Introduction

In May 2021, following a 3 month consultation, the Financial Services and the Treasury Bureau (FSTB) issued its consultation conclusions for a new licensing regime for virtual assets services providers (VASPs) in Hong Kong. Recently, further steps were taken to make the new licensing regime for VASPs a reality with the Hong Kong Government gazetting amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to enhance Hong Kong’s anti-money laundering and counter-terrorist financing regulatory regime. In addition, the Hong Kong Government has also issued a Legislative Council brief providing an overview of the amendments which follow the FSTB’s consultation conclusions.

Key changes being introduced by the amendments to the AMLO include the following.

Definition of a virtual asset

A virtual asset will be defined in the AMLO by reference to the key elements currently set out in the Financial Action Task Force’s definition (a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes).

As defined under the AMLO a virtual asset will be a  cryptographically secured digital representation of value that:

  • is expressed as a unit of account or a store of economic value; and
  • either:
    • is used (or is intended to be used) as a medium of exchange accepted by the public, for any one or more of the following purposes – (a) payment for goods or services, (b) discharge of a debt, or (c) investment; or
    • provides rights, eligibility or access to vote on the management, administration or governance of the affairs in connection with, or to vote on any change of the terms of any arrangement applicable to, any cryptographically secured digital representation of value; and
  • can be transferred, stored or traded electronically; and
  • satisfies other characteristics prescribed by the SFC by notice published in the Gazette.

Excluded from the definition of virtual asset are: (i) digital representations of fiat currencies (including digital currencies issued by central banks); (ii) financial assets already regulated under the Securities and Futures Ordinance; (iii) stored value facilities regulated under the Payment Systems and Stored Value Facilities Ordinance; and (iv) certain closed-loop, limited purpose items which are non-transferable, non-exchangeable and non-fungible in nature e.g. air miles, credit card rewards, customer loyalty programmes etc.

Also, acknowledging that the virtual asset sector is developing rapidly, the Secretary for Financial Services and the Treasury will be empowered to prescribe by notice published in the Gazette whether a particular asset is to be considered a virtual asset under the AMLO.

Operating a virtual asset exchange

 Operating a virtual asset exchange will entail providing services through means of electronic facilities where:

  • offers to sell or purchase virtual assets are regularly made or accepted in a way that forms or results in a binding transaction; or
  • persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of virtual assets in a way that forms or results in a binding transaction; and
  • client money or client virtual assets comes into direct or indirect possession of the person providing such service.

Peer-to-peer trading platforms will not be covered under the definition of “VA exchange” to the extent that: (i) the actual transaction is conducted outside the relevant platform; and (ii) the relevant platform is not involved in the underlying transaction by coming into possession of any money or any virtual asset at any point in time.

 VASP licencing regime

The Securities and Futures Commission (SFC) is to be the licensing authority and a licence is to be granted subject to meeting a fit and proper person test and other regulatory requirements. To ensure that the SFC will be able to effectively monitor the operation of a licensed VASP, only locally incorporated companies with a  permanent place of business in Hong Kong or companies incorporated elsewhere but registered in Hong Kong under the Companies Ordinance are to be considered for the granting of a VASP licence.

VASP personnel

Two classes of personnel, responsible officers and licensed representatives of a VASP will be subject to requirements. Each VASP applicant will be required to have at least two responsible officers who are to assume general responsibility of overseeing the operation of the licensed VASP. In particular, these responsible officers are to be held personally accountable in cases of non-compliance.

Regulatory requirements

A licenced VASP will be subject to regulatory requirements covering a wide range of matters including that it should have adequate financial resources, risk management policies and procedures, virtual asset listing and trading policies, together with mechanisms to prevent market abuse and conflicts of interest.

Initially, professional investors only

At the initial stage VASPs will only be able to offer services to professional investors. This will most likely be included as a licence condition providing for some flexibility so that the SFC may offer some VASPs the ability to provide services to retail investors at a later date.

Timing

The VASP regime will come into effect on 1 March 2023.

Transitional arrangements

The amendments to the AMLO provides for transitional arrangements for existing operators carrying on a business of operating a virtual asset exchange. Where such an operator files an application with the SFC within the first nine months of the commencement of the new regime and confirms that it will comply with the regulatory requirements set by the SFC, the operator will be deemed to be licenced until the SFC has made a decision on its licence application.

SFC rules

Further rules and guidelines from the SFC are expected to be issued in due course.

Penalties

Operating a virtual asset exchange in Hong Kong without a licence, or actively marketing (whether in Hong Kong or elsewhere) to the public of Hong Kong the services of an overseas virtual asset exchange that is not licensed in Hong Kong, without a reasonable excuse, will be an offence punishable on conviction on indictment, to a fine of HK$5 million and to imprisonment for seven years and, in the case of a continuing offence, to a further fine of HK$100,000 for every day during which the offence continues. A summary conviction will see fines of HK$500,000 and imprisonment of 2 years, and a further fine of HK$10,000 for every day during which the offence continues.

If you would like to discuss, please contact Etelka Bogardi (etelka.bogardi@nortonrosefulbright.com) or Amy Chung (amy.chung@nortonrosefulbright.com).