Virtual Assets: A Regulatory Overview

Virtual Assets: A Regulatory Overview

Virtual Assets: A Regulatory Overview 1400 935 Hauzen

In recent years, the trading of cryptocurrencies and other virtual assets (“VAs”) has flourished significantly, with a growing body of investors participating in the crypto markets. While this emerging sector presents new opportunities through financial innovation, it also poses considerable money laundering and terrorist financing (“ML/TF”) risks to the financial system, among other risks. A balanced regulatory approach is thus crucial to address these risks on the one hand, and to minimize the compliance burden to businesses on the other.

Regulators want to prevent excessive risks to the financial system and to the participants, but at the same time, are mindful that innovation in the financial markets is taking place and is inevitable in the electronic age.

Existing regulatory regime

Under the current regulatory regime, VAs or activities of virtual asset trading platforms (“VATPs”) are not subject to mandatory regulatory oversight by the Securities and Futures Commission (“SFC”), unless such VAs are regarded as “securities” or “future contracts” under the Securities and Futures Ordinance (Cap. 571) (“SFO”).

A voluntary “opt in” regime is currently offered by the SFC under which VATPs offering trading of at least one VA which is considered as a security can “opt in” to be licensed and regulated by the SFC. Subject to meeting the licensing requirements, the SFC will grant a licence to qualified platform operators to carry on their virtual asset trading business.

VA Exchanges that facilitate trading of non-security VAs (e.g. Bitcoin) exclusively would fall outside of the SFC’s regulatory ambit.

New licensing regime

To ensure a healthy and orderly development of the market for harnessing opportunities presented by financial innovation, the Financial Services and the Treasury Bureau (“FSTB”) put forward a proposal to establish a licensing regime for virtual asset services providers (“VASPs”) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”), in line with the recommendations from the Financial Action Task Force (“FATF”) in June 2019 to adopt a risk-based approach to VA activities and VASPs.

Under the FATF recommendations, countries are expected to manage and mitigate risks emerging from VAs and ensure that VASPs are regulated for anti-money laundering and counter-terrorist financing (“AML/CTF”) purposes, licensed or registered, subject to effective systems for monitoring and comply with preventive measures such as customer due diligence, recordkeeping, suspicious transaction reporting, sanctions and other enforcement measures.

A public consultation on the VASP regime was concluded on 21 May 2021, and its conclusions are to be introduced into the Legislative Council in the 2021-22 legislative session to bring the proposed regime into effect.

Under the new regulatory framework, the business of operating a VA Exchange will be designated as a “regulated VA activity” under the AMLO. Any persons seeking to operate a VA Exchange in Hong Kong will then be required to apply for a licence from the SFC as a licensed VASP. The licence granted will be of an open-ended nature, and will remain valid until revoked by the SFC.

Scope and Coverage

Virtual Asset Exchange

A VA exchange is defined as any trading platform that is operated for the purpose of allowing an offer or invitation to be made to buy or sell any VA in exchange for any money or any other VA, and which comes into custody, control, power or possession of, or over, any money or any VA at any point in time during its course of business.

The definition excludes peer-to-peer trading platforms that merely provide a forum for buyers and sellers to post their bids and offers, where the actual transactions are conducted outside the platform and the platform is not involved in the underlying transaction by coming into possession of any money or any VA, are not covered under the definition.

Virtual Asset

A VA is defined as a digital representation of value which (i) is expressed as a unit of account or a store of economic value; (ii) functions as a medium of exchange; and (iii) can be transferred, stored or traded electronically.

The definition excludes (i) digital representations of fiat currencies (e.g. central bank digital currencies); (ii) financial assets already regulated under the SFO; (iii) stored value facilities regulated under the Payment Systems and Stored Value Facilities Ordinance (Cap. 584); and (iv) closed-loop, limited purpose items that are non-transferable, non-exchangeable and non-fungible in nature.

Licensing Requirements


Apart from locally incorporated companies with a permanent place of business in Hong Kong, the new regime also allows companies incorporated elsewhere but registered in Hong Kong under the Companies Ordinance (Cap. 622) to apply for a VASP licence.

Fit-and-Proper Test

Applicants have to satisfy a fit-and-proper test to be considered for the granting of a VASP licence. Relevant considerations include:

  • whether the person has been convicted of a ML/TF offence or other offence in which the person is found to have acted fraudulently, corruptly, or dishonestly;
  • whether the person has failed or may fail to observe the AML/CTF, or other regulatory requirements applicable to licensed VASPs;
  • whether the person is of good standing and financial integrity; and
  • the experience and relevant qualifications of the person.

At least two responsible officers must be appointed to assume the general responsibility of ensuring compliance with AML/CTF requirements under the AMLO.

Regulatory Requirements

At the initial stage, a licensed VASP can only offer services to professional investors (i.e. individuals with investment portfolios worth over HKD 8 million or companies with total assets of no less than HKD 40 million) due to the highly speculative nature of VA activities. Retail investors are not permitted to trade cryptocurrencies under the proposed regime.

Other prescribed regulatory requirements are concerned with:

  • financial resources;
  • knowledge and experience;
  • soundness of the business;
  • risk management;
  • segregation and management of client assets;
  • financial reporting and disclosure;
  • prevention of market manipulative and abusive activities; and
  • prevention of conflicts of interest.

For details, read our news update on the FSTB consultation paper published on 3 November 2020.


VA Exchanges already regulated and supervised by the SFC as a licensed corporation under the voluntary opt-in regime will be exempted from the licensing requirements.

Upon commencement of the operation of the licensing regime, a 180-day transitional period will be given to facilitate application by interested parties.

Persons who are not licensed VASPs are prohibited from actively marketing (whether in Hong Kong or elsewhere) a regulated VA activity to the public.

Powers of the SFC under the licensing regime

The SFC is empowered to supervise the AML/CTF conduct of the licensed VASPs, as well as to enforce other regulatory requirements in accordance with the AMLO stipulations. This will include the power to:

  • enter business premises of the licensed VASP and its associated entities for conducting routine inspections;
  • request the production of documents and other records;
  • investigate non-compliances and impose administrative sanctions against non-compliances; and
  • impose restrictions and prohibitions against the operation of a licensed VASP and its associated entities where the circumstances so warrant.

Sanctions and Appeal

In addition to administration sanctions (e.g. suspension or revocation of licenses, reprimand, remedial order and a pecuniary penalty), persons who carry out unlicensed activities or fail to comply with the regulatory requirements will be subject to criminal sanctions.

Appeals against future decisions made by the SFC in the implementation of the licensing and supervisory regime for licensed VASPs will be within the jurisdiction of the Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal.

Going forward

Despite the stringent requirements for VASPs under the new regime, the regulations are nevertheless a milestone for the cryptocurrency market in Hong Kong, providing a consistent and transparent regulatory environment, as well as giving legitimacy to this emerging market. The amended AML/CTF regime should enable Hong Kong to meet the FATF standards so as to maintain the city’s competitiveness and reputation as an international financial centre.

The consultation conclusions paper published in May 2021 is available here.

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