, order for remedial actions, civil penalty and suspension or revocation of licence) against non-compliance.|
We expect the consultation conclusion paper will be issued soon.
To find out more about the VASP licensing regime, contact us today.